china: hegemonic heir apparent or … 2012/iss session 4/kriz(1).pdf1 china: hegemonic heir apparent...
TRANSCRIPT
1
CHINA: HEGEMONIC HEIR APPARENT OR SIMPLY A PRETENDER?
Anton Kriz, The University of Newcastle, Australia1
Egbert Groen, The University of Newcastle, Australia2
Antony Drew, The University of Newcastle, Australia3
David Cunneen, The University of Newcastle, Australia4
1 Corresponding author: Dr Anton Kriz, Faculty of Business and Law, The University of Newcastle, Po Box 127 Ourimbah, NSW 2258 Australia. Ph 61 2 4348 4107 email: [email protected] 2 Egbert Groen, Faculty of Business and Law, The University of Newcastle, McMullin Building, Callaghan, NSW 2308 Australia. Ph 61 2 4921 7966 email: [email protected] 3 Antony Drew, Faculty of Business and Law, The University of Newcastle, Cnr King and Auckland Streets, University House, Newcastle NSW 2300. Ph 61 2 4921 2099 email: [email protected] 4 Dr David Cunneen, Faculty of Business and Law, The University of Newcastle, Po Box 127 Ourimbah, NSW 2258 Australia. Ph 61 2 4348 4143 email: [email protected]
2
Abstract
Schumpeter’s and Kondratieff’s view of business cycles and extended waves appeared to be under duress prior to the GFC. The Federal Reserve and many prominent bankers began to bask in the economic certainty some were claiming they had derived. However, the banking fraternity may have been wiser to have been more circumspect. Schumpeter’s seemingly law-like generalisation appears more correct: economies remain in a state of flux stemming from the combinations and disruptive forces of innovation and entrepreneurs. Traversing several disciplines and historical perspectives, this paper develops this premise and in doing so, analyses key attributes of national economic advantage. The main objective is to understand how close China is to possibly usurping the US as a modern day hegemon.
The study of economies and why some are more successful than others is a critical pursuit in international business. Douglas North suggests it has to do with institutional development stemming from a society’s habits and beliefs while others like David Landes focus more on underlying cultural values. Jared Diamond alternatively focuses on underlying geographic pros and cons. If, as Diamond suggests, these are not ideal then “guns” come into play as does the acquiring of technology.
China is an enigma as it defies prescriptions outlined around success and failure. A country with a communist government is not meant to succeed. The experiences of Russia and the teachings outlined by von Hayek reinforce this view. China is defying the odds and since Deng’s reforms in 1978 a transition has occurred that is unprecedented. China is not just rising but some suggest it is now challenging the US for hegemonic supremacy. Hegemony is not easily acquired nor sustained with countries such as Portugal, Holland and England having had their opportunity. A real challenge for China is to sustain their recent rise and to consolidate its position.
The paper puts forward eight propositions around hegemonic “rules of the game” that the authors suggest are required for an heir to achieve such a preeminent title. These emanate from a multidisciplinary analysis and from various key works including Michael Porter’s Diamond Model in the Competitive Advantages of Nations. The paper acknowledges that the US remains the frontrunner based on several of these factors. However, as discussed, if China can free its creative spirits and nurture more radical innovation, it will offer a serious challenge.
Coming off a low economic base is a significant accomplishment given China’s huge populous and historical levels of poverty. An important objective for China within this context relates to the difficulty of balancing a communist polity with free market economics—what has been termed one country but two systems. More significant will be China’s capacity to take the next transitory step and to go beyond imitation and low cost manufacturing. The Chinese government is making this a critical priority and are expending significant resources towards innovation and this objective. However, without allowance for liberal diversity and free spirits many expect this will not succeed.
A detailed discussion outlining how the US compares with China on the eight propositions is then developed. Finally each proposition is then assessed with an overall judgement made about how each of the two countries is performing. The analysis is largely based on extensive empirical evaluations undertaken by the authors in the last decade on China. China and the US are then compared on key criteria drawn from Insead’s 2011 Global
3
Innovation Index. Appropriately, creativity and innovation is covered in substantial detail in the Index.
Comparisons on this index are then made between the four current largest GDP nations of China, the US, Germany and Japan. The figures show that although China is moving up the ranks it remains well behind the others and the US in particular. The overall result indicates that China has some claims to hegemon aspirations but they have to make up substantial ground. Their immense size helps but the real test will come in the next decade as wages rise and a shift occurs away from basic OEM manufacturing. Producing its own radical technologies is a key for China’s future success. China will need to compete with the US on this front if it expects to become the new hegemon. Balancing increased liberalisation with communist control also remains a big hurdle. How the new PRC leadership handles this delicate process is being keenly watched as the “stakes” for the Chinese and the globe are extremely high.
Key words: China, Long Wave, Institution, Hegemon, Innovation, Creativity
INTRODUCTION
Before the Global Financial Crisis (GFC), economic rationalists were starting to believe
business cycles were a thing of the past. Schumpeter’s seemingly law-like generalisation
appears more correct—economies remain in a state of flux stemming from the disruptive
force of innovation and entrepreneurs. Traversing several disciplines and historical
perspectives, this paper develops this premise and in doing so, analyses key attributes of
national advantages and economic growth. Ultimately, the aim is to assess China’s potential
for usurping the United States on a “grand” economic scale. A brief contemporary précis
suggests that the globe has already witnessed the United States in decline and the GFC and
a reputedly three trillion dollar war have sped up its demise. Inevitably any discussion about
China becoming heir to the hegemony of the United States needs to confront China’s battle
within. This battle is largely institutional in nature and revolves around balancing Chinese
central planning and control with what is thought to be an opposite modern hegemonic need
to facilitate a population’s creative thinking.
Thomas Friedman (2005) has suggested that technology, information and people mobility
has led to a world that is now “flat”. Others suggest megacities are actually making the world
not only flat but also more “spikey”. Irrespective, rapid diffusion of new products and services
4
is altering firm longevity. The modern listed company only has a 10 year window as opposed
to 65 when the United States began its rise (Foster & Kaplan, 2001). The virtues of
capitalism in its totality are also now being questioned with alternatives proposed such as
Constructive Capitalism (Haque, 2011) and Capitalism 4.0 (Kaletsky, 2010). History shows
that believers in unfettered hegemonic power are ultimately going to be disappointed. Nobel
Laureate Douglass North (2005) suggests we should view the world from a non-ergodic
perspective, that is, a world in which there is a zero probability that any state of being that
has occurred will reoccur. Ormerod (2005) goes further and has identified that like biology
most things commercial and political are ultimately likely to fail.
Beinhocker (2006) believes we deviated badly by allowing economists Jevons and Walras to
defer to 19th century physics. Economics inevitably adopted more simplistic notions while
physics and the “real” economy moved on to other theoretical pursuits. Schumpeter
meanwhile went chasing a theory built on laws and truths and one that would take
economics to what he believed would be a determinable grand outcome. Notwithstanding
McGraw (2007, p. 504) noted of Schumpeter, ‘After a lifelong struggle, he concluded that
exact economics can no more be achieved than exact history.’ Accordingly, economies are
now seen as open, non-linear and emergent. They remain largely unpredictable. Against
such a backdrop, one could question the value of any type of prescriptive analysis around
the potential rise of hegemon.
