Is what’s good for Hindustan Motors good for India? Large Corporate Sector Stability and Economic Growth

I notice a culture difference between India and China that creates some difficulty in understanding each other’s economy.

Indians are very proud of their global corporations such as Tata and Birla, and make a lot of analysis comparing them with China’s Haier, Lenova, etc. I see so many of them in newspapers, blogs, and academic papers.

I am sure these Chinese corporations are in no way comparable to their Indian counterparts. While Indian big corporations are already playing at globla scale and argubly operating at modern international standards, Chinese corporations such as Haier and Lenova are at best toddlers trying the water.

But such comparison is never relevant, because big corporations do not matter that much for Chinese. China is an ultra-competitive market, in the sense that turnover of industry leaders  is very high in product markets, and productivity enhancement is not usually created by small group of industry incumbents.

I don’t see any Chinese who are proud of Haier or Lenova in the way Indians are proud of their big corporations. If today Haier products are good, Chinese use them; and if tomorrow another Chinese company produces electronic appliance in higher quality and lower price, Chinese consumers simply switch to the new winners; there is no emotion attached to the old incumbents, and there is no sad feeling about failure of certain household brands. As a consumer, you don’t need to cheer up for the “milestones” achieved by Hindustan Motors.

You may ask then how can Chinese corporations make long-term investment when the horizon is so short. This is not a problem in China (although I believe that when Chinese move up the value chain, it will some day become an urgent problem). Engineers, technicians, workers, and machinery will move to the new winner’s plant in weeks, there will be no disruption in production. This is (wildcat) capitalism, Chinese style. Or as Bush puts it, “very capitalism”

Such ultra competition is good for China; at least Chinese don’t need to put up with the Ambassador cars produced by Hindustan Motors. The only beneficiary from India’s protectionism policy is the Birla family that owns Hindustan Motors, and other typcoons, not ordinary Indians.

There is empirical evidence that corporate stability is bad for the overall economy. Professors Kathy Fogel, Randall Morck, and Bernard Yeung study corporate stability around the world, and find that what’s good for Hindustan Motors may not be good for India!

They study the turnover in the list of a country's top ten corporations between 1975 and 1996, and find that higher turnover  is associated with faster overall economic growth, faster productivity growth, and (in high income countries) faster capital accumulation.  They interpret this as consistent with Schumpeter's (1912) theory of creative destruction, in which growth entails creative new firms destroying old stagnant ones.

China however still has a long way to go toward the goal of truely ultra-competitive capitalism. China’s largest corporations are mostly state-owned, and are usually granted certain monopoly rights. They hold substantial assets that are not put into the most productive use. They also wield their political power to create barriers for private sector new entrants, and establish barriers against foreign investors too. They are frictions in the economy that slow down China’s productivity growth. In order not to fall into the same trap where Indian economy currently stays, an urgent issue is to reduce government’s control in the economy.

Many Chinese large corporations (mostly state-owned) are talking about expanding their empire for the goal of eligibility in Forbes 500. They argue that it is important that Chinese have big corporations to compete with India in the Forbes’ list. They say this will be good for overall economy of China, good for national security, blah blah blah, and thus request preferential treatment and capital injection from government and taxpayers. I say Chinese don’t need to engage in this kind of resource-wasting contest.

Sooner or later Indians will find it meaningless too. What is important for you is to get higher income and better products for yourself, not useless national  pride. What is good for the incumbents are not good for the overall economy. Ask Hindustan Motors to stay away from your pockets (both as a consumer and as a tax-payer)!

Reference:
Large Corporate Sector Stability and Economic Growth: Is What's Good for General Motors Good for America?   (PDF file)

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