Ten years ago, Scott Ellyson and Jeff Sweeney co-founded East West Manufacturing (www.ewmfg.com) in Atlanta to bring U.S.-based companies both the cost-savings and speed-to-market offered by Asian manufacturing, along with the quality control Western companies demand. They began by forging partnerships with a number of manufacturing facilities in China, Thailand, Vietnam, Taiwan and India. Later they purchased factories for their team to operate in Changzhou, China and Ho Chi Minh City, Vietnam. Today, East West Manufacturing is a recognized, respected expert in the planning, design and implementation of offshore product manufacturing for original equipment manufacturers and distributors. The company’s transparent supply chain, on-site quality control and logistics systems reduce the risks and complexities of offshore manufacturing.

Scott Ellyson recently shared his experiences with Penelope Prime, the Director of the China Research Center. East-West Manufacturing, Inc. is a sponsor of the Center.

Prime: You have been working in China for well over a decade. Give us a sense of what has changed and what has stayed fairly consistent in terms of the environment for foreign businesses.

Ellyson: I made my first trip to China in 1993 and since then have returned more than 100 times. Back then, the sight of a foreigner was so unusual, children would come up to me and touch me. Now, Westerners doing business in China is commonplace. In terms of manufacturing, it’s amazing to see the country’s transformation in recent years. China has done in 15 years what it would take most countries 50-60 years to accomplish. Their rapid evolution from an agrarian society to an industrial one is remarkable, and makes me wonder what they will accomplish in the next 15 years.

When East West Manufacturing began working in China a decade ago, China’s laborers had a well-deserved reputation for their strong work ethic, and the costs of manufacturing were among the lowest in the world. However, the country’s poor infrastructure, low-tech suppliers and inexperience with quality control posed difficult challenges. Companies could manufacture products quickly and cheaply in China, but distribution was difficult and product quality was almost never up to U.S. standards.

Let’s compare the above scenario with today’s business climate. In a remarkably short time, China has built modern freeways, high-speed trains, subway systems and five-star hotels to host business travelers from around the globe. There are high-tech suppliers in place who actively promote their capabilities internationally. While the laborers still work extremely hard, there is a new emphasis on work/life balance. Although the cost-savings of manufacturing in China versus domestic manufacturing are not what they once were, the Chinese have become more adept at managing quality control and they have a greater understanding of the quality demanded by foreign-based companies.

One other striking change is the attitude of the customs agents and other government officials who work with foreign businesspeople. Years ago, they were suspicious, stern and unwelcoming. Today, they are friendly and helpful and make it obvious that they want to encourage our business partnerships. They ask for and act on feedback so they can continue to improve their service and successfully court new business investments.

Prime: Tell us about the early days of setting up your business in China.

Ellyson: Looking back, I’m reminded of how young and idealistic I was. Traveling in China was difficult at every junction. We drove ancient, beat-up Volkswagen Jettas over winding dirt roads full of potholes because there were so few paved roads. We had to constantly zig-zag around pedestrians, cyclists, push carts and livestock. It seems like I was carsick the entire time. I slept on factory floors because there were no hotels nearby. I used to take 30-40 food bars with me because I was unaccustomed to the local food and couldn’t tolerate it. I had to spend hours at night feeding documents into a fax machine to communicate with the U.S. and only on rare occasions could I pay for a factory to bring in slow, dial-up internet just so I could send and receive e-mails.

I used to see terrible working conditions in the factories and from the very beginning, we made it clear that if a factory wanted to work with us, then they would have to implement safety standards and greatly improve conditions. If the managers weren’t willing to do that, we took our business elsewhere. It was – and still is – extremely gratifying to see the improvements we were able to instigate and to know we were improving the lives of the factory workers and their families.

Prime: You don’t have to invest in China. What are the risks there for you and others and how have those risks changed over time?

Ellyson: I wasn’t completely aware of all the risks of doing business in China when I first began working there, but I thought I could figure it out as I went along. In general, the main areas of risk include environmental risks like floods and earthquakes and political disruptions that can shut down businesses and halt transportation. East West Manufacturing deals with quality risks where we have to educate and supervise the Chinese workers to ensure each and every shipment meets our clients’ quality standards. We clearly communicate and document quality expectations in advance and work closely with the factory managers throughout the manufacturing process.

The key to mitigating all of these risks is diversifying the process. For example, both environmental and governmental upheavals can disrupt a supply chain, so we have to develop multiple sources of materials and manufacturing sites. That way, manufacturing can continue without a disastrous interruption, and you can also move products around to take maximum advantage of savings – either raw material or labor costs. And by diversifying, I mean diversifying within and beyond China. There are many more options both in China and other developing countries than there used to be, offering customers security, flexibility and maximum competitiveness.

Prime: How has East West Manufacturing responded to the risks and to the changing opportunities?

Ellyson: We strategically match products to expertise, helping our clients take advantage of local production skills and strengths. We pre-qualify our suppliers on critical manufacturing capabilities, competitiveness, IP stewardship, safety and labor practices. And, most importantly, we believe in having “feet on the street.” In other words, we maintain a significant presence in each country of manufacture, whether working with sub-suppliers or a fully owned factory, to understand the local culture, negotiate the best pricing and manage suppliers’ performance.

When we manufacture over $1 million worth of products for a customer, we automatically add multiple suppliers. As I mentioned above, we have diversified both raw materials sourcing and manufacturing facilities outside of China to India and Vietnam, because I feel certain Chinese labor costs will continue to rise, and there is always a risk of political change. This year, we are working towards being able to sell products inside China, rather than shipping everything overseas, to take advantage of this emerging market. Some of our competitors are moving further west into China, but I believe it makes more sense to diversity outside of China.

Prime: One of the biggest challenges in your business must be quality control. How do you manage this? Does your strategy on quality control differ in China as compared with other countries?

Ellyson: No matter what country we are working in, it all starts by understanding what our customers’ quality requirements are and documenting those requirements in advance. From there, we work closely with the factory manager every step of the way, testing and inspecting raw materials as well as each shipment of finished product. I tell people it’s like baking a cake. The customer tells us what the cake must look, smell and taste like. We procure quality ingredients for the recipe. The factory bakes the cake. Our oversight ensures the ingredients are acceptable, the recipe is being followed and the end product – the cake – is exactly as requested. Quality assurance is built into every step of the process.

Prime: What is your favorite story from your China experiences?

Ellyson: There are so many, it’s hard to choose, but I am especially proud of how we established our office in Shenzhen, China. In the beginning, we wanted to find a Chinese engineer with the education and experience to run our Shenzhen operation. Despite an intensive search, we couldn’t find someone with our original requirements, but we found Kenny, who had the education and talent, but not the experience. We decided to take a chance with him, but as Plan B, we hired Matt, an engineer from Texas who had been living in China, studying Mandarin, and was now working for a U.K.-based manufacturer. We thought Matt could step in if Kenny didn’t work out.

