The giant firms of global capitalism
Kaveh Pourvand, 17 July 2013
‘China will not buy up the world’ writes Martin Wolf in the FT. Contrary to the common perception of China gobbling up Western companies; it in fact receives $324 billion more capital from foreigners than it invests abroad. Drawing on the work of Peter Nolan, Cambridge University Professor of Development, Wolf explains why this is likely to remain the case.
Global capitalism is increasingly oligopolistic. Many sectors, ranging from aircraft manufacture to beer production, are dominated by a handful of global firms, nearly of which are based in developed countries. These giant players cement their global dominance through their ability to raise finance on a large scale, invest heavily in R&D, develop a global brand and attract the best people. They also exert enormous pressure on their supply chain, encouraging consolidation there also.
China has successfully developed so far because it has been an attractive production location for these global giants. The trouble is that their economic power prevents Chinese firms from moving up the value chain. Karel Williams’ team at CRESC have studied Apple’s economic relationship with China. Apple made profits of $12 trillion in 2012 in part by squeezing the margins of Chinese supplier Foxconn to such an extent that it struggles to be profitable. It made a one per cent profit on pre-tax profits in 2010, followed by a 2.7 per cent loss in 2011. Foxconn has little surplus profits to invest and move up the supply chain, as did Korean and Japanese manufacturers in the late 20th century.
The economic power of these giant firms, Williams and Wolf suggest, place an economic ceiling on the development of emerging economies. This was not an environment Japan, South Korea or Taiwan operated in when they achieved stellar growth. There are also two other issues worth mentioning.
First, ownership matters. Growth is stunted if in many sectors an economy is locked into being a low-value component supplier, allowing profits to be taken abroad without getting much back in return. This should be an issue of concern particularly for the UK, with its lax takeover rules.
Second, planning is inevitable. While some castigate even modest proposals for industrial policy as the government trying to ‘pick winners’, large swathes of the global economy are in fact planned to minute detail by large-scale, hierarchical organisations. The debate about industrial policy should not be about a false choice between economies that have planning and those that don’t, but about the type of planning we want.