Chutes and ladders

Observers often credit the success or failure of multinational corporations in China to the whims of the one-party state. MNCs can’t afford to ignore the market, it seems, but neither can they ensure that the powers that be won’t quash their expensive and time-consuming efforts to capture a piece of this growing market. 

Kenneth Lieberthal takes this idea to task in Managing the China Challenge, an immensely practical and mercifully thin guide for MNCs that are planning corporate strategies and operations. Lieberthal argues that there is method to the madness of the Chinese corporate arena, and that understanding those principles is the best investment an MNC can make.

One of the heaviest China hitters around, Lieberthal is a commentator to be trusted. Following his work as an advisor on security issues to the Clinton administration and as a professor emeritus at Michigan University, he is now a senior fellow at the Brookings Institution and director of its John C. Thornton China Center.

Stakes are high

To take part in China’s growth, MNCs must first understand its character. Lieberthal highlights three drivers that are gearing the system for continued and extraordinary growth: First, the continued movement of rural residents to cities, where they both contribute more to GDP and demand services and infrastructure that require government investment; second, the government’s need to lift more people and their children into the middle class to ensure its legitimacy; and third, the political economy, whose structure privileges growth above all else.

Lieberthal’s expertise particularly shines in this last discussion. He writes that foreigners tend to hold contradictory views of the Chinese system, with one camp seeing it as centralized, disciplined and dictatorial, and the other as entrepreneurial and dynamic. Neither view is fully accurate, but each captures an element of the reality that MNCs must navigate. “The key to operating effectively in China is to understand the nexus – the ‘deal’ – that ties these contrasting perspectives together,” he writes. 

On one hand, the Chinese system keeps everyone in a position of power “looking up.” Political and corporate appointments are made from the top down, and officials must establish a record of implementing central directives to be promoted. For this reason, MNCs must be careful to align their goals with those of the central government. Lieberthal suggests that MNCs can help themselves along by publicly couching their agendas in government catchwords like “scientific development,” or “harmonious society.”

At the same time, however, he writes that China’s system allows local officials a great degree of autonomy in determining how to implement these directives. For MNCs, this can create drastically different operating conditions in different parts of the country. As a result, companies must also build their knowledge of local actors and agendas, including the rank and specific governance of each body of interest. Like many aspects of government in China, Lieberthal writes, these details are neither secret nor published.

Practical applications

Elsewhere, Managing the China Challenge addresses a variety of topics, including intellectual property violations, corruption, US-China relations, and environmental risks – making it a comprehensive if brief guide to the potential pitfalls and goldmines of business in China. One of the book’s few shortcomings is that it fails to illustrate its analysis and prescriptions with stories of specific companies. Adding these accounts would have brought the narrative to life and helped the book to attract an audience beyond the business crowd.

For all those already or soon to be doing business in China, however, the book is a quick and essential read. And although Lieberthal’s recommendations are mostly China-specific, some might argue that the book’s relevance extends beyond China’s borders: As economic ties among countries deepen, MNCs will need to be adept at formulating unique strategies for emerging economies. Lieberthal’s guidelines could be adapted and applied by MNCs in other developing markets that will account for much of global growth in the coming decades.

Managing the China Challenge

Brookings Institution Press, 2011

US$26.95