Kenny more than “worked out.” He exceeded our expectations and has become a valued member of East West Manufacturing’s senior staff, and a key reason for our Shenzhen operation’s success. Matt turned out to be the perfect person to oversee our new factory in Vietnam, and thanks to him, we were able to get new facility operational very quickly. Both men have made tremendous contributions to our company’s growth.

Prime: Being in an outsourcing business, you probably are often asked why you are not manufacturing more in the U.S. What is your response?

Ellyson: We call what we do for our customers “Domestic Offshore Manufacturing.” In a nutshell, we oversee the planning, design and implementation of offshore product manufacturing for Western-based original equipment manufacturers and distributors. We marry the quality control typically found in domestic manufacturing with the cost- savings of offshore manufacturing. The model makes sense for a number of U.S.-based businesses seeking to stay competitive in their markets. It doesn’t mean we take all of their manufacturing offshore. We take some of the component manufacturing offshore so our customers can reap the benefits of the expertise available in other countries and realize cost savings. It’s not black-and-white or all-or-nothing in manufacturing, meaning many products are manufactured in one or more locations and assembled elsewhere. Take cars for example. Even the ones touted as “American made” have components manufactured all over the world. The final assembly takes place in the U.S. The same is true with computers. China is where most circuit boards are now manufactured and then shipped overseas for final assembly. Maybe down the road, East West Manufacturing will set up our own manufacturing facility in the U.S. for final assembly. In the meantime, because of what we do, our customers are able to competitively price their products and grow their market share.

Prime: What should policy makers in the U.S. do to improve the domestic environment for manufacturing and for business more generally?

Ellyson: In my opinion, we’ve completely lost our way in terms of attracting manufacturing to the U.S. Taxes are the biggest culprit. The United States levies the highest corporate taxes in the world and fails to incentivize investment at the federal level. Compare that to any other industrial country trying to attract manufacturing. For example, if I go to Vietnam and China, I pay zero tax for the first five years and half the corporate rate for the next five years. Here at home, I pay almost 40 percent in taxes from day one. When you start a business, those early years are crucial and taxes take a huge percent. How can we expect people to begin businesses when the tax burden is so high? We could overcome the high labor costs in the U.S. if we could reduce taxes and regulations. The other thing that has to happen is healthcare reform. Healthcare costs severely impact businesses. In our own company, our healthcare costs just increased 20 percent this past year, which is a big deal for our bottom line. Everyone talks about labor costs in the U.S., but the reality is that healthcare costs are going up more than labor costs.

As for innovation, we must improve our regulatory and government agencies like the U.S. Patent Office. In China, the average lead time to obtain a patent is two-to-three years. In the U.S. the average lead time is eight-to-nine years. That sort of bureaucratic red tape discourages innovation, rather than supporting and encouraging it. One of our engineers may come up with a great idea to improve efficiency, but if I know it will take up to nine years before we have intellectual property protection via patent approval, I am not going to move forward with the idea.

Prime: Do you think it is likely the U.S. will take these steps?

Ellyson: Not anytime soon. Sadly, I believe things have to get even worse before we take the necessary actions to make them better. I don’t think these are political issues, I think they’re incompetence issues. It’s as if our political leaders are only looking at short-term ideas to solve long-term problems. For example, the new jobs bill recently proposed by the president is full of immediate, short-term recommendations. Those of us running a business have to think long-term, and I don’t see that happening in our government.

Another problem is the divisiveness of our elected officials. I don’t remember ever having such a polarized Congress. I think the citizens of this country are tired of all the bickering and want our elected leaders to work together to solve the serious economic issues the U.S. is facing. At the same time, we seem to be blind to our competition. We’re not taking note of what other countries are doing to obtain and maintain a competitive advantage. Instead, we’re distracted by wars, debt, joblessness and immigration issues and are taking our focus away from business productivity.

Prime: I have heard you argue that the U.S. needs to maintain some manufacturing in order to ensure innovation. What is the connection and why is this so important?

Ellyson: If you disconnect yourself entirely from manufacturing, you become removed from the processes that stimulate innovation. Ideas for how to make things better, faster and cheaper come from people who work day-to-day in manufacturing.

Prime: Although manufacturing’s share of employment has fallen substantially, the U.S. still has a large manufacturing base in terms of value. Is a large value base—if we maintain it—sufficient to support innovation from your perspective?

Ellyson: No, it is not. We need to become more creative to attract more manufacturing here. Every manufacturing job creates service sector jobs like dry cleaning, grocery stores, and so forth. The reality is we are in a competitive global market. China is going after our high-tech industry, for example. It’s not enough to hang onto the research and development functions. Look at Apple. They have around 50,000 employees designing their products, but they sub out the manufacturing of those products to another company with a million employees. That tells me it takes a million people to make what 50,000 people design. So, you can’t create enough jobs with just R&D. You have to hang on to the manufacturing, too.

Prime: Do you see Chinese companies as primarily competitors, or as cooperative partners in a global production networks that help create value for everyone?

Ellyson: They’re both and we’re shifting from one to another. We’re moving from a cooperative base that supports many multi-national companies to a competitive environment. Chinese companies created their foundation by serving as our suppliers, but now they’re going to be aggressively looking for brands to own that will compete against our brands. The Chinese want the same success we’ve had and they understand you’re not going to get there by making products for other companies.

Prime: Any final thoughts?

Ellyson: You often hear that China is unfairly manipulating its currency. In some respects this is true, but at the moment I don’t think it is undervalued. Most people don’t realize that just a few years ago, China’s currency was trading at 8.78 Yuan to the U.S. dollar and now it’s at 6.38. That’s a shift of nearly 30%. Even if the currency moves another 15-20 percent to the dollar, it’s not going to have a major impact on our trade imbalance. If anything a higher currency will just push more manufacturing to other lower-cost countries.

It’s true that China exports more products to the U.S. than it imports from us, but the reverse is true for China and the rest of the world. In total, China consumes more than it exports. Nevertheless, a lot of people are calling for taxing products coming into this country from China. Well, guess what? China is not the cheapest country for manufacturing any more and if we start taxing them, do you really think companies will move their production back to the U.S.? No – they’ll go to Vietnam, Indonesia, India or another low cost country. The only thing taxing products from China will help is in creating a trade war, which we definitely don’t need right now.

China is evolving and we’ve got to find ways to work together. Here at home, we should be focusing on high tech products (like bio and energy) that aren’t as sensitive to labor costs and incentivize manufacturing so we can compete in the new global reality. We must implement long-term programs like permanent R&D tax credits, lower corporate taxes, elimination of capital gains and Sarbanes-Oxley, reduced healthcare costs, faster patent processes and stopping the “brain drain” to other countries.

Let’s not view China as a threat. Instead, let’s look at China as a partner with whom we can make positive changes.