Nevertheless seeking out underlying patterns and trends and analysing cycles invariably has
merit (North, 2005). This paper attempts to draw simultaneously on theory, history and cycles
in a bid to add some important perspective to North’s non-ergodic world. The paper adopts
the metaphor of a “recipe” rather than a “blueprint” (Davies, 2000). Like Redding and Witt
(2007), the authors adopt a self-organising systems view and analyse growth from a range of
underlying ingredients. Eight key propositions are ultimately put forward around what are
suggested as the key levers of hegemonic economic growth. These are drawn from a range
of literature including Porter’s (1998) Competitive Advantage of Nations. These broad
5
propositions are likened increasingly to what North (2005), Baumol (1990), Redding and Witt
(2007) and others suggest are the “rules of the game”. The propositions in this case are
appropriately described as “hegemonic rules of the game”. Some critics may suggest that
there are other possible regions and nations that may usurp the US other than China. This is
correct, but ultimately given its currency as a rising power and in global economic debates,
the article chooses to focus predominantly on China.
BACKGROUND TO THE STUDY
The authors have undertaken extensive empirical and conceptual evaluation of China related
to the topic (Kriz, 2009; Kriz, 2010; Kriz & Cunneen, 2012). Max Weber identified key
weaknesses in China’s performance linked to a culture built around Confucianism. Redding
and Witt (2007) focused specifically on the inherent volatility of a society built on
interpersonal rather than systems trust. This paper ultimately recognises that it’s a
combination of China’s formal and informal institutions that are the key. Combined, it is
argued, these broad rules of the game limit China’s stock of possible productive knowledge.
The concept of ambidexterity has received increasing coverage for its role at the firm level
(O’Reilly III & Tushman, 2008). This is the capacity of firms to simultaneously explore and
exploit. This paper argues there are parallels between the firm and what some have labelled
China Inc. (Fishman, 2005) when it comes to ambidexterity. China’s capacity for exploiting
low cost advantages is unquestionable but whether China can challenge the US in terms of
exploration and radical technology and innovation is a key (Kriz & Cunneen, 2012).
One country with two systems based on a planned polity but free market has few
contemporaries. How China reconciles this “visible” and “invisible” hand is likely to be critical.
Balancing control versus the need for “free spirits” has serious implications. Complicating
China’s hegemonic ambitions is an unprecedented environmental event: global warming.
China is increasingly seeing the direct effects of such environmental changes. Related
disruptive innovations emanating from alternative energy have not been lost on the Chinese.
6
China has secured a large proportion of the world’s rare minerals and boosted investment in
alternatives. Napoleon’s concept of a sleeping giant awakening is now reality but whether
this leads to a Chinese political “evolution” or “revolution” awaits us. The former would see
the United States remain dominant whereas the latter would unearth a range of possibilities.
The next section offers an historical backdrop for this analysis before introducing the reader
to a key economic theory in the hegemonic game.
THE END OF HISTORY OR JUST ANOTHER BEGINNING
A key aim of this paper is to broadly identify the economic growth elements indicative of
hegemony. Hegemon refers to a dominant geo-political and economic power. It stems from
the Greek word hegeisthai—to lead. Understanding the recipe for such hegemony is
essential for those seeking a greater understanding of economic wealth and development.
There have arguably been five such economic transitory periods since the 1400s, spanning
from the Portuguese in the fifteenth century to the United States at present (Hugill, 1993).
These powers are contentious with Paul Kennedy (1989) for example adding the Hapsburg
empire in the 1500s to such a discussion. Nikolai Kondratieff’s (1935) work on “Major
Economic Cycles”, discussed later, offers a few clues even though it ultimately misses the
mark (Freeman & Louca, 2001). His focus on technological and trade realignment helped
inform Joseph Schumpeter’s work. Visualising entrepreneurs acting as free spirits around
creativity and innovation led to Schumpeter’s important legacy of “creative destruction”
(Schumpeter, 1939). This concept is now accepted across a diverse range of economic
disciplines (evolutionary, complex, historical and institutional) including proponents of rational
men (or women) acting in rational ways in a bounded rational state.
Creative destruction aligns well with Beinhocker (2006) and North’s (2005) view that
economies contain constant trial-and-error experiments. The second key aim of the paper is
to analyse China within the scope of the identified hegemonic growth elements. Markedly,
whether China can become a hub for market-induced experiments and creative destruction
7
emerges as a key theme related to this latter aim. Recently an argument was floated that
history had come to an end and we had achieved an imperfect but stable economic state. In
light of John Horgan’s (1997) proposition that we had reached the End of Science, Francis
Fukuyama (1992) began advocating that a new world order had emerged. Liberal democracy
and capitalism had won and in this economic game there was only one likely winner – the
United States.
With the benefit of hindsight and the occurrence of new events, Fukuyama (2002) has
alternatively suggested - Has history restarted since September 11? Fukuyama now sees a
more subtle clash occurring. Huntington in his Clash of Civilizations (1997) reinforced
Toynbee’s hegemonic caveat to those believing blindly in mirages of Nation-state
immortality. The move toward a global world cannot be denied. Speed of communication and
the ability to move goods and services rapidly is impacting on most. Despite these more
acute interpretations, no simple explanation exists for forecasting complex behaviour. On this
level, the myth of a rational or irrational man seems naive. Ultimately, all choices are rational.
Decisions are ultimately built around an evolutionary prescribed albeit systematic
organisation of a person’s complex set of synapses and neurons (whether logical to others or
not).
The occupation of social and economic scientists has been to make predictions and search
for explanatory proofs. This led to some better known attempts; Mitchel cycle (40-50
months), the Kitchin cycle (3 to 5 years), the Jugular cycle (9-11 years) and the Kuznets
cycle (15-25 years). Cycles have been a constant theme in economics with Kydland and
Prescott (1982) receiving the 2004 Nobel Prize for their contemporary addition. Joseph
Schumpeter (1939) in pursuit of such theoretical “alchemy” wrote a comprehensive tome in
economics called Business Cycles: A Theoretical, Historical and Statistical Analysis of the
Capitalist Process. Schumpeter ultimately became somewhat ‘ambivalent’ to the outcome
(McGraw, 2007, p. 252). The real value in Schumpeter’s work was however his unravelling of
key aspects of economic change and entrepreneurial activity (Freeman & Louca, 2001).
8
Likening innovation to “violent bursts” and “catastrophes” and acknowledging that it
resembles an “explosion”, Schumpeter realised that such punctuations potentially
dramatically alter the economic landscape. In a recently located manuscript (Schumpeter,
Becker, & Knudsen, 2005) Schumpeter acknowledged that novel outcomes from creative
genius have indeterminate outcomes. He probably should have realised earlier that this was
going to make his challenge of an overarching prescriptive theory around economics
extraordinarily difficult. Predicting patterns and institutional trends was one thing, but
predicting the novel creative whims of individuals, as he began to realise, was fraught with
problems. However, in the process Schumpeter had struck upon some fortuitous insights.
Schumpeter acknowledged that economic fractures are caused by frenetic entrepreneurial or
“New Man” acts of competitor “aggression”.
Beinhocker (2006) relates economic cycles to jelly, noting that the problem with economic
prediction is that there are both random inputs and outputs. These open economic systems
are actually growing in complexity. It is why Beinhocker (2006) and others such as Brian
Arthur (Waldrop, 1992) have resorted to complexity and evolutionary economics for
alternatives. Fortunately, from the 1400s to the turn of the 20th century markets were not as
complex and randomness was limited. John Kenneth Galbraith identified that Smith, Ricardo
and co were fortunate to live in more simple times with limited preferences and choice. A
most interesting theory of these commodity-based “simpler” times was proposed by the
Russian Nikolai Kondratieff (1935). The Kondratieff cycle (50-55 year) is built around
analysis of key resources and commodities and is based around waves of economic
dominance.
