Essay #2 - “Structures of Globalization (Part II)”

“Structures of Globalization (Part II)”

Bar Ranch Strategy Partners

July 25, 2024

Hello everyone -

Welcome back to our ongoing essay series on the structures of modern globalization. This piece is based upon Episode 3 of the New Pioneers, the official podcast of Bar Ranch Strategy Partners.

In the previous episode, we began discussing Petricevic & Teece’s 2019 essay in the Journal of International Business Studies, which is entitled “The structural reshaping of globalization.”

Our major takeaways from the first part of the piece were that contemporary globalization is being disrupted by the emergence of multipolar power blocs, that the “utopian” vision of frictionless cross-border trade is a myth, and that there are growing alternatives to the Washington Consensus.

From our perspective, it appears that to be a modern sovereign nation-state, certain necessary industrial sectors are required. Countries need energy, steel, food, medicine, and computer technology to function, and if nations do not produce these strategic items themselves, they are vulnerable to disruption.

As seen with recent crises, vast cross-border supply chains and the production of necessary commodities in foreign (often hostile) countries, are increasingly forms of weakness, not strength. If you are dependent on hostile foreign rivals for the production of your necessities, you may be in trouble.

To be a major power, nations must be producers, not merely consumers.

One of the major drivers of disruption in the global economic order is the contemporary rise of China, which Petricevic & Teece write, “has effectively created a new form of market capitalism and adopted a panoply of explicit pro-business policies, some of which have been highly effective” (Petricevic & Teece, 2019: 1491).

In this episode, we will expand on this insight, and discuss how the rise of China is challenging contemporary globalization and the international economic order.

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The economic rise of modern China is a massive topic, and something that we will certainly dive into with further detail in the future, particularly with a discussion of Ezra Vogel’s book Deng Xiaoping and the Transformation of China.

More narrowly, Petricevic & Teece are concerned with how the Chinese government intervenes in the economy in pursuit of its state-level goals, something that has been considered anathema to the more laissez faire philosophical conceptions underpinning modern globalization.

As opposed to taking an ostensibly neutral position in economic competition, or acting as an impartial referee enforcing “the rules of the game,” the Chinese state actively intervenes in the global economy to promote the interests of its domestic firms, and thereby its own national development interests.

This active intervention is apparent in many areas, from foreign technology acquisition to the development of parallel institutions, such as the Belt and Road Initiative and the Asian Infrastructure Investment Bank.

Beijing’s “state-backed and government-imposed controls and mechanisms,” the authors write, “are in fact China’s way of ‘shaping the rules’ by creating parallel institutions to the existing ones. In fact, many individuals and nations seem to welcome the new global realities and changing posture of international commerce and influence” (1492). In the modern global economy, China is moving from being a “rule-taker” to a “rule-shaper.”

Further, “China’s rapid growth, its hybrid economic structure, and its arguably opportunistic approach to norms and rules that guide international commerce, have created tensions among existing power constellations and revealed an alternative model. The model that China has developed may not be fully replicable, but it does offer an alternative lens on how to spur growth in developing nations (especially those of the autocratic type), and perhaps offers a credible path towards becoming a hegemon” (1492).

“In fact,” the authors write, “many argue that the Washington Consensus model is ebbing, while the model China has developed is advancing” (1492).

It would be ironic, ultimately, if China - welcomed into the World Trade Organization and supported by Western investment and technology - would ultimately become the viable alternative to the modern global economic order. The real risk is that such an alternative model were to become attractive around the world, and if the cracks currently showing in the existing order were to grow.

This begs the question, of course - what exactly is the modern Chinese model of economic development?

In essence, it might be defined as the utilization of state-level resources to promote domestic firms in the pursuit of national objectives. In other words, there exists a form of “state-firm fusion,” in which both the government and business collaborate to achieve larger goals (Li, 2022).

Put another way, Petricevic & Teece write that, “China’s unique combination of market size and accelerated growth, particular emphasis on tapping into advanced innovation and technology development through outward FDI activities, and the distinctive government’s role in systematically drawing upon its bargaining power to support technological upgrading, depart from traditional frameworks and empirical findings on FDI motivations and the internationalization process more generally” (Petricevic & Teece, 2019: 1493).

