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Big business boost

By LI CHEN | China Daily Global | Updated: 2020-09-07 08:27
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Strength in numbers, but China's corporate giants need to increase their international competitiveness

In 1990, when Fortune magazine started to compile its ranking of the world's largest industrial corporations by revenue, none of the Global 500 companies were based on the Chinese mainland. Together, the Chinese mainland, Hong Kong and Taiwan are now home to 133 companies in the Global 500. In comparison, the United States has 121 companies in the list and Japan 53.

Large corporations are at the heart of global business systems. They play a central role in the dynamic growth and technological progress of the international economy as well as national economic transformations. Employing productive assets on a vast scale, large corporations serve as fertile ground for the accumulation of technological and organizational capabilities.

The globalization trend since the 1970s has fundamentally altered the nature of how large corporations operate and compete. Through organic growth and active mergers and acquisitions, large companies headquartered in high-income countries have constructed and orchestrated their production networks, supply chains and distribution systems around the world. As Peter Nolan, a professor at the University of Cambridge, points out, the degree of global industrial concentration has increased greatly in many sectors. Mostly from the developed countries, a small number of large corporations with superior technologies and brands are the "system integrators" or "organizational brains" at the apex of global value chains.

Developing countries need large enterprises to build up capabilities in higher value-added activities such as research and development and marketing to support their industrial development. However, as latecomers, it's very challenging for companies from developing countries to reach sufficient economies of scale to catch up with the incumbent corporations from high-income countries that occupy the commanding heights of global business systems.

According to Keun Lee, an economist from the Republic of Korea, the size failure, defined as the difficulty of generating big business, is a key factor that prevents developing countries from overcoming the middle-income trap. Econometric studies have shown that except for a few cases such as the ROK and China that are more successful, most developing countries have had a smaller number of big companies than predicted by the size of their economies.

It is in this context that the rise of China's corporate giants should be seen as a remarkable achievement. It reflects the outcomes of China's gradual and experimentalist approach to economic transition and enterprise reforms. The market-oriented transition in China has unleashed vibrant private sector entrepreneurship and led to the rapid growth of non-State enterprises in numerous industries, especially in the new information and communication technology sector. Now, among the world's seven largest internet services and retailing companies in the Fortune Global 500, three come from the US and four are private sector companies from China, namely JD.com, Alibaba, Tencent and Xiaomi.

Reforms have also effectively streamlined and corporatized the core assets of China's State-owned enterprises, especially those in traditional capital-intensive industries. This process has created a group of large corporations with more efficient and accountable governance structures that are listed in domestic and international stock markets. The restructuring of China's State-owned enterprises sector has brought about State-owned corporate giants that represent the majority of Chinese companies in the Fortune Global 500. They have been at the forefront of China's energy, transportation and infrastructure sector development.

However, after four decades of rapid growth and catch-up, there are still wide gaps between the large companies of China and the corporate giants headquartered in high-income countries. Although Chinese companies outnumber US companies in the Fortune Global 500, they only account for around 26 percent of the total Fortune Global 500 revenue while US companies account for 30 percent. If ranked by total profits, China's companies would lag even further behind US companies.

In terms of R&D capabilities, China's large enterprises have been investing heavily to catch up, but the gaps remain substantial. According to the European Commission's Industrial R&D Investment Scoreboard, the top 2,500 large companies around the world accounted for approximately 90 percent of the global business-funded R&D in 2018. Among them, 507 Chinese companies accounted for around 12 percent of the total R&D expenditure of these 2,500 companies, while 769 US companies contributed 38 percent.

Moreover, China's large companies are still at a relatively early stage of catching up with the global corporate giants in terms of international competitiveness. Most of the revenues of China's large companies come from the domestic market and they face an increasingly challenging international environment to grow their businesses overseas. China's large companies have only been able to complete a tiny number of major cross-border mergers and acquisitions in comparison with US companies. According to the United Nations Conference on Trade and Development, China's total stock of outward foreign direct investment was less than 30 percent of the US's level in 2019. It's also significantly less than the combined foreign assets of the world's top 10 non-financial multinational companies (all from high-income countries) ranked by foreign assets.

The rise of China's corporate giants results from China's adaptive reforms and industrial development in a changing global business environment. The huge, continuously growing and increasingly open domestic market has created opportunities and stimuli for China's large companies to acquire new capabilities and achieve remarkable growth. However, China's large companies still need to strengthen their innovation capabilities and international competitiveness. While the future remains highly uncertain, how China's corporate giants perform in the coming decade will have profound implications on the evolving landscape of global business systems.

The author is an assistant professor at the Centre for China Studies and Lau Chor Tak Institute of Global Economics and Finance at the Chinese University of Hong Kong. The author contributed this article to China Watch, a think tank powered by China Daily.The views do not necessarily reflect those of China Daily.

 

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