Professor Jonathan Story, Marusi Chair of Global Business at RPI Lally school; Professor Emeritus at INSEAD; Distinguished Visiting Professor at Fordham University; and now Chairman at Story Productions Ltd, uncovers China in front of you.
Jackson: You wrote the book China Uncovered. Who did you write it for? What uncovered make China a special market?
Professor Story: The book is written for business people, who want to invest in China or who already have operations there. My initial specialization was not China but the dynamics of transition about which there is a huge literature, from history and political science, and that begins, I suppose, with the breakdown of regimes, that we call revolutions, and then tracks their transformation over time into something else. The major examples are the French revolution starting in 1789, the Russian revolution of 1917, and the Chinese revolution culminating in the entry of the Red Army to Beijing in 1949. As we all know, Mao’s years in power from 1949 to his death in 1976 were turbulent, and resulted in a China where 400 million people lived in extreme poverty, China’s per capita income was equal to impoverished Albania, and the country traded well under one per cent of a small economy with the rest of the world. Deng Xiao Ping inaugurated major changes, about which I wrote in a book, China: The Race to Market, and was published with the Financial Times in 2003, also aimed at a business readership. There were at least two features of this process inaugurated under Deng: one was “feeling the stones as you cross the river”, in other words, policy was scientific in the proper sense of a cycle of experimentation and testing, regularly kept at local levels, until revealed to have been effective. Effectiveness was expressed in the aphorism ascribed to Deng that “what matters is not the color of the cat, but whether it catches mice”. The other feature was to de-centralise experimentation across the huge country of China to allow thousands of experiments to bloom. Remembering Mao’s late 1950s policy to let a hundred flowers bloom—where Mao encouraged criticism, and then proceeded to punish the critics—Chinese people were at first very careful not to be too bold. But through a complex process, which I trace in China: The Race to Market, , the market dynamics which we now associate with China began to pull policy along. The story which best encapsulates the theme of China: The Race to Market, and it is the theme which underpins, China UnCovered, was told to me by a former student of mine, Ken Courtis, who later became MD and Vice-President of Goldman Sachs, Asia Pacific. Ken went to visit Prime Minister Li Peng, the adopted son of Prime Minister Zhou Enlai. Ken was ushered into the great man’s presence. Normally, the form is to wait until the great mans says what he wants to say, and then withdraw. But Ken, in the true spirit of INSEAD graduates, opened the interview with a direct question. “Prime Minister, why have you taken so long to crack down on inflation”(The interview was shortly after the peak of inflation at 23% in 1993). Li Peng replied: “Mr Courtis. Imagine you are running a marathon, with 1.3 billion Chinese running as fast as they can behind you. Would you turn around and ask them to stop”. This story encapsulates what I had been analyzing in China’s transition process. Interpreted into my book, China UnCovered, the theme I emphasize is the speed at which the business context evolves in China, and the challenges and opportunities that provides for business people who decide to operate there.
Jackson: How did you write this book? What’s your approach studying China and markets from other countries?
Professor Story: I began writing business cases on China to find out what was happening there. There were a growing number of good cases available: in the 1980s, the main theme for foreign investors was how to manage joint ventures, because that was the dominant way by which business was conducted. In the 1990s, when I began to write corporate cases on China, the government opened up the formulas which investors could adopt: they ranged from setting up sales operations, or licensing technologies, through to joint ventures, Greenfield sites and then the holding company formula. This was introduced in 1996 in an interesting incident when the government, continuing on its learning path about how to put multi-national investment to its own purposes, began to realize that a major foreign corporation like Kodak could become a national champion in its own sector. The policy went along with the broad strategy of “selling the small, and grasping the big”, in other words of selling off often local government assets to other institutions of the party-state, promoting the development of a stock exchange, and eventually allowing foreign as well as local investors to buy these assets as part of their corporate portfolio of companies. So a key component chapter of my book is the importance for foreign business people of keeping track of government policy as it develops. That is also directly related to the need to manage government-business relations as a major part of corporate strategy.
I wrote this book based on the cases which I wrote, on the documentaries that I made, and on interviews with business people operating in China. I have been trained as a historian first, and then as a social scientist. The historical method is always to test your sources, and to make sure that you survey the matter under study from as many angles as you can, before reaching a conclusion. The social science method that I choose to follow states that the people who do things—the workers who work on the shop-floor; the salespeople who have to get people to part with their money; the soldiers who actually fight the battle—these are the experts which you have to learn from. So in the case of operations in China, go out and meet and learn from people who sell, make things, employ, finance and negotiate in China. Together, they have a wealth of information. My task, I see as collating that information, and then pouring it into the mould that I have in mind. That mould, derived from what I learnt in writing China: The Race to Market, is that the clue to corporate strategy and policy in China, is the speed and direction of change in the China business context.