They continue, writing, “China’s FDI policies provide the platform that facilitates Chinese firms’ international expansion trajectories with the goal of capturing the fruits of innovation and knowledge from foreign entities to serve nation-state objectives. The pursuit of nation-state objectives is especially pronounced in the case of state-owned enterprises (SOEs) that China is increasingly mobilizing in its quest of technological upgrading” (1493).

The key here is that the strategic industries and technologies required to “upgrade” the country are identified and consciously built, with the specific intention of benefiting the nation as a whole (or the government, if you are cynical). Instead of operating in a neutral and open arena - which is the Platonic ideal of economic liberalism - the Chinese government actively supports its domestic companies in the acquisition and development of key technologies, which can then be utilized in other areas of their national economy through their positive “spillover” effects. The most prominent example of this phenomenon is so-called “dual use” technologies - like advanced jet engines - which can be used to enhance both commercial and defense capabilities.

Referencing projects like Belt and Road and the Made in China 2025 initiative, the authors write that, “China’s systematic and coordinated actions towards technological dominance” represent a “state-led techno-nationalist industrial policy that focuses on ‘winning at all costs’ to facilitate China’s rise and dominance in key technological domains and enable its self-sufficiency” (1493-94, original emphasis).

The key here is the focus on national self-sufficiency, a goal often scoffed at in modern international economics as impossible. Widely accepted theories of competitive and comparative advantage highlight the critical importance of free trade for national development, while presumptions to “autarky” are often associated with closed-off, centrally-planned economies and their accompanying poverty, stagnation, and backwardness.

China’s alternative method, however, presents another possibility - that of engaging with the global economy across a wide range of industries, while simultaneously pursuing the protected domestic development of critical technologies and commodities. Far from the Maoist-inspired peasant egalitarianism of the past, the modern Chinese economy balances global trade and national production.

Increasingly, and in defiance of the “utopian globalists,” some international business scholars are suggesting that “the world had reached the stage of techno-nationalism,” where nation-states wish “to have their own enterprises as market leaders in high-technology sectors.” In essence, Petricevic & Teece write, “techno-nationalism assumes that nations are units that innovate, facilitate, and fund R&D and cultures of innovation, and that they use and diffuse those innovations and technologies to further national goals” (1495, original emphasis).

China’s challenge to modern globalization, both in structure and philosophy, means rejecting the promise of continued international integration and frictionless cross-border trade. Beijing utilizes participation in the global economy as a method of “capturing foreign innovations to further hegemonic goals of technological leadership,” rapidly “reintroducing techno-nationalism” back into the global economic order (1496).

Specifically, the authors contend, "China has developed a state-directed approach that leverages national resources and regulatory systems to gain access to foreign-developed technology in key strategic areas.” Rejecting laissez faire platitudes about free trade and global economic cooperation, China focuses “primarily on state-led interventionist policies to acquire technology advances that originate in other countries, thereby supporting its national objectives” (1496).

If China is actively engaging in a “techno-nationalist” drive to develop and acquire technology, the question then becomes - what technology? And why?

The core emphasis is on “strategic” industries and technologies, or those required for the effective functioning of a modern nation-state. Claims of a “postindustrial” or “service-based” economy notwithstanding, countries still need food, housing, and medicine for their people, and steel, energy, and chemicals for their militaries. This baseline reality - that economies must be productive and make things - appears to be lost on many, but not Beijing.

A specific illustration of China’s prioritization of strategic industries can be seen with the Made in China 2025 initiative, which focused on providing government assistance to domestic companies operating in ten key sectors: electrical equipment, agricultural machinery, new materials, new energy vehicles, robotics, information technology, aerospace equipment, railway equipment, medical devices, and high-tech ships.

Prioritizing these strategic industries, amongst others, has key advantages for a nation - it produces new jobs and entrepreneurial startups; it enables cutting-edge research and development in globally competitive fields; it provides training opportunities to develop advanced specialists; it creates supporting industries that spur economic growth; and it enables civil-military collaboration through the development of dual-use technologies that advance both commercial and defense objectives. Further, in the event of a global crisis or confrontation, the existence of domestic productive capabilities insures against being cut-off from necessary items.