The post Manufacturing in China: The Key Decisions appeared first on China Research Center.

The first three articles in this issue of China Currents each point out some of the unusual, and perhaps unexpected, characteristics of China’s stunning economic development, and the following two pieces discuss ways to profit from them – for a neighboring country with a history of antagonistic relations and for budding entrepreneurs with eyes on the China market.

The lead article by Sam Trachtman explains how China’s model of development has so far broken the mold in terms of international trade surpluses and deficits. Normally low-income countries have trade deficits that are complemented by net foreign investment inflows that help them fund infrastructure and productive investments in various sectors. In China’s case, the opposite has been the norm. Trachtman reviews the current thinking on why this has been the case, elucidating new research focusing on distortions in factor markets as a new starting point.

Another surprise development is described in the second piece by Clifton Pannell, where the previous backwater Macau has flourished over the last decade while a former leader of the East Asian economies, Hong Kong, faces many worrisome new challenges. Hong Kong’s logistical and financial strengths are facing serious competition from cities in China, while Macau has offered up a glitzy but sophisticated gaming industry that has been remarkably prosperous.

In neighboring Vietnam the consequences of a strong, assertive China are also being felt. With a background of centuries of intermittent conflict, surprisingly relations between Vietnam and China have improved recently, as Dennis McCornac chronicles. Although there are tensions over territorial claims in the South China Sea, Chinese labor in Vietnam, and head-to-head competition in labor intensive goods, new agreements have been signed along with new processes established to deal with rising conflicts in the future. These are very positive signs.

So, how to make the most of these trends?

Chen Ye-Sho, E. Watson and Renato F. L. Azevedo describe a vibrant channel for linking Chinese and U.S. businesses to the emerging opportunities and to each other. This linkage model involves students and a long-term basis for innovation. Finally, our interview with Scott Ellyson of East-West Manufacturing provides one clear case of a U.S. company utilizing the resources of the region to provide value globally. Mr. Ellyson also offers some sobering thoughts on how, and if, the U.S. economy can maintain its competitiveness in the years to come.

The post Introduction: Surprises in China’s Economic Model and Profiting from Them appeared first on China Research Center.

The soft landings program developed originally by the National Business Incubation Association (NBIA 2011) was designed to help a company from one country land softly into the market of another country through a local incubator. ¹The purpose of the program is to help reduce risks and costs for the company as well as to find business opportunities in the new market. There are two key success factors in the soft landings program: (1) connecting the expanding company with key decision-makers from relevant network supply chain companies in the new market and (2) providing revenue generation services for the company (Mencin and Erikson 2009). A major driver behind the two key success factors is global talent retention and recruiting (Hansen et al. 2000; McLean and McLean 2001; Beebe, et al. 2006).

The objective of the Soft Landings Curriculum (SLC) (Chen et al. 2010; Liu et al. 2010) is to provide a curricular platform for cultivating talented people for the expanding companies by linking college students at various levels (e.g., undergraduate, graduate and executive education) with business communities engaging in the soft landings program. The SLC enables the company to reduce risks and costs, find business opportunities and identify talented people for its new business-venture. Moreover, the participating students are able to (1) network with key decision makers at both the expanding company and the supply chain companies; (2) engage in developing revenue generation models for the expanding company; (3) earn income or internships; (4) become employees or partners of the expanding company and (5) create their own businesses by leveraging the networked resources developed in the course of participation. The SLC program achieves a win-win situation for everyone involved.

In this paper we discuss how the SLC works at LSU. Silberman (2006, p.158-159) raises several questions that should be taken into account when shaping and designing active learning experiences: (1) Does the design achieve the activity’s objective? (2) What knowledge or skill level does the design require of participants? (3) How much time will it take? (4) Is the design slow or fast-paced? (5) Is it suited to the size of the group? (6) What skills are required to conduct the design? With that in mind specifically, we answer the following eight questions with the goal that the lessons learned at LSU could be a real aid for those who might want to set up a similar approach at their own universities.

• What components are necessary for developing an SLC?
• How do we develop an SLC?
• What do the students do from week to week and how do their activities tie into social networking and linking up with local incubators and Chinese student partners?
• How do the students get from making contacts with Chinese students to doing actual projects with real companies?
• How is a trip to China organized and how is it funded?
• At what point do the students develop their business plans?
• Are case studies available that describe these success stories?
• What kinds of area resources are essential in making this kind of course a success?

1. What components are necessary for developing an SLC?

There are three major components of an SLC: first, companies interested in expanding their businesses into other countries; second, local incubators available to assist in the expansion and third, curricular programs allowing students to help companies land softly into local incubators. In this section, we discuss how we start on these three components.

Companies Interested in Soft Landings to Expand Their Business

In their book on how China’s cost innovation is changing global competition, Zeng and Williamson (2007) identify the evolution of foreign multinationals’ business relationship with China in the following four stages: (1) made in China, using China to manufacture their products for the global markets; (2) market in China, selling products to the rising domestic market in China; (3) innovation in China, investing in R&D, design, and branding to innovate and lead in China and (4) global brands from China, selling products globally that were originated and successfully marketed in China. Industries on the frontier of this evolution include textile and apparel, shoes, toys, consumer electronics, home appliances and personal computers. The need to transform from Made-in-China to Global-Brands-from-China is discussed in Harney’s book on China Price (2008), in which she argues China is losing its cost advantage. With the recent endorsement of China’s 12th Five-Year Plan (2011-2015), we see a clearer plan for this transformation, especially regarding the Chinese market and Chinese innovation (KPMG 2011).

The transformation of China’s economy means increased opportunities for U.S.-China entrepreneurship. In particular, there will be more U.S. companies in need of soft landings into the China market and more Chinese companies in need of soft landings into the U.S. market. There are various ways to engage with these companies. Here are some of our examples:

• Through the networks of the International Franchise Forum, a component of Stephenson Entrepreneurship Institute at LSU, we have received soft landings requests from several U.S.-based franchise companies interested in the growing consumer markets in China (KPMG 2011).
• Through the networks of our partners in China, we have received the soft landings requests from several Chinese companies interested in the U.S. markets, e.g., clean energy and senior care.
• Through our alumni networks we have received the soft landings requests from U.S.-to-China and China-to-U.S. companies. For example, an EMBA alumnus, who is a physician, is interested in the market opportunities of health care in China (KPMG 2011). Another example, a student from China is interested in expanding his family business into the U.S.

Local Incubators Available to Assist Soft Landings

Local incubators for soft landings are those having the capacity of helping foreign companies develop their new local markets through their incubators. Consider, as an example, Louisiana Business and Technology Center (LBTC), a local incubator at LSU. In operation since 1988, LBTC was selected as the 2005 Technology Incubator of the Year by the National Business Incubation Association. In 2006, LBTC won the Excalibur Award from the Association of University Research Parks for its leadership in housing numerous technology companies displaced by hurricanes during the post-Katrina and Rita periods. More significantly, LBTC’s mobile classroom program received the 2009 Excellence in Rural Economic Development award by the U.S. Economic Development Administration.

