Will China Experience a Prolonged Period of Slower Growth?

China's greatest asset to growth was its cheap manufacturing base that drew investment and interest in low cost alternatives. Globalization is stripping China of this advantage as other nations find their own competitive ground. China will need to adjust its economic strategy to help it find sustainable growth that doesn't rely heavily on foreign capital accumulation. Changing their investment policies and encouraging long-term solutions will be more helpful than short-term strategies in the next phase of China's economic life.

China has been known as a great place to produce products because of a business friendly government, lower labor costs, and less environmental restrictions. This cheaper cost alternatives encouraged foreign companies to outsource simple manufacturing of parts to Chinese companies. This create a net influx of foreign dollars that fuel growth over the past couple of decades.

The country's production capacity was based on its ability to partner with outside companies seeking to shave costs. As Chinese industries learned new skills and abilities they developed many of their own products based upon existing product models. A few industries developed advanced models of products but this is still not the mainstream much of China's manufacturing sector.

Now that countries like the U.S. have achieved cost parity due to high technology and productivity improvements the benefits of outsourcing to China have lessened. Therefore, there is downward investment pressure that limits the amount of capital available to Chinese companies. The percentage of companies that have developed independent income streams has improved.

Without the innovative process that comes from a highly skilled and educated workforce Chinese growth is likely to be muted as nations find alternative places to seek resources. This doesn't mean that there is a wholesale disinterest but that such contracts are not as lucrative as in the past and alternative opportunities such as India, U.S. and Eastern Europe are viable options for production.

Think of how the free market works on a macro scale. China went through major economic reforms in 1978 that liberalized and privatized a number of state businesses. Like a hole in the middle of the ocean the capital rushed in and sparked an era of growth capitalizing on a cheap labor supply. It was a nation hungry and ripe for investment. As that hole filled up and costs increased many of the advantages are muted.

China of tomorrow will not grow as fast as it did in the past as alternative investment locations are found and manufacturing parity occurs with other nations. Chinese labor productivity has gained but is running to its limit without mass educational investment that can improve on innovation and technological production. Poor policies that favored pro-Chinese knowledge accumulation at the expense of foreign companies have raised a skeptics eyes to alternative countries with better patent protections.

With an interest rate of around 5% they can reduce that rate to encourage internal growth and development. They may also consider additional infrastructure improvements that connect regions and lower transactional costs. Revamping education to ensure more scientific minds and skilled labor are created can further help in the long run. Changing government policy to open their economy, ensure free and fair transference of knowledge, and focus their investments in high development areas.

The Chinese Tiger has not been netted yet but will need to consider additional reforms that encourage higher levels of growth. Telecommunications, lower shipping costs, and cross-border partnerships are offering cost-quality alternatives to Chinese investment. By reaching out with partners in countries like the U.S. and finding collaborative methods of mutual development with American companies the Chinese companies can further extend their reach.  

Did China Waste 6.8 Trillion Dollars In Mismanagement and Corruption?

According to a report by China's National Development and Reform Commission and the Academy of Macroeconomic Research the country wasted nearly $6.8 trillion dollars in investment money (as cited in Business Insider).  Half of the investment money between 2009 and 2013 was wasted in ineffective construction projects that were supposed to improve the nation’s infrastructure to spur growth.  A sign of major corruption or just mismanagement?

Low interest rates can spur all types of investments and these are beneficial for national growth. There is always a cost with such stimulus if infrastructure investments in the provinces don't actually lead to growth or simply don't have a return on their investment. Local government makes decisions on where and how to spend resources but continued poor investments can damage growth. 

As with any large project it is possible that money is not spent in the most effective places to obtain a significant return on investment. For example, an expanded highway will have one return rate over 10 years while the development of discounted industrial parks may have another. Some will improve upon the infrastructure and expand the economy while others will help a few business but have a lower overall impact. 

Likewise, China is known for higher levels of corruption. This is typically the case in restricted economies that follow a communist system where central government makes most decisions. Government becomes the major source of income and officials and their associated companies find a way to skim off the top of major projects. Development is a great buzzword that leads to the reallocation of resources. 

The $6.8 trillion dollars may not have been a complete waste but certainly didn't get the bang for the buck it was originally intended to have. Poorly designed projects, lack of proper financial planning, inefficient development, a week development plan, and of course corruption can zap stimulus power. At present the Chinese economy is expected slow down a little while further stimulus in the form of lower interest rates are used to prop up growth.

Developing the Global Marketing Mindset

Global marketing is a new business necessity as global integration leaves few localities untouched by outside market influence. Developing global managers and moving them into organizations where they are most useful can help in the development of stronger marketing decisions. Research by Moeller and Harvey (2011) highlight the need to develop the “global mindset” among managers and use that mindset to compete on international markets. 

Before discussing the benefits of globally oriented managers it is first beneficial to understand what the “global mindset” is. According to Rhinesmith, the global mindset is, “the ability to scan the world from a broad perspective always looking for unexpected trends and opportunities that may constitute a threat or an opportunity to achieve personal, professional or organizational objectives” (1993, p. 24). They are able to overview the global environment and understand larger trends and move to specific knowledge adaptation when necessary. 

Those with “global mindsets” do something a little differently than local managers. They use something called the reference point theory. Similar to the process of socialization, acknowledging and understanding reference points, those with the global mindset can use multiple strategic reference points when transitioning into culturally, economically, and politically foreign environments (Fiegenbaum, et. al. 1996). In other words, they have gained enough knowledge in their lives to bounce around different cognitive models to see problems from varying cultural perspectives. 

The ability to scan wide swaths of information, dig deeply into areas of interest, and use multiple perspectives to solve problems obviously has advantages for organizations that must market, distribute, and operate on multiple continents. According to Gupta and Govindarajan (2004), it provides organizations with the benefits to forecast trends in the market, gain sophistication in analysis due to diversity of perspective, integrate best practice knowledge, and coordinate across functional activities and borders. 

The global mindset is developed through experiencing other cultures and gaining of environmental knowledge. This comes from studying concepts, understanding others points of view, being aware of your surroundings, and being creative in problem solving. Some personalities strive for understanding greater breadth of information while others do not. When managers have gained cultural experience and knowledge they can put that to strong use in solving complex global problems in logistics, marketing, human resource management, and many other areas. 

Fiegenbaum, A. et. al. (1996). “Strategic Reference Point Theory,” Strategic Management Journal, 17 (3), 219–35.

Gupta, A. & Govindarajan, V. (1991). Global Marketing Strategy and Organization. Hoboken, NJ: John Wiley & Sons.

Moeller, M. & Harvey, M. (2011). Inpatriate marketing managers: issues associated with staffing global marketing positions. Journal of International Marketing, 19 (4). 

Rhinesmith, S. (1993).  A Manager’s Guide to Globalization. Alexandria, VA: Richard D. Irwin.