This theory has periodically gained in popularity (Freeman & Louca, 2001). Hugill (1993)
adopted the Kondratieff view in his publication World Trade Since 1431: geography,
technology, and capitalism. Hugill contended that hegemony seems to concur with
leadership patterns; noting that two Kondratieff cycles conforms relatively closely to 100 year
world leadership ascents and descents. A notable attribute of Hugill’s (and also Kennedy and
9
Diamond’s writings) is the centrality of technology and innovation. The hegemonic reign of
those occupying such long term cycles is discussed in the next section.
WORLD SYSTEM THEORY AND ECONOMIC HEGEMONY
Hugill’s World System Theory postulates that predictions of future hegemony can be made
on the basis of discernible patterns. Hugill restricts his analysis to discernible patterns or
waves since 1431. 1500 is a date often chosen to delineate between modern and pre-
modern times (Kennedy, 1989). Hugill acknowledged that the early 1400s marked the
beginning of capitalism and the following 500 year social/economic narrative has produced
regular but longer term patterns. Kondratieff identified data up until the 1920s to support his
proposition regarding long cycles. This regularity of waves seems to coincide with the
increase in world trade that began from the 1400s and Europe’s expansion overseas.
Conversely, the 1400s is regarded as a key period for China’s economic and technological
demise (Kriz, 2010). As Kriz (2010) and Mokyr (1992) have identified, the Chinese at that
stage had all the ingredients needed for a substantial hegemonic reign—a large ocean going
fleet, gunpowder, the compass, an extensive military and a long history of trade. According to
Hugill, over the last five hundred years there have been five clear hegemons: Portugal,
Holland, England, Britain and the United States.
Hugill identifies that these hegemons have thrived on a capitalist system stemming largely
from favourable geographical and technological factors. Portugal’s success was built on
cannon-armed, three-masted ships with open-ocean navigation, maps and exceptional
design. Holland’s triumph was related to manufacturing, canal based logistics, and a better
equipped commercial shipping fleet that coincided with a Protestant Reformation and the
Calvinist’s pursuit of wealth. The shift of fiscal power from Amsterdam to London led to a
third hegemonic reign. This was driven by a war between Holland and France and a move by
William (of Orange from Holland) to England. England’s creation of a cheap labour force,
plus property rights and the spreading of risk through insurance all operated as catalysts.
10
This eventually spread to all of Britain and a fourth hegemonic reign. This stanza included a
transition from wood to coal and the development of a factory system as well as telegraphs,
submarine cables and banking structures enabling a new level of trade.
The United States’ transition from a mineral-based economy using coal to other energy
sources such as petroleum and with it petroleum-fuelled automobiles, trucks and tractors led
to the rise of a fifth hegemon. Building on the exploits of the British, The United States
created new forms of management and this enabled more efficient production. The
promotion of individualism and a comprehensive structure of governance and property rights,
a highly competitive wage and market structure as well as banking infrastructure and
bankruptcy laws has enabled the United States to maintain its hegemony.
Contemporary analysis of these dominant polities has increasingly shown that technology is
not by itself the reason for such hegemonic reigns. These reigns are also related to softer
process-driven advances and transfers also around culture (Landes, 1999). One common
thread is the transition from agro-industrial to techno-industrial. Beinhocker focuses on
important differences between physical technology (transforming things) and social
technology (transforming methods and processes). Understanding cotton extraction is one
thing; inventing systems to improve manufacture is another. Developing better methods for
structuring production that revolutionises both can considerably multiply the returns (Mokyr,
1992).
Sull and Houlder (2006) suggest companies manage opportunities (chances) and try to
overcome a trail that ultimately ends in decline. Charles Handy’s (1995) sigmoid curve
(second curve or cycle effect) identifies that companies can extend their cycle by
reinvigorating themselves before they wane. Beinhocker (2006) applies a similar evolutionary
process to business units and suggests surviving companies are now in a frenetic game of
identifying and sustaining “fitness”. The winner is likely to be the company that plays multiple
bets (experiments) and has creative and adaptive thinkers that can execute (ambidextrous
11
organisation). Countries that want sustained high growth need to establish an institutional
structure that encourages and facilitates such experimentation (Redding & Witt, 2007).
Unfortunately on a Nation-State level, the rise seems to also inspire military clout and this is
often the rationale behind their self-destruction (Kennedy, 1989).
This section has briefly traversed 500 years of hegemon development and notably Hugill’s
World System Theory has many contemporaries. Landes and Kennedy for example have
equally written compelling tomes. In the tradition of Schumpeter alerting the field to creative
destruction, consistent themes increasingly seem to be the importance of formal and informal
institutions including entrepreneurship and innovation (Landes, Mokyr, & Baumol, 2010). It is
equally possible to argue that one’s creative destruction is another’s opportunity for “creative
construction”. It is not the purpose of this paper to take part in the debate as to whether
regular cyclical patterns occur, or how they may be measured, or even whether they truly
exist. Samuelson in reviewing Schumpeter’s work concluded that it ‘began to smack of
Pythagorean moonshine’ (McGraw, 2007). The real essence is to find whether some present
characteristics or variables exist that can help us glean some aspects around hegemon
development.
FROM BLUEPRINTS TO SCENARIOS AND RECIPES
Two alternative scenarios were postulated by Hugill (1993, p. 325) on the basis of the
regularities discerned: firstly a sixth world leadership with the potential candidates being
North America, Germany or Japan; or, secondly the emergence of a truly global system with
no dominant polity. Forecasting is a dangerous pastime and already predictions like a sixth
hegemon in Japan seem highly improbable. As demonstrated earlier, human behaviour is far
too complex for simple or even sophisticated neo-classical predictions. Taleb (2008)
identifies the weakness of naïve inductive reasoning. Humans are quick to assign cause to
effect despite poor empirical foundations. Fortunately alternatives to making one-right
prediction have evolved (Lindgren & Bandhold, 2003).
12
Lindgren and Bandhold (2003, p. xi) argue that ‘strategising, without scenario thinking is
more or less pointless.’ Scenario planning works on the premise that there is a consistent
view of the future but scenarios will account for risks, “what if” options and offer alternatives
(Lindgren & Bandhold, 2003). Life is about choices and intuitive heuristics built on imperfect
information. This paper focuses primarily on identifying some of the important variables and
potential scenarios contributing to a hegemon’s potential development without overt
prescription. Paul Davies (2000) notion related to genetics is used for this purpose with
variables considered as a “recipe” rather than “blueprint”.
Paul Romer (1993, p. 9) noted that big competitive advantages are about “better recipes”
and not “just cooking”. North (2005, p. 165) suggests it is a case of investigating the process
rather than laying claim to some ‘set formula for achieving economic development’. It is like
prescribing as Taleb (2008, p. xxiv) suggests a ‘singular recipe’ [in the sense of
entrepreneurial success] for a restaurant in the food industry. Everyone would follow and
thus everyone would ultimately be on thin margins or fail. Deviation is what makes business
succeed—not imitation (De Tarde, 1903). Markets are dynamic and any discussion of a
potential hegemon should be couched in a way that respects that markets like economies
are in a constant state of flux. The key is to identify some meta-theory that may shape such
behaviour while acknowledging equally that such theory will change over time.
HEGEMONIC RULES OF THE GAME
Understanding what makes a nation succeed has become an important pursuit across
disciplines. Kennedy (1989), Mokyr (1992), Diamond (1997), Porter (1998), Landes (1999),
Drucker (2002), North (2005) and Beinhocker (2006) are recent notables in this field but
there are also numerous others. Michael Porter’s The Competitive Advantage of Nations
(1998) offers some important evidence and direction for those observing global economic
development. Porter’s text carries some of the most widely used models in academe.