• LBTC’s capacity of helping companies develop new markets consists of three pillars:
• Business incubation: These services include facilities, management and technical assistance, financial analysis, access to capital, referral to fee-based professional and advisor resources, technology transfer and commercialization assistance and entrepreneurial educational training.
• Business counseling and networking: These services include seminars and workshops on current practices and changing trends, providing networking opportunities to gain resources, providing access to resources and expertise within the federal laboratory system, outreach to rural communities in Louisiana through the mobile classroom, business emergency operations and providing a key link between LSU and business communities for joint venture exploration and program development in the U.S. and China.
• Talent cultivation and recruiting: LBTC’s regional, national and international resources and networks provide fertile ground to cultivate talents for expanding companies. Consider three examples. First, MBA students with qualified skills work as business development counselor assistants at LBTC. Second, LBTC works closely with LSU’s Stephenson Entrepreneurship Institute’s Entrepreneurship Fellow Program to provide students the opportunity to network with and be mentored by top executives. It thereby gives these students an extra edge in developing their business plans. Third, LBTC provides a Student Incubator to help students develop and advance their business plans.

Curriculum Designed to Help Foreign Companies to Land Softly

Based on the literature review, a meaningful SLC shall cultivate talents (Hansen et al. 2000; McLean and McLean 2001; Beebe, et al. 2006) who can help soft landings companies get connected with key decision-makers within the supply chain in the new market and provide revenue generation services for the soft landings company (Mencin and Erikson 2009).

An SLC can be interpreted as a strategy for instruction leading to learning. According to Smith and Ragan (2005) instructional design “refers to the systematic and reflective process of translating principles of learning and instruction into plans for instructional materials, activities, information resources and evaluation.” Considering their concepts for design and instruction, it is possible to rephrase, saying that instructional design is the field responsible for the process, activities and people engaged to improve the quality of their subsequent creations in order to develop and deliver information and outputs that are created to facilitate attainment of intended and specific learning goals. Based on the process involved, instructional design is divided into three major activities, which are to perform an instructional analysis, to develop an instructional strategy and to develop and conduct an evaluation. The first activity aims to answer, “Where we are going?,” the second, “How we will get there?” and the third “How we will know when we are there?” The instructional design structure is based on learning that meets learners’ needs.

• With this background of instructional design in mind, we have developed a five-step SLC:
• Step 1: Develop social networking opportunities for LSU students to learn the needs of U.S. decision-makers interested in doing business in China as well as Chinese decision-makers interested in doing business in the U.S.
• Step 2: Develop a social media platform, such as Twitter, Facebook or Skype, for U.S. students to communicate with Chinese students at partnering universities and explore solutions to the needs identified in the first step.
• Step 3: Develop student mobility for students to visit and network with the decision-makers in the U.S.-China supply chains related to the solutions explored in the second step.
• Step 4: Assist students to develop robust business plans.
• Step 5: Work with our soft landings clients and student ambassadors to build their businesses in the U.S. or China utilizing the local incubators.

Due to the effects of the recession on higher education, we realized at the outset in Spring 2007 that in order for the SLC program to be sustainable, we needed to be self-sufficient. Fortunately, we have been graced with collaborative partners who are willing to share resources and move the SLC program forward. Specifically, in collaboration with partners in China, this action-oriented SLC program is the concerted effort of the following entities at LSU:

1. The Emerging Markets Initiative: The Initiative has developed courses and resources for doing business with emerging markets.
2. The Flores MBA Program: The Program, ranked 31st in 2010 by Forbes, provides the linkages to business communities, including the development of soft landings curricula for full-time, part-time and executive MBA students. The Program also organizes business trips to emerging markets.
3. The Stephenson Entrepreneurship Institute: The outstanding success of SEI allowed LSU to be ranked 3rd as America’s most entrepreneurial campus by the Princeton Review and Forbes in 2004. SEI organizes seminars and provides business plan development advice.
4. The Louisiana Business Technology Center: The Center, designated the 2005 Technology Incubator of the Year, provides incubating facilities that assure the successful implementation of business plans developed by soft landings participants. The LSU business incubator also provides space and services to companies from emerging markets or joint ventures with U.S. firms to give them a starting place in which to develop their businesses in U.S.
5. The International Programs at LSU: The Programs leverage the network resources of LSU international students from emerging markets. The Programs also provide the linkages to international business programs around the world.

2. How Do We Develop the SLC?

To move the SLC program forward, we have developed a rich repository of resources and networks focused on U.S.-China business education and entrepreneurship. The resources include a knowledge repository of courses and cases on U.S.-China business opportunities. Consider, for example, the following three courses:

• Sourcing in China: Sourcing plays a vital role in global business competition. Understanding how sourcing in China works and doesn’t work is critical for firms seeking to thrive in the 21st century. Students take this course to understand the general characteristics behind the successes and failures of sourcing in China and show what firms can learn to succeed in executing their sourcing strategies. The students will explore opportunities of helping U.S. companies choose strategic partners and suppliers in China.
• Entrepreneurship in China: Entrepreneurship plays a vital role in modern Chinese business. Understanding how Chinese entrepreneurs thrive is critical for foreign firms seeking to grow in China. Students take this course to understand the general characteristics behind successful Chinese entrepreneurs and to show what foreign firms can learn from them to thrive in China.
• Emerging Markets and Supply Chain Opportunities: The rise of emerging markets, such as China, India and Brazil, produces various entrepreneurial opportunities in global supply chains. This course seeks to understand the general characteristics behind successful business cases in retail global supply chain, product life cycle and global supply chain, supplier clusters and emerging markets, information technology and global supply chain, life-saving supply chain and disaster management, and greening the global supply chain. The students explore entrepreneurial opportunities for local communities playing the role of growing the U.S. economy.

U.S.-China business education and entrepreneurship networks include key decision -makers of U.S.-China businesses, success storytellers and their networks. The networks are developed from various sources, including LSU international alumni networks, Chinese faculty, LSU students from China, members of the globalization committee in the Dean’s Advisory Board, the Louisiana Business & Technology Center, the Baton Rouge Area Chamber of Commerce, the Baton Rouge Center for World Affairs, Social Entrepreneurs of New Orleans, the Louisiana Cultural Economy and World Cultural Economic Forum, the Port of New Orleans and the World Trade Center in New Orleans.

3. What Do the Students Do?

The first step of the SLC process is to develop social networking opportunities for LSU students to learn the needs of U.S. decision-makers interested in doing business in China as well as Chinese decision-makers interested in doing business in the U.S. In this section, we discuss what students do from week to week and how their activities tie into social networking, linking up with local incubators and Chinese student partners.