China’s alternative model to contemporary globalization is based upon identifying and developing “new forms of strategic trade and investment” that focus on “new knowledge, technological, or managerial capabilities” (1493).

The primary basis of this techno-nationalism is “that states protect the development of their technological capabilities,” instead of openly sharing them with the world, with the main goal of achieving “access to advanced technology and established global innovation networks,” no matter their origin, in a process that the authors label “innovation mercantilism” (1496-97).

The challenge that techno-nationalist policies such as Made in China 2025 pose to the structure and ideology of modern globalization is that they do not “call for long-term cooperation, but for “self-sufficiency” through technology substitution and global leadership in strategic, high-tech industries (1497).

Instead of seeking self-sufficiency in all economic sectors, China has identified specific strategic industries that are required for national strength and economic development, which it views as the sectors of the future. Taking a state-level view, it is clear that not all industries are equal, and that some are inherently more important than others.

In the modern world, those industries that help to feed, clothe, and defend your people are absolutely critical, and any nation that loses the ability to produce these items fails in its most fundamental role.

These insights, of course, are not new, nor are they particularly Chinese. Scholars, executives, and policymakers have known for centuries that national strength is based on industrial might, and those countries which lose their productive edge fall behind, and are destroyed.

Referencing Witt (2019) on how hegemonic status is gained and maintained, Petricevic & Teece write that, “creating and capturing value through the use of new technology lies at the heart of the wealth of nations, and relatedly, military potential and national security” (1495).

We will be taking a much deeper dive into the connection between economic strength and military power through a discussion of Paul Kennedy’s The Rise and Fall of the Great Powers, which will appear on a future episode of the New Pioneers.

The emergence of the Chinese model - based on a strategic techno-nationalist industrial policy - has had two major consequences for contemporary globalization: the disruption of the international economic order, and the emergence of an alternative philosophy of national economic development. Both pose fundamental challenges to the Western-led system.

China’s new role in shaping the global economy, the authors write, is acting to “disrupt the existing norms, values and the commonly understood rule-of-law” in global economics (1492). They go on to write that, “this reshaping will alter the structure of the global economic system along the lines of China’s own economic model and its own ‘rules of the game,’ and may pave the way for other peripheral economies to emulate China’s behavior (or even invent their own models or path to hegemony).” For Petricevic & Teece, this reshaping “presents one of the “grand challenges” that future IB scholarship should address” (1493).

However, the disruption of contemporary globalization and the emergence of alternative models was not caused by China alone - they had significant help from the West itself. Looking back, it is becoming apparent that the 2007 Financial Crisis, in addition to unleashing untold miseries of countless people, enabled a challenging of conventional orthodoxies regarding economic policy and regulatory management, shifting the Overton Window regarding what is considered appropriate for the modern global system.

As the authors write, the Global Financial Crisis “has been a catalyst for the erosion of the prevailing rules-based system of international commerce,” fundamentally challenging “the role of institutions that have underpinned the global commerce system thus far and the competitive advantage of companies that have relied on these institutions” (1493).

The shift signaled by the financial crisis was understood around the world. As documented in Richard McGregor’s book, The Party: The Secret World of China’s Communist Rulers, the “implosion of the western financial system, along with an evaporation of confidence in the US, Europe and Japan, overnight pushed China’s global standing several notches higher” (McGregor, 2011: xxiii).

Recounting the collision of philosophies created by the crisis, McGregor states that for many years, “Beijing had resisted pressure from Washington, led latterly by the former Goldman Sachs boss, Hank Paulson, as Treasury Secretary, for wholesale financial liberalization. In the seven years to 2008, the Chinese economy had more than tripled in size. But alongside China’s rise, the patience with which Beijing listened to advice from foreigners had been dwindling. It wasn’t until the western financial crisis that the confidence of the likes of Wang Qishan spread through the system and burst to the surface like never before. Many Chinese leaders were beginning to voice out loud sentiments expressed privately by Wang: what on earth have we to learn from the west?” (xix-xx).

In addition, the perceived negative consequences of modern globalization - deindustrialization, offshoring of critical manufacturing, and the death and decay of formerly prosperous regions - has reached deep into the Western economies themselves, giving rise to populist movements such as Brexit and the Trump election.