However, it is Porter’s Diamond Model that is of most interest here. It outlines four key
13
determinants of national advantage. They are factor conditions (skilled people and
infrastructure); demand conditions (home demand for products and services); related and
supporting industries (internationally competitive companies); and firm strategy, structure and
rivalry (the nature of the company, competitive environment). The addition of chance and
government to the model are notable. Chance is a factor that is too-often downplayed, yet it
has serious implications for prediction. This model also has its detractors with some
suggesting a double diamond effect and advantages that stem from being more aggressive
beyond initial domestic borders (see Verbeke, 2009). Notwithstanding, Porter’s diamond has
reasonable insights for this discussion and has withstood considerable debate.
Mokyr (1992, p. 3) explored the role of technological creativity in detail noting that it adds a
‘free lunch’ as it provides more than simply an input-output advantage. Notably Mokyr also
identifies four key drivers of economic growth: increase in investment and the stock of
capital; commercial expansion related to internal and external trade; increases in the scale of
the economy including the population; and increases in the stock of knowledge. Peter
Drucker (2002) recommended that business and society should focus more on knowledge
and people, identifying also that this story should encompass ‘world history and world
civilisation’ and not be simply about a Western-centric worldview (1992, p. 95).
The first of the eight propositions agrees with Drucker’s view and puts human capital and
knowledge at the forefront of hegemony. It is commonly accepted that there is no product
and process innovation without human invention and intervention. People harness
technology and are therefore really the “centrifugal force” in economic advances and equally
hegemon growth. Redding and Witt (2007, p. 22) see the principle components of economic
life as ‘capital, human capital and social capital’. Marketing theorists (Vargo & Lusch, 2004)
have recognised that developed economies are being driven by operant (technology,
knowledge and skills that transfigure inanimate objects) rather than operand elements
(mainly factors of production). Enhancing the “stock of knowledge” has always been a key to
14
growth and productivity but in pursuit of modern hegemony it has risen to even more
prominence.
North (2005, p. 1) highlights the importance of formal and informal institutions but
acknowledges this is really a function of the ‘quantity and quality of human beings’ and its
application to transforming nature’s resources. Beinhocker (2006) goes further and suggests
knowledge creation is common to both evolutionary biology and economics and concludes
that this is the central tenet to understanding the real origins of wealth. Pertinent here is the
importance of demand conditions (one of Porter’s key dimensions) and the importance of
growing a creative people as described in Florida’s Rise of the Creative Class. The first and
second propositions in hegemon growth are therefore associated with having productive
people and potential scale for domestic market expansion. The US unlike Japan has
benefited from local demand and has not relied purely on export markets for expansion.
Sizable and growing domestic markets have been useful to Great Britain and more so the
US. It is a weakness for countries like Finland, Switzerland and Singapore in terms of their
ultimate scope.
P1: Access to a creative productive population
P2: Sizeable domestic market demand and potential
Human capital functions within a geography and its natural resource “set”. Porter called for a
new paradigm to understand why some nations succeed and others fail. Jared Diamond
(1997) based his whole premise around inherent geographic riches or lack thereof and
consequent shifts in technology and germs from one country to another. “Stealing” or taking
by force such riches can have its advantages. It has not helped the Portuguese or the
Spanish but the Chinese seem to have focused more on softer elements of such exchange.
If IP is passed on more legitimately through MNC home-to-host absorption then there may be
more sustained advantages. Much has been written about technology but not as much has
been focused on geography. Phillip Parker (1995) acknowledged that a market’s
15
consumption potential is drawn from its longitude and latitude and physio-economic forces.
The 18th century philosopher, Montesquieu (1748) was also cognisant that climate and
location play an important role. Coupled with chance such ideas have powerful implications
for a country making claims to being the next hegemon. Diamond highlights that a hegemon
that lacks resources is at a distinct disadvantage. It is why shipping and military advantages
and trade became so significant for Portugal, Holland and England. The US has benefited
from abundant resources and this has helped their industrial development. It is why threats to
oil supplies have been closely monitored and why alternatives are now being increasingly
sought.
P3: Advantage of abundant natural resources and geographic diversity
The paper adopts North’s (2005) approach that informal and formal institutions help shape
people’s behaviour and structure their interactions. Hodgson (2003 , p. 254) highlights that
institutions have potential to affect an ‘individual’s habits, conceptions and preferences’.
Individuals and institutions are inextricably linked and this has profound implications for
economic development. Redding and Witt (2007, p. 22) liken it to the ‘stable predictable rules
for conduct, and the purpose of this set of rules is to provide a predictable framework within
which people can judge how to behave’. The style of government is an important aspect of
such theory. Governments often run airlines, utilities and can be large buyers and play a
strong welfare role. Communist Russia is cited by North as the epitome of a poor experiment.
A suitable adaptive institutional structure aligned to traditional formal and informal habits and
beliefs is what, for example, the Russians have forgone. Whether culture is responsible for
the institutions or the institutions for culture is not that important. What is relevant is the
outcome. The difference between Northern Italy and Southern Italy offers a good example.
Religion in some cases seems to be a reasonable proxy for predicting positive and negative
derivatives. Such ‘scaffolding’ is often estimated to be over 500 years in its development
(North, 2005). Competition is seen as important and ‘Big Man’ led Nations have less potential
as they rely traditionally on benevolence and limited economic freedoms. Democratic
16
governance around modern capitalism has been a positive for recent formal institutional
successes like Great Britain and the US. Notwithstanding that such a model is increasingly
under review.
P4: Access to stable formal predictable rules and institutions
P5: Presence of proactive and transparent governance
Hugill identified geography and technology as fundamental drivers for world hegemony and
combined with advancing knowledge, entrepreneurship and innovation it forms the central
thesis behind Beinhocker’s (2006) The Origin of Wealth. Diamond indicates that national
success and failure is mostly borne out of environmental rather than human variations.
However, this underplays chance and some deep cultural and philosophical twists. The
adoption of the printing press and QWERTY keyboard are but two examples used by
Diamond of unexpected diffusions. Douglas North relates England and the Netherland’s rise
in the hegemon race to institutional changes that allowed more political freedom and enabled
trade and economic growth. Added to individual liberty, property rights and invention, this
change enabled a new level of entrepreneurship. England’s strength was softer, process-
driven developments related to trade and improved production. Entrepreneurs kicked in with
creative people inventing and executing and this was added to credit accumulation around
“new combinations” built around banks, stock-holding companies or family wealth. The US
has since taken away the stigma of failure and bankruptcy. Many of the key enterprises in
this global environment are not only large. Hermann Simon (2009) also refers to medium size
‘hidden champions’. They complement Cunneen and Mankelow’s (2010) high growth
entrepreneurs (gazelles) that add a disproportionately high impact to regional, national and
global economic growth.
P6: Propensity for risk minimisation, capital accumulation, innovation and entrepreneurship
Ultimately what Porter and other contemporaries offer is some solid empirical evidence of
what key indicators to look for when analysing national strengths. Landes (1999) illustrates
17
the importance of culture in such appraisals and looks for an “x-factor”. Much of the x-factor
in Europe’s industrialisation, according to Landes, came from a Protestant ethic mixed with
science, and a new emphasis on reading, learning and questioning. The nature of Confucian
culture and its support of an imperial examination system is a potential key deviation here.