Social Networking

Three effective networking approaches for students to learn the needs of decision-makers are the following:

• Invite interested decision-makers to speak at related classes, such as Sourcing in China and Entrepreneurship in China, to discuss what they need and what incentives they can offer for inspired students to pursue further to the next steps.
• Invite success storytellers as speakers to inspire the students about their journeys and connect the students to their networks.
• Hold seminars and workshops on Doing Business with China for students, faculty and Louisiana business communities. They provide opportunities, such as internships, for students to network with business people.

Consider, for examples, the needs of U.S. franchises interested in doing business in China. There are three general needs. The first need is to help them establish the company headquarters in China through trustful Chinese partners in legal, site selection, human resources, supply chain and marketing. The second need is to help them develop the franchise strategy to grow the business, including standard operation procedures for franchised units and franchisee selection. The third need is to help them with product R&D. The Chinese market is highly competitive and intellectual property protections are relatively loose. A common strategy to address the two issues is to constantly develop new products Chinese consumers like.

As for Chinese decision-makers interested in doing business with U.S., here are some examples:

• A growing natural medicine company in Beijing. The company has R&D, manufacturing facilities and a hospital focused on natural medicine. The company is growing into the vertical market in natural medicine in China by mergers and acquisitions and purchasing land for growing herbs found in natural medicine. Seeing the demand of natural medicine among the increased population of retired baby boomers in the U.S., a senior executive of the company visited LSU for six months in 2010 to develop collaborative projects with the teams, including faculty and students, at LSU.
• leading jeans manufacturer in China. The owner has much knowledge and a strong network in the textile industry in China. By leveraging networked resources, the company has developed a new fashion brand ready to go global. The owner visited LSU for three months in Spring 2011 with three objectives: exploring the market opportunities for the new brand, looking for U.S. brands with a rich history to adapt for China markets and exporting good U.S. household brands to China’s developing markets.
• A large solar energy component manufacturer in China. The company’s raw materials come from a U.S.-based company specializing in turning sand into high quality silicon. The company is interested in expanding into the U.S. market by first finding solar panel installers and distributors here. Once they understand the market demands in U.S., they plan to invest in domestic solar panel manufacturing. It is worth noting that the owner’s children are studying at LSU. They are expected to participate in the U.S. venture and eventually become executives of the company’s U.S. office.

Week-to-Week Activities

Students inspired by the opportunities presented by the decision-makers of an expanding company may work on a class project, individually or as a team, to fully understand the needs of the company in the new market. The project includes five major questions:

• What are the demand and supply chains of the company in the home country?
• What is the current business model for revenue generation in the home country?
• What are the demand and supply chains of the company in the new market?
• What are potential revenue generation models in the new market through the local incubator?
• How can companies relate the findings from the first four questions to the specific needs of the decision makers?

The students have to present weekly reports summarizing their activities, findings and questions. They also have to make one mid-term presentation and another final presentation allowing them to learn how to effectively present their findings and gain valuable feedback from the audience, including classmates and the representatives of the soft landings companies. From time to time, Chinese student partners at LSU or in China are introduced to help answer the questions.

4. From Networking to Real Projects

The second step of the SLC process is to develop a social media platform for U.S. students to communicate with Chinese students at partnering universities and explore solutions to the needs identified in the first step. In this section, we discuss how the students get from making contacts with Chinese students to doing actual projects with real companies.

A key feature of the SLC program is that international resources such as Chinese students at LSU, businesses and their networked resources are leveraged to help interested students explore solutions to the needs. For example, consider the natural medicine company in Beijing described above. The interested U.S. students need to first know the company’s demand and supply chains in terms of history, management, market shares, etc. The visit of the senior executive at LSU was helpful in providing needed information. However, the serious U.S. students still needed to use all means available, such as social and face-to-face networking in China and LSU, to fully understand the company.

Another question was to explore how the company’s natural medicine products can fit U.S. markets. Three markets were identified and analyzed: drug, medicinal foods and over-the-counter health supplements. The medicinal foods market was selected as a good target for the company’s U.S. investments. While exploring solutions for the company, other market opportunities were identified. For example, some U.S. entrepreneurs had patented natural medicine products, but did not have manufacturing capacities. Those entrepreneurs were interested in having the Beijing company manufacture their products for the U.S. and China markets. Another example is a senior care franchise in the U.S. interested in the growing senior care market in China. The franchise company was interested in partnering with the Beijing company to venture into China’s market.

5. Gaining Experience in China

The third step of the SLC process is to offer students a chance to visit China and network with the decision-makers in the U.S.-China supply chains related to the solutions explored in the second step. In this section, we discuss how the trip is organized and funded.

Trip Organization

The objective of the trip is to allow students to network with decision-makers and fine-tune their drafted solutions with real-life data and facts. Consider, for example, the natural medicine company in Beijing described above. During the senior executive’s six months visit at LSU, we were able to meet with the key decision-makers of the U.S. supply chain in the natural medicine industry. The meetings were arranged by our networked partners in U.S. Some participative students found the meetings very valuable. In return for our assistance, the Chinese senior executive arranged for our students and faculty to visit in the summer of 2010 the key supply chain companies in the Chinese natural medicine industry. The visits include (1) the city Anguo in Hebei, China, famous for its herbal medicines; (2) a top science park where leading natural medicine R&D projects are developed; (3) the company’s manufacturing facilities in Beijing, where we found that some of their sophisticated machineries were made in the U.S.; (4) the company’s hospital in Beijing, where we saw lengthy processes for treating chronic diseases using Chinese acupuncture; (5) a U.S. company manufacturing capsules in China for the world market; (6) a large pharmaceutical logistics distribution company, where we saw highly automated processes handling the inventory and distribution of the products and (7) a large natural medicine museum, where we saw how Chinese herbal medicine was developed and modernized. Most importantly, the students were able to meet, discuss and network with the key decision-makers in the vertical market of the natural medicine industry in China.

To make the trips to China fruitful, three types of preparations are needed by participants. Consider, for example, the LSU MBA study trip to China. First, we conduct a pre-trip seminar, focusing on linguistic, social and cultural aspects of China. The students are also required to read one or more books, such as China Shakes the World (Kynge 2007), and write a report before the trip. Second is the Doing Business in China group study journal. All students are involved in documenting their study trip experience in a group effort to include narrative and photos. Each group is assigned one of the following five topics discussed in The China Rules (Paine 2010): Dealing with Government, Managing Business Conduct, Developing the Workforce, Competing for Customers and Markets, and Coping with Complexity. The group members are responsible for answering the sub-questions associated with each topic for each company visited.

In addition to the assigned topic, each group will be responsible for summarizing the specific learning that occurred during each day (including site visits, events, seminars or business meetings). Third is the group presentation, summarizing what they have learned during the trip and what they plan to do next. In addition, pictures from the trip will be used to help prepare a Shutterfly.com documentary. This book will be used for promotional purposes targeting both potential MBA prospects as well as potential International Study Trip sponsors. The book will focus on the learning that has occurred during the trip, primarily regarding global business practices but is also reflective of history, culture, geography, politics, law, government and language.