I have been teaching for decades about doing business in different markets, first in Europe, and than as my teaching requirements developed along with the opening up of global markets in the 1980s, in the rest of the world, including Japan, Russia, the bog stories of policy changes and market opening going on in Latin America, Asia, India, and the Mid-East. The approach was always a mixture of two insights, amply developed in the respective literatures: the first is that institutional approach to economic policy, which states that policy output of different countries are surprisingly consistent over time. The downside of the institutional approach is that, unless great care is taken, it tends to blind people who use it to the possibilities of change. This is best illustrated in the doctoral thesis, which was proudly brought to the press in November 1989, arguing that the German Democratic Republic would be around for a long time. So the second literature which I have applied is that of regime change or revolution. This literature emphasizes why changes or breakdowns occur. Because I am at root a historian by training, I always opt for an eclectic approach, rather than a monochrome interpretation of why things happen. Take the case of the Soviet Union’s breakdown. There were many and complex reasons why it happened, not one.
Jackson: One thing doesn’t change in China is change itself; and China is such a big country with large variety. Hence it’s hard to cover all the timely issues in one book. How do you suggest readers take the best advantage of this book? Is there any follow-up readings?
I like to think that Europeans should have a major advantage in thinking about China. In many ways, there are many parallels between the two. China has 23 provinces; the EU has currently 27 countries, most of them smaller it must be admitted than a medium size Chinese city. But they each differ significantly from eat other. Denmark is distinctly different from Sweden. And in case anybody hadn’t realized, Italy does not function like Germany. The same point may be made about the provinces in China. They have different dialects, distinct cuisines, and their own often rather protectionist-oriented local governments. Of course, the big difference is that China is a sovereign state, whereas the EU is a composite of sovereign states. But that crucial distinction apart, both are very diverse. And because they are diverse, thinking about them is complex. Thinking about doing business in the EU must start with a recognition that business people have to be prepared o become familiar with the considerable diversity of tax systems, labour laws, financial institutions that populate the region. Thinking about doing business in China must start with the fat that China is a political unity, and that the party-state is emperor. But then, business people have to learn that they are dealing in distinct markets, with discrete local authorities—bound together under the party-state—but each a significant player in their own right. In particle, because, as your question implies, change is the constant in China, we are not dealing with acquired knowledge that we can bring out of the draw in the future. We have to permanently update, and we have to do so by understanding the relation between the dynamics in the China markets, and the operations of government at its five different levels. Hello to complexity! But then in Europe, we should be acclimatized.
If you read my book, I have suggested readings at the end of the chapters. The organization of the book illustrates the thesis which I have attempted to lay out here. I start with the big picture of China’s transformation from 1978 to the present, because I think that without an understanding of the big picture, you will be overwhelmed by detail, and loose your way in the forest of China’s evolution. Then I use a framework derived from the writings of two great former colleagues of mine, Edith Penrose and Sumantra Ghoshal, to look at the learning process i that is required of corporations approaching, or operating in the China market. The fascinating part of the China story is that China is learning about its own evolution, and the same goes for corporations operating there. The third chapter deals with government relations, and there are a host of significant authors from whom one can learn. I would draw the attention of Chinese readers to the work of Professor Lu Feng from Beijing University. But I also draw on the work of Professor Ken Lieberthal, who must definitely be counted as one of the world’s leading experts on China. He has written a definitive work on the Chinese administration, which I cite. The next chapter deals with how business people are advised to go about choosing the appropriate business structure and location for their operations in China. All business people I interviewed consider that th key to doing business in China is getting your people right. That is a very challenging area, and is one of the reasons why foreign companies come to rely on key Chinese personnel. Then I deal with operations, particularly manufacturing, but the same lessons can be applied to companies operating in services. Here I would advise readers who are interested to follow a few chosen cases, rather than get lost in the myriad of books about doing business in China. Chapter seven deals with the issue of supplying the China market, and the challenges that have to be met. Chapter eight deals with the matter of promoting the brand. My final Chapter, Choosing China, summarizes everything by using a software which I have developed at INSEAD, my globalization tool, and which may be used for any investment anywhere in the world. In this sense, China UnCovered, uses doing business in China, as the sort of approach which I recommend for doing business anywhere in the world. In other words, Chinese business people could read my book, if they wish, and study the approach I suggest for foreigners operating in China. They can then apply the same method to developing their operations. With nearly 40 years of teaching behind me, I’m confident that I am on the right track.
