Foreign Pulse: Ice-bucket therapy

Napoleon Bonaparte once said that “when China wakes up, the world will shake”. The Chinese government’s latest assertion of regulatory authority over multinational corporations (MNCs) through a systematic crackdown amounts to a re-ordering of power relations between the state and foreign firms and offers valuable lessons for the global economy.

Over the last year, MNCs in China are being roused out of bed and bullied through involuntary ice-bucket treatment. The Chinese government’s regulatory agencies are on the prowl — there are sustained investigations and raids on the Who’s Who of global business brands for violating consumer protection laws, antimonopoly rules, price setting principles, and other ethical norms of conduct.

“Surprise visits”, fines, inquiries, demands for disclosure and confiscation of data from the offices of American giants Microsoft, General Motors and chip manufacturer Qualcomm; the German automobile industry heavyweights Daimler and Volkswagen; Japanese auto part makers like Hitachi and Nachi-Fujikoshi; and European pharmaceutical and dairy majors have established a new regime of highly stepped-up regulatory surveillance.

Suspicion of MNCs has captured Chinese society’s imagination since President Xi Jinping assumed office in 2012. Government bullying of MNCs is accompanied by a witch hunt-like environment full of exposes and denunciations in Chinese state-run media outlets of exploitative tendencies of American fast food giants, French retail supermarket chains or the perpetual whipping boys from Japan Incorporated.

The annual “Consumer Day Gala” broadcast on China’s state-owned CCTV channel is a barometer of the anti-MNC culture being promoted by the Central government. It showcases a whole year of undercover reporting and citizen journalism against foreign companies committing “injustices” and violating the rights of Chinese customers. The media ritual starts by alerting the public to unscrupulous foreign corporations, bullying MNCs to apologise for their misdeeds, and then triumphantly announcing the government’s success in correcting the errant behaviour.

Since decision-making within China’s secretive Communist Party Politburo, Standing Committee and State Council are opaque, the motive for the upsurge of attacks against MNCs is anyone’s guess. Observers who discern long-term strategic objectives in every major policy initiative undertaken by the Chinese state believe that it is going after MNCs with a vengeance to protect and carve out political space for indigenous industrial and technological capabilities.

In his address to China’s scientists in June this year, President Xi stressed that core technologies must be “in our own hands” so as to “truly hold the initiative in competition and development”. It is not coincidence that sectors where MNCs are facing the music in China today happen to be those in which Chinese domestic companies want to scale up and gain local market share and conquer export destinations. For example, China’s Great Wall Motors Company and Geely Automobile Holdings are finding the going tough against American, German and Japanese automobile competitors, which are the first choices of Chinese consumers thanks to their technological superiority and functional efficiency.

The Chinese government’s industrial policies emphasise “indigenous innovation” as the bedrock of national power, but domestic producers still lack the finesse to outdo MNCs in research and development. State-instigated diatribes against MNCs as corrupt cheats who need to be disciplined can be interpreted as directing Chinese citizens towards a more economic nationalist direction in their spending habits.

A second possible reason for the anti-MNC fervor in China is bureaucratic tussles within the Chinese government’s multiple agencies tasked with regulating industries. According to the Financial Times, President Xi’s administrative reforms have downgraded a hitherto influential state planning agency and transferred its powers to a rival body. The former is feeling insecure and is hence “pushing high-profile investigations of foreign companies.”
Although domestic corporations, including state-owned enterprises, are also under the scanner for corruption and malpractices, they frequently get away due to entrenched political patronage networks in the Communist Party and cosy understandings with regulators.

Whether a grand economic strategy or a bureaucratic turf war is propelling the crusade against MNCs, its effects have huge ramifications for global business. China is the world’s largest trading nation whose cumulative imports and exports of goods have overtaken those of the United States. China also has a humungous domestic market of half a billion middle class consumers. It is an understatement to say that the future of globalisation depends on which way Chinese economic governance goes.

Globalisation is premised on strengthening of private enterprise at the expense of governments’ capacity to interfere in the markets. China initially did accommodate the needs of MNCs when it began wooing foreign direct investment in the 1980s, especially by depressing wages for labour and permitting liberal export policies that generated whopping profits for foreign investors. But after China managed to lock in massive amounts of FDI, the government changed gear to stricter corporate policing driven by the confidence that foreign capital has no option but to bear with the humiliations rather than risk a costly exit.

Last year, the World Bank’s “Ease of Doing Business” ranked China below Russia and found fault with the former for failing to implement more market-friendly reforms. Yet, despite all the negative publicity, MNCs are not voting with their feet and deserting China. They have sunk too much capital into it already and continue to benefit from Beijing’s policy shifts such as permission for fully foreign-owned company structures as opposed to the earlier mandatory joint ventures with local Chinese firms.

President Xi’s current campaign against MNCs thus strikes a fine balance, wherein he ensures there are enough incentives for them to stay in China, but in return extracts higher compliance with local laws and sensitivities. As a result, nationalistic China is not a stomping ground for foreign investors to lord over but an opportunity if they play by the rules. Every developing country that is struggling to attract FDI but fears loss of sovereignty must study the evolution of the Chinese model over time and learn how to harness MNCs without kowtowing to them.

The writer is a professor and dean at the Jindal School of International Affairs