Trip Funding

Typically students have to pay for their own trips. Sometimes we are able to get some financial support from grants or private donations to partially cover travel expenses. For students serious about U.S.-China trade relationships and the opportunities the SLC program can bring, we encourage self-sufficiency. That is, we try to find funding sources from which the findings of their China trips can add value to them. In addition, we prepare trips well so that every fruitful trip may lead to opportunities of another trip funded by someone who can benefit the next time.

6. Developing the Business Plans for Incubation

The fourth step of the SLC process is to help students develop robust business plans. Consider, for example, the leading jeans manufacturer in China and the large solar energy component manufacturer in China described above. Three graduate students and two faculty members were involved in developing the business plan for the jeans company’s new brand to market in U.S. The business plan focused on the strategy of using social media to market its products. Two students and one faculty member were involved in developing the business plan for the solar energy company’s market in the U.S. The fifth step of SLC is to work with our soft landings clients and student ambassadors to build their businesses in U.S. or China through the local incubators. For example, the solar energy company in China established its U.S. business in March 2010 and incubated at the LSU incubator in January 2011. Through the SLC, the new company was able to reduce risks and costs and recruit talent relatively easily.

7. Impact and Benefits of Cultivating Storytellers

Cultivating Storytellers

The SLC, empowered by the resources and networks such as the foundation, has cultivated storytellers through networking, team building and coaching in every step of companies’ soft landings. Below are some examples:

The Harvard Lady ² : In a class analyzing the needs of U.S. decision-makers interested in doing business in China, a motivated student was interested in the need of aligning companies’ business strategies with the Chinese government’s Five-Year plans. Her study led to a research paper, accepted and presented at the Harvard Project for Asian and International Relations Conference at Harvard University, regarding China’s censorship of Google. This success storyteller, The Harvard Lady, became a role model to inspire others to win awards in other competitions.³

The China Lady ⁴ : In exploring solutions for a Louisiana-based company to do business in China, an inspired student realized the importance of relationship-building and the key role Mandarin plays in the process. She took various Mandarin courses at LSU, attended a study abroad program in China, enrolled in Peking University and maximized the utility of social media to engage in idea discussions with friends in China. Because of her impressive proposal, this student, The China Lady, was hired as an intern in China to evaluate industry opportunities and explore synergies between the company and the Chinese market for possible expansion in the future.

The Language Man ⁵ : In networking with U.S.-China supplier chain decision-makers, a gifted student with strong language skills, The Language Man, was able to find a high-paying job in China selling environmental-control products to the global supply chains of multinationals. He also leveraged his supply chain networks to explore a side-business of his own.

Step 4 – The Who Dat Pig ⁶ : Inspired by the New Orleans Saints’ victory in the Super Bowl and the team’s slogan “Who Dat,” a highly-connected student partnered with an artistic relative and sourced help in China to quickly turn a class business plan into a real business.

Step 5 – The Class-On-Demand Man ⁷ : During the financial crisis in 2008, an entrepreneurial student reflected on the lessons he learned in the Entrepreneurship in China class, specifically the Chinese character for crisis, which is made up of the symbols for danger and opportunity. This student, The Class-On-Demand Man, began to put a business plan together during his final semester at LSU and incorporated many of the ideas taught in class for the future expansion of his business. The business was incubated at the LSU incubator in early 2009. In addition to steadily growing his business, he also incubated another business in late 2010. While enrolled in the class, he got the opportunity to work with several students and business people from China. This real-life experience gave him an understanding of China’s market. Seeing the increased number of U.S.-China businesses interested in soft landings through local incubators, he is planning to develop another business to provide online cross-cultural business etiquette training services for U.S. decision-makers interested in doing business in China and Chinese decision-makers interested in doing business in the U.S.

Impact and Benefits for Instructors, Students, and Other Participants

To successfully conduct business in the global economy, students must acquire international knowledge, including language, business and cultural etiquette, and must have the opportunity for hands-on experience in local markets. Similarly, business communities need to acquire international knowledge and skills for doing business in local markets in order to prepare them to strategically expand their businesses in a global economy. The SLC is designed to take advantage of resources from the participating entities with the impact of enriching our students’ educational experience and enabling business communities to engage in global business opportunities. Its significant impact is achieved by:

• Integrating the ongoing efforts of several vibrant entities to enhance awareness of the strategic importance of trade relationships between the U.S. and China, and to promote international business education in Louisiana to cultivate more business-oriented entrepreneurial potential in a global marketplace.
• Bridging the gap between the personnel and information needs of local Louisiana businesses and U.S.-China business education curricula and programs.
• Developing a long-term constructive relationships with academic institutions and the business communities in China to promote international business education and global business in Louisiana in a sustainable manner.

This action-oriented program enhances higher education curriculum and instructional effectiveness by providing the following benefits for instructors, students and other major participants:

• Instructors involved in developing and teaching the SLC: The knowledge accumulated and networked relationships built through the curriculum are documented in a knowledge repository. This will help the instructors teach the curriculum more efficiently and effectively. In addition, the increased number of participating companies in the U.S. and China will be valuable for conducting research toward enhancing the curriculum.
• Students at various levels (undergraduate, graduate, and executive education): In addition to learning real-life business practices in the global context, the curriculum provides the ideal combination of theoretical knowledge, practice and networking opportunities to prepare students to successfully and confidently confront the challenges and opportunities presented by the global marketplace.
• The State of Louisiana: The State of Louisiana, engaging in economic recovery from the damage caused by Hurricanes Katrina and Rita, has a lot to gain from the SLC. State entities focused on business and commerce will benefit immensely through the increased linkages and business opportunities created by the proposed program.
• Louisiana certified minority, women-owned and small businesses in related sectors:The SLC provides a direct link between certified minority, women-owned and small businesses in Louisiana and resources in China. For example, this linkage enables those businesses to gain access to high-quality and low-cost textile/apparel products directly from reputable producers in China. As such, these small businesses will become competitive suppliers for major U.S. fashion manufacturers and retailers.
• U.S. Corporations: Doing more business with certified minority and women-owned businesses in Louisiana adds value to corporate America. Working through the SLC, U.S. corporations can take advantage of some of the best supplier diversity programs through sponsoring LSU students’ travel to China.
• Businesses in China interested in going global: Many Chinese apparel manufacturers have competitive advantages of producing high quality products at lower costs than their counterparts in the U.S. These manufacturers are also looking for opportunities to work with the U.S. businesses on establishing their brands to compete in the China market. Business opportunities can be created or facilitated through linking Chinese fashion entrepreneurs with those firms with Louisiana certified minority and women-owned businesses that have extensive knowledge of the U.S. and speak English when presenting products and services to U.S. customers.