The nature of the Chinese cognitive style which is acknowledged as considerably different
(Nisbett, 2003) seems to engender alternative responses. The Chinese seem to “connect the
dots” a little differently. However, it is not possible to do justice to these “softer” operant
elements in a single paper (for a detailed discussion refer to Kriz, 2010; Liu, 2009; Nisbett,
2003; Redding & Witt, 2007). A comprehensive review of the historical development and role
of the Emperor, State, mandarins and rural versus urban communities is gleaned through the
various work of Kent Deng (2012). This work identifies that this largely agrarian country was
moving considerably forward up until the 1800s. However the Chinese had limited trade and
were not benefitting from the Western industrial revolution. Confucian harmony mixed with a
largely agrarian population and a mandarin proletariat rather than mercantilism restricted
open and more complex trade. The law of comparative advantage suggests this is a key to a
hegemon’s success.
P7: Access to an open economic trading system
Porter (1998) talks about major technological discontinuities such as oil shocks, wars and
foreign government intervention as potential sources of chance. The Chinese, for example,
may have dominated the early economic race had it not been for chance and a freak lighting
strike that set fire to the Forbidden City in the 1400s (Menzies, 2003). Such key outliers and
black swan events (Taleb, 2007) undermine Hugill and other cyclical economists who
suggest economic growth is predictable. A war, as Porter points out, can still have
considerable advantages, if like WW II it produces streams of innovation. Hugill on the other
hand suggests it often forewarns of a hegemon’s fate as they pour much of their resources
into maintaining their dominance (see also Kennedy, 1989). The Iraq war is being cited by
some as such an event. Equally interesting in Porter’s (1998) work is Government’s
18
interwoven impact on the four core diamond dimensions. Government impacts on a nation’s
competitiveness through intervention or non-intervention. Government may change policy
based on variations or perceived changes in Porter’s other four dimensions. However,
Government is not necessarily a better judge when juxtaposed with a market’s and/or
nation’s own “invisible hand”. This is an obvious weakness in allocating resources in planned
economies.
P8: Plus or minus chance and serendipitous events
Identifying the next hegemon is a real challenge. Based on the aforementioned research and
additional literature it could be proposed that the following are important in these rules or the
game:
Next hegemon ≈ Access to a creative productive population plus sizeable domestic
market demand and potential plus advantage of abundant natural resources and
geographic diversity plus access to stable formal predictable rules and institutions
plus presence of proactive and transparent governance plus propensity for risk
minimisation, capital accumulation, innovation & entrepreneurship plus access to an
open economic trading system plus or minus chance and serendipitous events.
The section to follow looks at these known aspects of National development and explores
China’s capacity within each of the eight identified elements.
CHINA AND ITS HEGEMONIC CLAIMS
China has seen an unprecedented transition since Deng Xiaoping changed China’s formal
institutional path and reinvigorated the Chinese by suggesting “to get rich is glorious”.
China’s GDP growth over the last two decades has been maintained at an unprecedented 9-
10%. The World Bank has acknowledged that 500 million Chinese have escaped poverty
during this period. Nevertheless, China has major challenges going forward. Using China as
a single case is a reasonable approach (Styles & Ambler, 2003). Its rapid rise is being seen
19
as a possible turning point in history (Arrighi, 2007; Hutton, 2008). The previous section
identified eight key propositions in a potential hegemon’s development. These are now
analysed within the context of China’s present capabilities. Redding and Witt (2007) in The
Future of Chinese Capitalism question China’s economic growth prospects on an institutional
and commensurate business systems level. Ten key factors or rules of the game are
identified (p. 27): ‘Professional public administration, wealth legitimate, rationalism, available
information, law, allocative efficiency, productive efficiency, talent, innovation, property
rights’. Key aspects of these growth factors are also interspersed in the sections to follow.
P1 and P2: Access to a creative productive population plus sizeable domestic market
demand and potential
Gary Becker (1996) has placed human behaviour and capital, via personal and social utility,
firmly into the minds of economists. China has harnessed this natural advantage. The one-
child policy limited China’s stock of people but not necessarily its productive capacity. China
has lacked systematic growth in higher education but this is changing. China recently
attracted 1000 of its most talented overseas researchers back to the Mainland. The top nine
China University’s (C9) have become a priority as China strives to increase its scientific
citations and outputs. China has embarked on a number of other advances in growing its
stock of knowledge. China had a University population of 16 million in 2006 (including
352,000 engineers). This was four times what it was a decade ago. Building a creative
population however is China’s next real challenge (see Kriz, 2010). A Confucian environment
is the antithesis of creative learning and this is exacerbated by formalised controls over
freedom of speech. China has vigorously pursued export markets for manufactured goods
but is now hording significant financial reserves. The United States has managed to
moderate economic instability through domestic demand and China will increasingly benefit
from shifting consumption internally. The Chinese are aware there is inherent power in a
population of over 1.35 billion plus buyers. Nevertheless, the Chinese need to ensure that
such consumerism is spread more equally. Speculative investments in both property and
20
stocks are causing potential bubbles and the Chinese Government is aware of the need to
manage its current high growth levels. Extensive investment in road and rail including 13,000
kilometres of high speed rail and the largest global online user network offers mass mobility.
P3: Advantage of abundant natural resources and geographic diversity
Natural resources are abundant across the various provinces of China but equally the world
has never seen this level of consumption within such a short time-frame. Ordos in Inner-
Mongolia is representative of one of 170 plus cities in China with a population over 1 million.
It is one of the wealthiest cities in China and boasts large coal deposits. Shortfalls in
agriculture are expected over time and the Chinese have become increasingly concerned
with their reliance in key commodities. Notably they have cornered the rare minerals market
as a way of capturing the main inputs into solar cells and batteries and other renewable
sources of energy. China is increasingly investing in South America, Euro-Asia, Africa and
Australia in an attempt to minimise such reliance. The rapid environmental degradation of
areas of China and global warming are important downsides. Desertification, acid rain and
water related issues like the slowing of the Yangtze could potentially harm continued growth.
However, it should be noted that China is reported to be the largest investor in renewable
energy technologies and has recently been recognised by the World Bank for reforestation.
P4 and P5: Access to stable formal predictable rules and institutions plus presence of
proactive and transparent governance
Confucian values and “rule of man” conquered the Legalist’s potential “rule of law” over two
millennia ago. Redding and Witt (2007) claimed that this reliance on interpersonal over
systems trust is likely to debunk China’s future growth prospects. This could be true but it
has not stopped the Chinese diaspora succeeding. The stability of Government is a
necessary criterion for sustained economic growth. A review of the United States identifies
that this has been fundamental to its success. China is interestingly positioned with its
socialist-cum-capitalist controls. As Deng Xiaoping noted, it is not the colour of the cat that
21
matters but whether it catches the mice. Schwartz, Leyden, and Hyatt (2001) in The Long
Boom, talk about the rule of two but history shows (take Singapore as an example) that you
don’t need an opposition to move forward – a (close to) benevolent dictator or dictatorship
will do. This point is supported by North (2005, p. 67), who suggests that “Taiwan and South
Korea both jumpstarted growth with authoritarian regimes before becoming democratic; and
Singapore, as of this writing, remains an authoritarian state with an impressive performance.”
He further suggests that “an authoritarian ruler bent on promoting growth has a freer hand
than a democracy beset by multiple political and economic interests.” Corruption and bribery
within a transitory government is a notorious disadvantage and this has impacted on China.
One of China’s real weaknesses is the significant inequality between 1st, 2nd and 3rd tier cities
and this is increasing social unrest on a provincial and State level.
P6: Propensity for risk minimisation, capital accumulation, innovation and entrepreneurship
The National Financial Centres of the world have spread out over time with London and New
York the forerunners followed by Tokyo, Frankfurt and Hong Kong. Shanghai is focused on
achieving such status. Lack of ownership of property has been a traditional inhibitor to
growth in China. In a modern developing economy such ownership is often used as a source
of funds (the property as collateral). De Soto (2000) in the Mystery of Capital identified that
only twenty five countries had adequate property rights to benefit from global expansion.