Many influential groups within the advanced economies - particularly those with electoral power - are consciously rejecting the stated promises of modern globalization, shifting away from ideologies of free trade and economic liberalism. As Petricevic & Teece write, “negative distributional effects in the country that has benefited most from the existing world economic order, are now giving rise to “America First” anti-globalism, protectionist policy by the current United States administration” (Petricevic & Teece, 2019: 1493). While this reference, from 2019, refers to the previous Trump administration, the Biden presidency has kept on many of these protectionist and local development policies, increasing tariffs on Chinese imports and providing subsidies for domestic manufacturing.

Nevertheless, while it is clear that the Chinese model has been enormously successfully - both in developing its own domestic economy and challenging the contemporary architecture of globalization - it is likely not directly replicable in other circumstances, primarily due to the nature of China itself.

Simply put, China is different than others. Its population and market size are larger; its politics and governance model are unique; and it is coming off the backend of nearly four decades of phenomenal economic growth. Few countries in the world can compare in this regard.

Despite the previous emergence of other developing economies, particularly the Asian Tigers, the authors write that “the rise of China and the pressure China is exerting should not be dismissed as deja vu or equated with the previous paths of Japan, Korea, Singapore, or Taiwan,” as with these countries, their “impacts on the global economic system were absorbed with manageable disruption, because: (1) their economies were relatively small, and (2) these countries were themselves on a path evolving towards adopting a more liberal and open, rule-of-law order. Neither condition applies to China” (1494). Accordingly, China is the sine qua non of the structural reshaping of globalization.

In addition, the method by which China has implemented its alternative model - a strategic techno-nationalist industrial policy implemented by a competent, centralized, and authoritarian elite - may not be replicable in other countries, even if desired. Policymakers operate within the political and bureaucratic structures of their given countries, many of which may not be able to carry out such a monumental effort over the time required.

Referencing previous arguments against adopting strategic policies in the US, the authors write that, “for example, Rugman and Verbeke (1989) observed 30 years ago that various forces in the United States were strongly advocating in favor of strategic trade policies, even though this country’s administrative heritage would have made effective implementation of such policies highly unlikely” (Petricevic & Teece, 2019: 1492). We will be digging into these arguments on a future episode of the New Pioneers, rest assured.

Even so, it is clear that certain insights can be identified from analyzing China’s alternative model for economic development, particularly concerning the nature of “strategic industries,” which will be the subject of our third and final essay on the structures of modern globalization.

In essence, the modern global economic order, as it exists today, is being challenged from both without and within, by those who want to chart a different course to the future. As the authors write, “by playing by a different set of rules, China is affecting the viability of the existing global innovation ecosystem, requiring that other ecosystem partners change their strategy.” Because of “China’s ambitions as a hegemon,” their development of an alternative model “is not just an economic and business issue. It is a national security issue too, as the United States and the European Union are now starting to realize” (1497).

We’ll continue to discuss the implications of this new reality in the next episode of the New Pioneers podcast, our third and final segment on the structures and ideologies of modern globalization.

See you then.

Sam

References

Kennedy, P. (1987). The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000. New York, NY: Vintage Books.

Li, S. (2022). The Rise of China, Inc.: How the Chinese Communist Party Transformed China into a Giant Corporation. Cambridge, UK: Cambridge University Press.

McGregor, R. (2011). The Party: The Secret World of China’s Communist Rulers. New York, NY: Harper Perennial.

Petricevic, O., & Teece, D. J. (2019). The structural reshaping of globalization: Implications for strategic sectors, profiting from innovation, and the multinational enterprise. Journal of International Business Studies. 50(9): 1487-1512.

Rugman, A., & Verbeke, A. (1989). Strategic trade policy is not good strategy. Hitotsubashi Journal of Commerce and Management. 25(1): 75-97.

Vogel, E. (2011). Deng Xiaoping and the Transformation of China. Cambridge, MA: The Belknap Press of Harvard University Press.

Witt, M. A. (2019). De-globalization: Theories, predictions, and opportunities for international business research. Journal of International Business Studies. 50(7): 1053-1077.