8. Essential Area Resources

There are three essential area resources in making the SLC a success:

• A local incubator with a proven track record of success: The incubator plays two major roles: (1) connecting the soft landings company with the key decision-makers from the relevant networked supply chain companies in the local market, and (2) providing revenue generation services for the soft landings company. The example at LSU is the Louisiana Business and Technology Center.
• A U.S.-China business education program: The program plays two major roles: (1) recruiting Chinese companies interested in soft landings in the U.S. and U.S. companies looking to do the same in China, and (2) developing U.S.-China curricula resources to cultivate students’ capabilities to engage with soft landings companies. The example at LSU is the Emerging Markets Initiative in the Ourso College of Business.
• An entrepreneurship program with a proven track record of success: The program plays three major roles: (1) cultivating students’ entrepreneurial skills; (2) coaching entrepreneurial students to develop business plans to be incubated at the Student Incubator and (3) facilitating the communications between the entrepreneurial students interested in the SLC with the two essential area resources above. The example at LSU is the Stephenson Entrepreneurship Institute in the Ourso College of Business, as well as the Entrepreneurship specialization available to all MBA students.

9. Conclusion

Soft landings is a term from the aviation industry to denote a landing which does not destroy the aircraft. In our work, we use it to refer to a process which helps a company from one country land softly into the market of another country. The E. J. Ourso College of Business at Louisiana State University, in collaboration with business and education partners in China, have developed an action-oriented Soft Landings Curriculum that enables U.S. and Chinese students to explore business opportunities and develop new global ventures by actively helping the Chinese businesses to invest in the U.S. and for U.S. businesses to invest in China. The SLC consists of three basic elements: (1) resources and networks for soft landings as the foundation, (2) five steps of soft landings and (3) cultivating success storytellers through networking, team building and coaching.

In their study of Chinese businesses investing in U.S., Kwan and Sauvant (2008) identified two major challenges: building human resource capacity and navigating overseas political environments. Based on the success of Japanese businesses investing in the U.S., they suggest that Chinese businesses understand the U.S. market and build key relationship within governments and communities and build positive social capital for their companies. The SLC enables the Chinese companies to understand the U.S. market and build key relationships within governments and communities through local incubators in the U.S. The SLC also enables U.S. companies to understand China’s market and build key relationships within governments and communities through local incubators in China. By doing so, the costs and risks of investing in U.S. or China are significantly reduced. The SLC also allows the Chinese and U.S. companies to build positive social capital for their businesses by investing in university or college students through a five-step soft landings process. By doing so, the Chinese and U.S. companies are able to cultivate students for talent recruiting and retention to feed growth opportunity. The SLC is a win-win program for everyone involved.

References

The post Soft Landings Curriculum for U.S.-China Entrepreneurship appeared first on China Research Center.

China and Vietnam share a long history marked by collaboration and cordiality, but also tumult and hostility at times, as far back as the first century B.C., and as recently as during the last half -century. Nevertheless, following modern economic reform in China and Doi Moi in Vietnam, both countries have continued on their transition path to a market-oriented economy putting industrialization and trade issues at the forefront, with territorial disputes generally left on the back burner. The year 2010 marked the 60th anniversary of the establishment of China-Vietnam diplomatic ties with official normalization of relations being in place since 1990. There is no doubt that China and Vietnam will forever be intertwined because of geographic, economic and political realities.

Swinging on a Tightrope

A Vietnamese government official once described Vietnam as swinging on a tightrope in which China held one end and the United States held another. Not willing to place all its eggs in either basket given its past history with both nations, and in an effort integrate into the global economy, Vietnam is pursuing a foreign policy of what some analysts label “more friends, fewer enemies.” Stable, normalized economic and military relations with both China and the United States are the current state of affairs. Vietnam has also placed an emphasis on global integration which has resulted in political and economic engagement with a wider range of countries, the purpose which is presumed to counter the influence of Beijing in the region.

Strains in Sino-Vietnamese relations emerged in 2009 when China presented a claim to 80 percent of the South China Sea (East Sea) to the United Nations Convention on the Law of the Sea. This put Vietnam in the awkward position of either accepting Chinese dominance of this areas or risking an engagement. ²

The issue is particularly important to both sides since it involves the claim on possession of two island groups: the Paracels and Spratlys. The most important matter at stake is who has the right to explore and exploit the natural resources in and below the waters surrounding the islands. Although proven reserves have not yet been forthcoming, the most optimistic estimates from China suggest potential oil resources of the Spratly and Paracel Islands could be as high as 213 billion barrels of oil and the area is also rich in natural gas. ³

The disputes will ultimately focus on who has the rights to these natural resources, and is being structured as a legal dispute on the interpretation and application of Article 121 of the 1982 United Nations Convention on the Law of the Sea (UNCLOS). Article 121 provides that an island – defined as “a naturally formed area of land above water at high tide” – can, in principle, generate the same maritime zones as land territory. These include a 12 nautical mile (nm) territorial sea; a 200 nm exclusive economic zone (EEZ) and a continental shelf.⁴

Some of the Spratly Islands’ features claimed and occupied by China and Vietnam, and other countries as well, do not meet the definition of an island. In addition, a majority of the declared EEZs overlap, and historical claims to ownership are difficult to prove. As Jörn Dosch notes, “Outcomes are unpredictable given that all claimants have at least some convincing arguments on their side . . . yet Beijing holds the key to a resolution of the dispute which will either be decided through Chinese power projection or a negotiated settlement on the Chinese terms. The latter seems more likely than the former.⁵

It is not, however, in the best interest of Vietnam to antagonize China unnecessarily. Ideologically, Vietnam is more comfortable with China than with the United States. Economically, China is a large market, a source of financial assistance and a model of development.⁶ Nevertheless, in Vietnam as well as China, nationalist sentiments have put pressure on their governments to remain firm on issues of sovereignty. For Hanoi, the matter has become especially sensitive as an array of dissidents has taken up the cause of the archipelagoes, accusing the ruling Communist Party of selling out to China with every act of acquiescence.⁷

A controversial mining venture involving China in 2009, for example, although supported by the Vietnamese Communist Party, raised the ire of notable figures in Vietnam, including military icon General Vo Nguyen Giap. “I would like to propose to the prime minister to stop the implementation of bauxite exploitation until its ecological impact is seriously studied by international experts,” wrote the 97-year-old retired general, criticizing the agreement allowing China to mine and process bauxite in the central highlands region.

The project was divisive for a number of reasons with critics contending it would leave behind scarred landscape and produce effluents that pollute farmland and water sources. The central highlands are well known for production of coffee and other crops that are important sources of export earnings. Complicating the matter was the announcement that China would be bringing in its own workers to run the project, raising the specter of a permanent Chinese settlement in this strategically sensitive area. Originally thought to be an economic boom to the region, only a few jobs for Vietnamese workers were in the plans, causing outcries of Chinese economic imperialism and colonization.