Jackson: Lots of voices are talking about shorting China. What’s your opinion?
Professor Story: Lots of voices have been saying that since 1980. But the interesting pattern of Chinese policy is to always have found surprising ways around, through or under problems. That is no reason for believing that the next set of problems will be dealt with in such a way. But it is to warn against doomsters, who sell pessimism in the hope that they will eventually be shown to be right. No doubt they will be, but as business people, we should realize that while there is an awful lot that go wrong on our way into the future, in the past we have as often as not been surprised at how we got where we are. In the case of China, my view on this has been spelt out in an article that I have published online,with the Brussels-based Institute of Contemporary China Studies. There is an ample bibliography there.
Jackson: What do you think are the top three challenges facing China? Is China doing the right things address these challenges?
Professor Story: There are many challenges, and that is one of the key characteristics of China’s transformation. In terms of policy, growth has been given priority, but other issues are always clamouring for pride of place. First among these is the natural environment. China faces major challenges here, in terms of available soil, water, and clean air. Very closely related to this is the challenge to local levels of government in dealing with a more educated, and informed population. The tendency of Chinese administrators is to be secretive, and to wait for the boss to decide before they act. The requirements of a more sophisticated and informed Chinese population is to have responsive government. A third key issue is Chinese foreign policy. Many Chinese people are rightly proud of what the country has accomplished in so short a time. But my advise is that China not be tempted to behave as an 800 pound guerrilla in global politics. To do so, in my view, does not serve Chinese interests nor those of the rest of the world.
Jackson: We’ve seen government’s hand on Google, Walmart, and Unilever. Do you think it’s difficult for foreign companies to do business in China? Or they have to adapt to new strategies?
Professor Story: Well, Google deals with an area which is very sensitive in China. The CCP could also be clued the Chinese Control Party—control of information, control of labour markets, control of financial flows, comes naturally to the CCP. To my mind, it is no surprise that Google has had a run in with the Chinese government. On the matter of Walmart, the party has told the giant wholesaler and retailer to accept to deal with the official union, whereas Walmart’s policy in the US is not to deal with trade unions. The real name of the CCP is of course “communist”, and that means defending the interests of workers, and not just managers. That balance has to be urgently dealt within China. The question is: cn it be dealt with through an official union? Put another way, in the realities of China, could legal unions not affiliated directly to the CCP have an impact?
Jackson: Could you compare China with other emerging markets?
Professor Story: Yes. But each has its own characteristics. The two leading emerging markets among the BRICS are without doubt China and Brazil. Both are significantly different, but both have had a strong of successful leaderships. The last two Presidents of Brazil, Cardoso, and Lula, have had eight years each, and have placed Brazil firmly on an upward trajectory. Russia’s transition out of stagnation has been a major source of negative learning in China about how not to manage the process. On all indicators, Russia is essentially a petro-state with a weak and underperforming government and political culture. India has many assets, but also deep structural problems which we can see in the inability of the present government to implement vital structural reforms, as inflation rises to double digits and growth falls to 3% this last year. But my advise to Chinese is: don’t sop leaning from the ret of the world. The United States began to do that in the 1990s, and it was not to the US benefit.
Jackson: You are now also making business documentaries. That’s pretty interesting. What’s the difference between writing a book and make a documentary? What documentaries have you already made and what’s your next one?
Professor Story: Yes, I make documentaries. For instance, i have a documentary on “doing business in China” which I made with the UK Trade and Industry organization in 2007. I have just used the documentary in a course on doing business in China given at the University of Antwerp business school, UAMs, which has an excellent China section. In this case, the interviews I did for the documentary, I used for the book. But other documentaries, for instance, on the Egyptian oasis Siwa, are rather different. In the case of Siwa, the theme is the modernization pressures which the Siwa population are undergoing. In the late 1970s, you war not far wring if you said that the last person to visit Siwa had been Alexander the Great. Now, the population is open to modern tourist buses, the internet, Wahabite preachers funded out of Saudi Arabia, and much else.
My next documentary, I hope, will be on a major investment in Mozambique, and a more general one on Brail in the run-up to the forthcoming Olympic Gales after London. My son is married in Sao Paolo, and he and I work on documentaries together.