However, government reserves in China have formed a reasonable proxy for this lack of
private funds. Commanding Chinese banks to lend during the GFC illustrates what is
possible albeit the allocations can be quite inefficient. It is important to note that initial FDI
into China was courtesy of capital injections from firms in Hong Kong, Taiwan and Singapore
(Ambler, Witzel, & Xi, 2009; Arrighi, 2007). These economies and their diaspora continue to
inject capital into the Mainland. The China Sovereign Wealth Fund controlled by China
Investment Corporation reportedly has $300 billion in portfolio assets. The Chinese have
mastered cost innovation but it is unlikely that China can grow to another level without
encouraging diversity and high tech development. There is no sign of a revolutionary global
22
technology. A positive is the rapid shift away from State Owned Enterprises to small, medium
and large private enterprises. China has a rapidly developing private business sector with at
least 2.03 million private business registered in 2002 (Zhu, Camp, Ashamalla, & Garg, 2007).
P7: Access to an open economic trading system
China has used inbound FDI and outbound export growth as the turbine for its initial growth.
It is now the second largest economy (in terms of PPP based GDP) having overtaken
Germany and Japan. Known as the “workshop or factory of the world” for its cheap
manufacturing originally in textiles, China had export trade in 2008 of US$1.4 trillion and a
trade surplus of over US$300 billion. Equally, capital inflows from revenues to the home-
country are somewhat offset by the local outflows for labour and taxes to overseas
subsidiaries. A major shift by Chinalco and other prominent Chinese firms to embark on
outbound Foreign Direct Investment (FDI) signals an important aspect of economic
development. Multinationals have shifted their manufacturing, research and development,
and sales and distribution globally, so it is no longer a simple case of saying a country that
dominates a technology is locally bound. China’s share of world gross product (based on
purchasing power parity PPP) has increased from 3.4% in 1980 to 15.4% in 2005 and is
presently around 20% of world trade.
P8: Chance and serendipitous events
As identified above, numerous variables are involved in the analysis of China’s hegemonic
development. However, history identifies that hegemonic power is also susceptible to chance
and uncertainty. In the case of a natural disaster (Chengdu earthquake in 2008) this is
largely outside a nation’s control. However, strong institutions which support
entrepreneurship and development can ameliorate the impact of such natural and man-made
disasters. This was particularly relevant in the development of the United States after the
American civil war and in both Japan and Germany after WW II. Random events, like 9-11,
the Tsunami in 2004, earthquakes in Pakistan in 2005 and Hurricane Katrina, do occur.
23
Michael Porter (1998) called it chance, Jared Diamond (1997) talks about wild cards and
chaos theorists’ nominate strange attractors. Beinhocker (2006) identifies a particularly
debilitating aspect called the ‘Big Man Society’. This type of society is built around a
dominant person or polity. Such societies are notoriously poor allocators and susceptible to
market manipulation. Such a transition is difficult to manage and interestingly between 1978
and 1998 there were over 2.4 million party members in China found guilty of corruption.
Social unrest is growing in China and this is exacerbated by higher levels of rural
unemployment and a Gini-coefficient that has risen from 0.28 to 0.50.
The eight key drivers (or propositions) above have been offered as key ingredients in a
China potential hegemonic recipe. Table 1 identifies the list of these propensities. These
have been coupled with low to high rating scales for the US and China. As discussed,
creativity and innovation have serious implications for a prospective hegemon like China.
Joel Mokyr (1992) identified that a country’s hold on creativity is tenuous and fluctuates.
Extensive work is underway to better understand creativity on a global level. China is a good
example of a region that once thrived on creativity and innovation. The distance between
China and the US is shown to be considerable but China is making efforts to catch up.
Generally on most other propositions the gap is closer. The rationale however is sometimes
not straightforward. Stable formal institutions are listed as moderate for China and high for
the US. However, a communist government could arguably be labelled as more stable. It is
within the context of China’s ongoing development and future liberalisation of the people that
such a judgement is proffered. Overall China is not tracking that far behind the US on most
propositions but some of these aspects have deeper cultural underpinnings. North’s
suggestion that change can take hundreds of years on such a level identifies the potential
difficulties that may be encountered.
24
Table 1: Summation of the Hegemon Propositions
Source: Developed for this research
CHINA AS THE NEXT HEGEMON: HEIR APPARENT OR PRETENDER?
Peter Drucker identified that organisation is a relatively new term (post WW2) and suggested
‘they are purposefully designed and always specialised’ (Drucker, 1992, p. 100). China Inc
(Fishman, 2005) is a reasonable metaphor for China’s large PRC organisation that
permeates both its formal and informal institutions (Kriz, 2010). In essence, the PRC is the
most populous formal institution and purposeful organisation in the world. Much is riding on
China Inc (Fishman, 2005) and its leaders’ capacity to manage such a complex system.
Innovation is a common formula for both a company and a country. Those that don’t innovate
invariably “die”. Some countries and enterprises in decline alternatively become trapped in
the “Red Queen” effect of running extremely fast just to remain at the level they are. As
Foster and Kaplan (2001) suggested, the life of the company is growing shorter and shorter
and much of this change is linked to hyper-competition and rapid changes in consumer
preferences.
Propositions US performance China performance
P1: Creative productive population High Low
P2: Sizeable domestic market demand and potential
Moderate to High High
P3: Abundant natural resources and geographic diversity
High High
P4: Stable formal predictable rules and institutions
High Moderate
P5: Proactive and transparent governance
Moderate Moderate
P6: Propensity for risk minimisation, capital accumulation, innovation & entrepreneurship
High Moderate to High
P7: Open economic trading system High Moderate
P8: Plus or minus chance and serendipitous events
Unknown Unknown
25
Richard Florida (2002) identified key aspects of creativity from which he was able to develop
a city-by-city US Creativity Index. It includes elements like high technological capacity, levels
of innovation (patents), diversity of the population and presence of a creative class. Florida
also identified that there is some correlation between the size of a city’s gay population and
the level of creativity. It is unlikely that a region could flourish on a hegemonic level without
some serious level of diversity and high tech development. The PRC Government has
strategically made innovation a key priority but given the nature of what creativity entails it
remains a significant challenge. Whether China’s more creative human capital can be
unleashed within the dynamic of a command economy is a key question. Romer (1993)
noted the importance of technology and its exponential capacity, and coupled with
knowledge, this is a recipe for “increasing returns”. The Chinese Government is obviously
conscious of the importance of innovation and is expending significant financial resources to
meet a number of key targets. Two point five percent of GDP applied to R&D is now the
objective. There are other key targets including improving the level of technological advances
to 60% (of total growth) and becoming a top five country for patents and science citations.
Fischer and von Zedwitz (2004) highlight some key how-to solutions for China in the next 20
years: raising the depth of science and technology literature; reducing scientist and engineer
turnover rates; retaining the best people; shifting from product process development to
technology research and creativity; internationalising R&D; increasing the English levels of
R&D staff; coping with new challenges in IPR management; and improving process and
performance management. A key indicator of a country’s ability to innovate is the number of
patents developed. Patent filings are a crude proxy often used to review a country’s
investment in R&D and innovation. The US continues to dominate with nearly a third of all
filings (53,521), but China has a respectable ranking of sixth having increased its filings to
6,089. China defied the global trend and increased its filings considerably (up 11.9%) in
2008.
