Mapping Business Opportunities in China China’s Strengths and Weaknesses

Main problem: Wrong model of development model? GDP = private consumption + gross investment + government spending + (exports − imports) China is heavily export and investment oriented:

China's economic transformation Video 10 min

Producing more competitive products but lacking true innovation The technological products are largely developed incrementally (no disruptive innovation). The new inventions are often „only“ refinements of imported pre-existing technologies. “Import/assimilate/re-innovate model” does not foster a climate of original innovation. Why?

China has a cheap workforce. But for how long? Cheap labor rates were and still are crucial to the Chinese economic boom. BUT China’s supply of cheap labor is going to run out soon: Workers are already becoming more assertive in their demand for higher wages and better benefits. The whole Chinese society is ageing very fast (one child policy) = reduciton of pool of new cheap labourforce.

Flawed investment policy Long-term plans include aggresive targets for economic growth, innovation, and sustainability (for example 15 percent of energy from renewables till 2020). BUT investment policies are plagued by “malinvestment (i.e. can non-market forces decide on such a huge amount of investment efficiently?). Like….

Weak legal system and corruption Not only cannot protect human rights, but cannot also protect rights of a business. For example: Courts are not independent and will in general favor domestic party or a „friend“. Properties can be seized arbitrarily. Governement is corrupted (15 percent of GDP!) and discriminate on the friend/no friend basis. Intellectual property lights (enforcement still weak) - annual economic loss accounts for eight percent of GDP. Like…

Weak institutions Quality of a country’s institution as important as the development and strength of its market processes. Tension and opposition necessary to keep market honest. Non-market institutions include: Independent courts Universities Free press Welfare systems Labor unions These nonmarket institutions keeps markets in check. China needs them, but don't have them.

Non-privatized industries Communist party still retains the control of most of the state owned companies in strategic industries: Telecom Energy Transportation Steel production These companies limited growth of productivity in recent 20 years. Private owned companies 40 – 70 percent more productive.