MNCs Production Responsibility

Production is one of two of MNCs domains in the four pillars of structural power and governed interdependence framework. Output of Chinese SOEs has however not been as envisaged (Shen, 2013). There are however avenues that China can pursue to get companies to perform better. These include incentives such as provision of more credit, but also awards and punishments, like point deductions (as explained in the previous section); thus, placing the state at the forefront again. In order to ensure that SOEs remain competitive and increase their profitability and the value of assets under their control, the State Council established SASAC in 2003, whose existence is based on the government’s directive for it to transform large SOEs into “national champions” (Lardy, 2014:49). However, Clarke (2003) argues that it is debatable whether SASAC can achieve this objective, given that it controls over 120 national companies.

Another avenue that is often pursued in order to boost MNCs productivity, and was frequently used during the Hu and Wen era (2003-13), is the promotion of industrial policies geared towards SOEs at the expense of private and foreign firms, yet again in the domestic realm.

122 However, it was largely unsuccessful, as efficiency of SOEs is at 1/3 of private firms according to Lardy (2014).

This sparked the debate about the dramatic increase in the number of private domestic and foreign MNCs and a decline in SOEs (Elliott and Zhou, 2013). The rise of private MNCs and the decline of SOEs is easiest to measure in the manufacturing sector. The number of private MNCs by sector in 2009 indicates that out of 7, 402 000 companies, 1,745 000 were in manufacturing, 2, 632 000 in wholesale and retail trade, 367 000 in construction, and 60 000 in mining (All-China Federation of Industry and Commerce and China Non-state (Private) Economy Research Association (2011)).

In terms of Chinese MNCs sluggish performance domestically, one of the respondents that was interviewed, commented the following: “You cannot just shut them down, so you have to make them transform and transport to Africa” (Elite Interview F, March 2016). This was also echoed by Elite Interview G (March 2016): “Expansion in Africa is easier than establishing domestic ties and operations”. This fits in with the structural pillar of production, given that overcapacity in the domestic market, forces MNCs to look for market and production options elsewhere.

In Africa, Xu (2013) claims that by 2011, 36 per cent of private Chinese projects were in the manufacturing and 22 per cent in the service sector, compared to SOEs holding 35 per cent in construction and 25 per cent in mining. This indicates how little SOEs engage in manufacturing (only 6 per cent) and how small the private sector’s involvement in the construction sector is (only 5 per cent) (Xu, 2013). However, one thing that stands out is the increase of private MNCs investing in capital intensive sectors and catching up with their SOE peers, reaching a total of 16 per cent of the total investments by end of 2011 (Xu, 2013). Nevertheless, SOEs comprise roughly 30 per cent of Chinese MNCs in Africa, and they account for roughly 70 per cent of contracts, predominantly in mining and infrastructure. SMEs are more engaged in agriculture and manufacturing, considering that incentives to invest in capital intensive sectors are limited and mostly geared towards SOEs.

Furthermore, if a company is not performing as it should (production is lacking or environmental protection measures are not adhered to), China will not deregister or close it down as that is more of a hassle than getting them to rectify their wrongdoing. The following

123 quote relates to this: “The attitude is: if there is a problem overseas, you [the MNC] fix it!” (Key Informant K, March 2016).

Elliott and Zhou (2013) on the other hand argue that the declining number and productivity levels of SOEs is a misconception. They claim that SOEs are in fact stronger than ever; placing a caveat saying that performance and productivity levels of SOEs differs markedly between those that export and those that only supply the domestic market. According to Cavusgil (1980), historically, MNCs that only export have a significantly lower production output compared to those that diversify their operations, as export accounts for only 10 per cent of production. This indicates that those SOEs that have focused on international competitiveness and a diversified operations portfolio are significant global players.

While in the domestic realm, Chinese citizens whose tax money has been poured into non- performing SOEs, have become increasingly dissatisfied with SOEs (Key Informant L, March 2016); an incentive given to well performing SOEs is the Most Touching Chinese Company award, given by an NGO. Key Informant F (March 2016) says: “Good that they are giving award instead of MOFCOM, gives the company more credibility as good doers”. The domestic dissatisfaction with SOEs and the increasing complaints from private business and intellectuals has also caused the government to adjust its tune towards private business, as they have historically paid too much attention to SOEs (Elite Interview G, March 2016).

It was mentioned earlier that the private sectors degree of influence on industrial policies depends on its relations and proximity to (local) government. To explain this, Saich (2001) says that in Xiqiao Township in Guangdong: “…local officials do not give priority to publicly – owned industry over the private sector and […] they do not insist on relationships in which private enterprises are subordinate to and dependent on them”. In a similar fashion, Zhang (1995) claims the same about Wenzhou in Zhejiang province, where market forces guide enterprises and local government does not interfere. The same can be applied in relation to private MNCs operating in Africa, where the dependence on the home state is logistically more difficult as companies often operate in settings where official Beijing has no surveillance capacity, nor do the Chinese embassies on ground have overview of companies (Yun, 2014; Xu, 2013). This means that MNCs are left to their own devices and have to find their own way of doing things to the benefit of the company and its reputation.

124 Based on the previously mentioned provision of credit by the home state (China) to its MNCs, predominantly SOEs, and the still high numbers of Chinese SOEs operating in Africa as opposed to private Chinese MNCs; it could be argued that the SOEs carry a bigger importance in China’s foreign policy. In addition, Chinese SOEs increasing internationalisation of their operations and the increasing focus on diversification of their operations, has placed them in a privileged position to negotiate better terms with their home state. Conclusively, despite their productivity at times being not as expected, the fact that they are important players in China’s foreign policy places them at the same level as the home state in the governed interdependence structure.

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