26
What is most interesting is the movement of a Chinese telecommunications equipment
provider, Huawei Technologies. Huawei reached the number one position for global filings.
Chinese telecommunications manufacturer, ZTE Corporation, is another Chinese company
appearing in the top 100 on the PCT (Patent Cooperation Treaty) list. However, to gain a
more accurate interpretation of the overall role patents are playing it is important to focus on
the OECD’s measure of triadic patents. China is rapidly improving with an increase of 33%
from 1995 to 2005, but it is coming off a very low base. China is now ranked in the top 15
patenting countries (considerably lower on per capita figures). Patents have value in
interpreting growth.
The Global Innovation Index is a more comprehensive tool for measuring broader economic
progress (Dutta, 2009). China ranks 29th (46.43) on the Insead developed score card (first
placed Switzerland has an index rating of 63.82 with the US seventh placed on 56.57). This
is a comprehensive rating of numerous indicators that are combined to develop an overall
innovation rating. Table 2 highlights the respective ratings of China, the US, Germany and
Japan as these are the countries that have competed for overall GDP supremacy in recent
years. China is compared in terms of several key criteria including: institutions (98th); human
capital and research (56th); infrastructure (33rd); market sophistication (26th); business
sophistication (29th); science outputs (9th); creative outputs (35th). These rankings are below
many other countries and place the Chinese as inferior to their competing rivals including the
US. Notably, as stated, the US is only ranked 7th. This indicator focuses more on innovation
as a turbine of overall growth and accordingly it is only one aspect of the hegemonic overall
scorecard. The law of large numbers plays a role as scale is important to hegemon status.
Table 2 identifies other important criteria like indicators around creativity. A rank order for
each criteria from one (highest) to four (lowest) is listed in the table for China, the US,
Germany and Japan.
27
Table 2: Comparison of Global Leaders on the Innovation Index
Source: Insead Global Innovation Index 2011
China’s economic transition since 1978 has been substantial but as the rankings identify
there is still a long journey ahead in its road to hegemony. Table 1 and 2 identify some of the
important ingredients that China will need to improve. Unlike democratic governments the
China US Germany Japan
Population (Million)
1354 (1) 318 (2) 82 (3) 127 (4)
GDP (US$ billions)
$4985 (3) $14119 (1) $3330 (4) $5069 (*2)
$US - GDP per cap
$4985 (4) $45989 (1) $36267 (2) $32452 (3)
Political Env.. 108th (4) 27th (3) 16th (2) 13th (1)
Regulatory Env.
76th (4) 8th (1) 23rd (3) 18th (2)
Business Env. 95th (4) 35th (1) 59th (2) 69th (3)
Education 51st (4) 36th (2) 12th (1) 40th (3)
Tertiary Edu. 102nd (4) 46th (2) 24th (1) 60th (3)
R&D 32nd (4) 5th (1) 14th (3) 7th (2)
ICT 59th (4) 9th (2) 15th (3) 7th (1)
Energy 92nd (4) 18th (1) 40th (3) 36th (2)
General Infr. 2nd (1) 63rd (4) 33rd (3) 27th (2)
Credit 36th (4) 4th (1) 5th (2) 8th (3)
Investment 8th (2) 3rd (1) 44th (4) 23rd (3)
Trade & Comp.
67th (4) 83rd (3) 30th (1) 75th (2)
Knowledge Workers
30th (4) 12th (2) 25th (3) 8th (1)
Innovation Linkages
46th (4) 22nd (1) 30th (2) 35th (3)
Knowledge Absorption
19th (1) 47th (4) 25th (2) 27th (3)
Knowledge Creation
12th (4) 9th (3) 7th (2) 6th (1)
Knowledge Impact
9th (1) 11th (2) 77th (3) 95th (4)
Knowledge Diffusion
21st (4) 12th (1) 18th (3) 14th (2)
Creative Intangibles
30th (2) 51st (3) 23rd (1) 74th (4)
Creative G&S 45th (3) 18th (2) 8th (1) 57th (4)
Total Index Score (highest is best)
46.43 (4) (29th Overall)
56.57 (1) (7th Overall)
54.89 (2) (12th Overall)
50.32 (3) (20th Overall)
28
Chinese have the ability to act quickly and with less inhibition and this is potentially an asset
(Kaletsky, 2010). However, there are arguments for and against such polity dominance. A
lack of human rights and political freedom is seen as a weakness. However, infrastructure
undertakings like the Beijing Olympics, World Expo and the Three Gorges Dam are
illustrations of the Chinese polity’s power. This power can have positive impacts even if it
impacts negatively on a minority. Lee Kwan Yew has proven that strong political controls
have positive institutional underpinnings. China enjoys a level of entrepreneurial freedom
which contrasts to their lack of political freedom. One key advantage over the United States
is its potential domestic market size. Despite 500 million people exiting poverty over the last
30 years (an unprecedented accomplishment) there are still 128 million people surviving on
less than $1 a day. Managing the formal institution of Government and the informal institution
of the people is the ultimate key. The propensity to enable its vast stock of human capital to
access broader and more robust knowledge is likely to determine whether China overtakes
the United States. For a communist country this is a tenuous balancing act.
CONCLUSION
Nothing is more certain than the likelihood of change. It is possible that the world has entered
the realm of a new hegemon. The technologies that this hegemon is likely to advance are
probably already apparent yet the “dots” are not yet connected. Undoubtedly, technological
innovation will be a centre piece of a hegemon’s success. With powerful cross-currents like
global warming there is much to be won and lost. The aspect that seems most difficult to
predict is the element of chance or serendipity and that’s what makes the “dismal science” so
much more interesting. China’s rise is unprecedented on several fronts. The most important
is the nature of the formal institution. Within this context some of the “softer” advances like
learning and innovation, the Chinese climate for creativity and China’s need to nurture risk
takers seem critical (Kriz & Cunneen, 2012). Kriz (2010, p. 556) concluded ‘It is unrealistic to
believe that China will remain a strict communist society in the long term just as it is to
believe Western democracies will remain in their own stable state.’
29
Contrary to many assertions outside of China, the belief and institutional structures align well
to an autocratic style. A single despot has reigned since 200BC and benevolent dictators are
acknowledged in Confucian tradition. The unique structure that flows from a communist polity
is more contemporary and the sustainability of this structure is more questionable. However,
one can expect that the best alternative is a relative close proxy. Capitalism in its modern
form is equally being questioned and some hybrid is likely (Kaletsky, 2010). Russia provides
a suitable example to North (2005) of what is likely to happen if a revolution was to occur in
China. Redding and Witt (2007) question the capacity of a polity built on personal trust and
not some form of system certainty. In a yin-yang tradition, one could suggest it need not be
an either/or. Singapore and Hong Kong have thrived on both a “rule of law” and a “rule of
man”. It is becoming clearer that China is in the process of adopting more systemic
approaches that will ultimately add more certainty to property rights and lower transaction
costs.
China is a new experiment and how well liberal values are reconciled with political control is
what China as an emerging hegemon is yet to answer. Creative innovation and Medici
Effects are not so easily reconciled where a ‘Big Man’ controls the rule of the game. China’s
challenge is to free its entrepreneurial spirits in a way that brings together two divides
(creative entrepreneurship and innovation with a strong communist polity) into a highly
productive hegemonic system. The West had 200 plus years to develop appropriate
structures to facilitate such development. The most important challenge, as North would
suggest, is for China to maintain a structure that fits with previous habits or “scaffolds”. It is
probable that a rapid adoption of a liberalised democracy is not such a scaffold and on this
level both the Government and the people would equally fail.
