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Government Subsidies Pave the Way in China

Professors Usha Haley and George Haley identify the origin of Chinese dominance in four major industries.

(originally published by Booz & Company)

In the 2000s, China transformed itself from a net importer to one of the largest producers and exporters in the world in four mature, capital-intensive industries: steel, glass, paper, and auto parts. What accounted for this success, which in each case was achieved in a short five-year span?

Industry research reveals that each of the four has relatively low labor requirements, so it wasn’t China’s seemingly endless supply of inexpensive workers. The Chinese companies didn’t enjoy economies of scale or scope. Nor did the undervaluation of the renminbi explain their growth.

According to Usha Haley, director of West Virginia University’s Robbins Center for Global Business and Strategy, and George Haley, a professor of marketing and international business at the University of New Haven, it was government subsidies that drove this industrial transformation. In Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy (Oxford University Press, 2013), they calculate that subsidies from China’s governmental bodies—in the form of free or low-cost loans, energy, materials, land, and technology—provided the dollar equivalent of as much as 30 percent of the output of these four industries.

The Haleys argue that the fact that China has vaulted into leadership positions in the global markets for steel, glass, paper, and auto parts, and is currently following the same model to build a dominant position in the nascent solar industry, should give pause to economists, government officials, and corporate executives the world over. They point out that economists who dismiss government subsidies as a distorting factor that will eventually lead to an economically disadvantaged position may need to alter their views in light of China’s success. And government officials and corporate executives might want to reconsider their positions on open markets in a time when “free trade may lead to suboptimal outcomes, and protectionism can increase national income by raising firms’ profitability in imperfect markets.” 

Subsidies to Chinese Industry isn’t an easy read: It’s an economic study and an academic treatise. But the industry research on which it is based, the issues it explores, and the conclusions it suggests are important. And, as the letters reproduced in the book’s appendices demonstrate, the Haleys’ findings are already being used to influence trade policy in the United States.

Theodore Kinni
Ted Kinni

Theodore Kinni is a contributing editor of strategy+business. He also blogs at Reading, Writing re: Management.



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