REFERENCES Ambler, T., Witzel, M., & Xi, C. 2009. Doing business in China (3rd ed.). New York:
Routledge. Arrighi, G. 2007. Adam Smith in Beijing: Verso New York.
30
Baumol, W. 1990. Entrepreneurship: Productive, Unproductive, and Destructive. Journal of Political Economy, 98(5): 893-921.
Becker, G. S. 1996. Accounting for tastes: Harvard Univ Pr. Beinhocker, E. D. 2006. The origin of wealth: Evolution. Complexity, and the Radi. Cunneen, D., & Mankelow, G. 2010. Entrepreneurship and New Gazelle Creation: How
Entrepreneurs Create New Gazelles: Lambert Academic Publishing, Saarbrucken. Davies, P. 2000. The fifth miracle: The search for the origin and meaning of life:
Touchstone Books. De Soto, H. 2000. The mystery of capital. London: Bantam. De Tarde, G. 1903. The laws of imitation: H. Holt and Company. Deng, K. 2012. China's Political Economy in Modern Times. Oxon: Routledge. Diamond, J. M. 1997. Guns, germs and steel : a short history of everybody for the last
13,000 years. London: Vintage, Random House. Drucker, P. 1992. The new society of organisations. Harvard Business Review(Sept/Oct): pp.
95-104. Drucker, P. 2002. They're not employees, they're people. Harvard Business
Review(February): pp. 70-77. Dutta, S. 2009. Global Innovation Index 2008-2009. Fontainebleau, France: Insead. Fischer, W., & von Zedtwitz, M. 2004. Chinese R&D: naissance, renaissance or mirage?
R&D Management, 34(4): pp. 349-365. Fishman, T. 2005. Cina Inc. How the Rise of the Next Superpower Challenges America and
the World. New York: Scribner. Florida, R. L. 2002. The rise of the creative class: and how it's transforming work, leisure,
community and everyday life: Basic Civitas Books. Foster, R. N., & Kaplan, S. 2001. Creative Destruction: Why Companies That Are Built to
Last Underperform the Market and How to Successfully Transform Them. New York: Currency: Doubleday.
Freeman, C., & Louca, F. 2001. As time goes by: from the industrial revolutions to the information revolution: Oxford University Press, USA.
Friedman, T. L. 2005. The world is flat: A brief history of the twenty-first century. New York: Farrar, Straus and Giroux.
Fukuyama, F. 1992. The End of History and the Last Man. London: Penguin Books. Fukuyama, F. 2002. Has history restarted since September 11?: Centre for Independent
Studies. Handy, C. 1995. The empty raincoat: Random House UK. Haque, U. 2011. The new capitalist manifesto: building a disruptively better business:
Harvard Business Press. Hodgson, G. 2003 Institutional Economics: Old and New. In G. Argyrous, & F. Stilwell
(Eds.), Economics as a Social Science: Readings in Political Economy, New and Revised Edition ed.: pp. 154-158. North Melbourne, Australia: Pluto Press.
Horgan, J. 1997. The end of science: Broadway. Hugill, P. J. 1993. World trade since 1431 : geography, technology, and capitalism.
Baltimore: Johns Hopkins University Press. Huntington, S. P. 1997. The clash of civilizations and the remaking of world order: Pocket
Books. Hutton, W. 2008. The Writing on the Wall: China and the West in the 21st Century:
Hachette Digital. Kaletsky, A. 2010. Capitalism 4.0: the birth of a new economy. London: Bloomsbury. Kennedy, P. M. 1989. The rise and fall of the great powers: economic change and military
conflict from 1500 to 2000: Vintage.
31
Kondratieff, N. D., & Stolper, W. F. 1935. The Long Waves in Economic Life. The Review of Economics and Statistics, 17(6): 105-115.
Kriz, A. 2009. Secrets to Building Personal Trust in China. Saarbrucken, Germany Lambert Academic Publishing
Kriz, A. 2010. The challenge to rekindle China's innovative spirit. Management Decision, 48(4): 541-561.
Kriz, A., & Cunneen, D. 2012. China's next big challenge: mastering radical technology. Journal of Science and Technology Policy in China, 3(1): 6-25.
Kydland, F. E., & Prescott, E. C. 1982. Time to build and aggregate fluctuations. Econometrica: Journal of the Econometric Society: 1345-1370.
Landes, D. S. 1999. The wealth and poverty of nations: Why some are so rich and some so poor: WW Norton & Company.
Landes, D. S., Mokyr, J., & Baumol, W. J. 2010. The invention of enterprise: Entrepreneurship from ancient mesopotamia to modern times. Oxford, UK: Princeton University Press.
Lindgren, M., & Bandhold, H. 2003. Scenario planning: the link between future and strategy: Palgrave Macmillan.
Liu, H. 2009. Chinese business: landscapes and strategies. New York: Routledge. McGraw, T. 2007. Prophet of innovation. Cambridge (Mass.) und London. Menzies, G. 2003. 1421: the year China discovered the world: Corgi. Mokyr, J. 1992. The lever of riches: Technological creativity and economic progress:
Oxford University Press, USA. Montesquieu, C. 1748. The Spirit of the Laws. Cambridge: Cambridge University Press. Nisbett, R. 2003. The geography of thought: how Asians and Westerners think
differently…and why. New York: The Free Press. North, D. 2005. Understanding the Process of Economic Change. New Jersey: Princeton. O’Reilly III, C. A., & Tushman, M. L. 2008. Ambidexterity as a dynamic capability:
Resolving the innovator's dilemma. Research in Organizational Behavior, 28(0): 185-206.
Ormerod, P. 2005. Why most things fail… and how to avoid it: London, Faber and Faber. Parker, P. M. 1995. Climatic effects on individual, social, and economic behavior: A
physioeconomic review of research across disciplines: Greenwood Press (CT). Porter, M. 1998. The Competitive Advantage of Nations. Hampshire, New York: Palgrave Redding, S. G., & Witt, M. A. 2007. The future of Chinese capitalism: Oxford University
Press, USA. Romer, P. 1993. "Economic Growth” The Fortune Encyclopedia of Economics: Time Warner
Books. Schumpeter, J. A. 1939. Business cycles: Cambridge Univ Press. Schumpeter, J. A., Becker, M. C., & Knudsen, T. 2005. Development. Journal of Economic
Literature, 43(1): 108-120. Schwartz, P., Leyden, P., & Hyatt, J. 2001. Long Boom: Texere Publishing Ltd. Simon, H. 2009. Hidden champions of the twenty-first century: success strategies of
unknown world market leaders: Springer Verlag. Styles, C., & Ambler, T. 2003. The co-existence of transaction and relationship marketing:
insights from the Chinese business context. Journal of Industrial Marketing Management, 32(8): 633-642.
Sull, D. N., & Houlder, D. 2006. Avoid a Midlife Crisis. MIT SLOAN MANAGEMENT REVIEW.
Taleb, N. 2008. Prologue, The Black Swan: The impact of the highly improbable, Revised ed.: xxi-xxxiii. United Kingdom: Penguin Books.
32
Taleb, N. N. 2007. The Black Swan. New York: Random House. Vargo, S. L., & Lusch, R. F. 2004. Evolving to a new dominant logic for marketing. Journal
of Marketing: 1-17. Verbeke, A. 2009. International Business Strategy. UK: Cambridge. Waldrop, M. M. 1992. Complexity: The emerging science and the edge of order and chaos:
Simon & Schuster. Zhu, M., Camp, R., Ashamalla, M., & Garg, R. 2007. Comparison of entrepreneurship
environment for executives between state-owned and private enterprises in China. China & World Economy, 15(6): pp. 104-120.