Although the early phase of construction of the bauxite mine began in March of 2010, the issue may have more serious political implications for Vietnam in the long run. The unwavering support for the project by the majority of the most powerful members of the Vietnamese Communist Party has been attributed by some to payoffs to these officials by the Chinese. And the government of Prime Minister Nguyen Tan Dung was accused of kowtowing to China and selling out to Beijing and to capitalism.

A new concern in Vietnam, attributed to the “Chinese economic expansion,” is represented by the influx of illegal Chinese laborers, particularly involving joint Vietnam – China projects. Vietnamese press and labor leaders have warned of the irregular situation of Chinese workers in Vietnam. According to statistics from the Ministry of Labor, War Invalids and Social Security, in May 2011 there were 74-thousand foreign workers in Vietnam and among these employees, 90 percent are Chinese. Most Chinese employees, it is argued, do not have professional skills and the workers are causing instability in the economic, social, military, political spheres as well as everyday life of people. Newly elected President Truong Tan Sang has spoken out and told Vietnamese authorities and employers to better manage the country’s foreign workforce.⁸

The Dragon is Awake and Hungry

Despite the occasional hiccup, China and Vietnam bilateral relations are becoming more interdependent, particularly in the realm of economics. The year 2010 marked the 60th anniversary of the establishment of Sino-Vietnamese diplomatic ties, with official normalization of relations being in place since 1990. This has led to a rush of political goodwill and a boom in economic trade evidenced by growth in bilateral trade jumping from US$32 million in 1991 to just a shade below US$28 billion in 2010 and for the first nine months of 2011, it rose by 35 percent as compared with the same period of the previous year (See Figure 1).

China is Vietnam’s largest trade partner (See Figure 2), but because of China’s size and global trade integration, Vietnam counts for less than one percent of China’s total export trade.

Bilateral trade is increasing at a significant rate particularly, because China’s insatiable demand for goods and resources. Sustaining economic growth for a nation reaching almost 1.4 billion citizens requires a tremendous amount of natural resources, much of which needs to be imported. As China scours the globe building economic relationships with various nations and regions to ensure a continuous supply of commodities such as coal, crude oil and iron ore, it is only natural to look to a close neighbor for help.⁹ Further spurring trade, particularly along Vietnam’s northern border with China, has been the establishment of the Free Trade Area (FTA) between China and 10 member states of the Association of Southeast Asian Nations (ASEAN) that took effect January 1, 2010. ¹⁰

The size of bilateral trade notwithstanding, Vietnam’s trade deficit with China is continuously rising, with Vietnam selling unfinished commodities and running a trade deficit with China of more than US$12 billion in 2010. This figure is expected to rise substantially for the foreseeable future. The discrepancy in the trade balance can be attributed mainly to the types of products Vietnam exports to China: coal, crude oil, rubber, foodstuff, seafood and footwear, to name a few (See Figure 3a). The majority are either raw materials or low-value-added manufactured goods.

On the other end of the spectrum, China’s top exports to Vietnam include high-value-added manufactured goods such as cars, motorbike parts, machinery, package equipment, pharmaceuticals and petroleum (See Figure 3b). China, for example, accounts for almost 60 and 17 percent of Vietnam’s coal and oil export revenue respectively, and is also the major importer of natural rubber needed to fuel China’s industrial rubber products industry.

Currently, there are almost 2,000 China-funded firms in Vietnam engaged in trade and investment, project contracting and other businesses. Vietnamese enterprises are paying more attention to the Chinese market and are looking to China for more business opportunities and markets for selling equipment and raw materials. China is also a main market for Vietnam tourism, accounting for one-fourth of the international tourists to Vietnam (almost 786,000 arrivals) in the first seven months of 2011. While the opening of markets and trading routes can be described as a win-win situation for China and Vietnam, it may be too simple a formula precisely because of the disparities between the two countries, particularly in terms of economic size and political power. ¹¹

The influx of Chinese goods, both smuggled over the border and imported legally into the Vietnamese market, has negatively impacted the domestic production of a number of goods in Vietnam, particularly consumer goods. One special concern in Vietnam is that many of the goods are of low quality and dubious origin and may contain toxins and other substances harmful to people’s health. Some products can be made in Vietnam, but are still imported as the latter approach is more cost-effective. This, in turn, has choked a host of Vietnamese enterprises, including production of chopsticks and toothpicks. ¹²

Truong Thi Thuy Lien, director of the Lien Phat Ltd. Company, a shoe manufacturer in southern Vietnam, notes that since early 2011, prices of materials imported from China have increased by 40 percent against the end of 2010, exposing sudden price increases as the biggest risk factor in such imports. Economic expert Le Dang Doanh said local producers imported a large quantity of material from China because the country was nearby, so transport costs were low and added incentive for domestic exporters.¹³

Further adding to uncertainty regarding the pricing of Chinese imports is China’s overall trade surplus, which has escalated tensions with a number of its trading partners who are now arguing that the Chinese currency, the Yuan, is undervalued. Should China revalue its currency, Vietnam would see import prices rising even faster, putting more inflationary pressures on an economy with already escalating prices.

Even though this dependence on increasingly expensive Chinese imports has already pushed many Vietnamese firms into the red, Vietnam’s heavy dependence on trade with China is only expected to increase over time. Le Hong Hiep of the Vietnam National University fears that “should China decide to discontinue trade with Vietnam for some reason, the damage to Vietnam’s economy would be immense.¹⁴

Wither the Future

Relations between China and Vietnam have improved recently, and the conciliatory nature of the recent meeting between Beijing and Hanoi has ushered in a relative period of calm. Both countries appear keen to continue to foster better bilateral ties and improvements in Sino-Vietnamese relations are unlikely to damage Vietnam’s relations with the U.S.

However, anytime China swings the tightrope more aggressively, Vietnam finds itself in a more precarious position, not knowing which end of the rope is the safest point of refuge. If the Vietnamese government is to continue to be successful in maintaining a balance, it must avoid too close an alignment with one country at the expense of ties with the other.

Now is a relatively unique time in Vietnam’s history. It is unified, and it has the economic and political wherewithal to challenge China in the region – though whether it will be successful remains to be seen.¹⁵ The rise of national sentiments on either side may portend more troubling times ahead. And as a Vietnamese diplomat is quoted as saying, “No one will say it openly, but what drives every meeting in Southeast Asia now is fear of what the region will be like with China dominating.”¹⁶

References and Bibliography:

The post Vietnam’s Relations with China: A Delicate Balancing Act appeared first on China Research Center.

One of the most controversial macroeconomic issues of this decade is the question of how China has run such massive trade surpluses and has accumulated so much in foreign reserves over the past 20 years. Generally, developing countries tend to run current account deficits and capital account surpluses, meaning that on net they import both goods and capital investment, which they repay in later stages of development. The benefit is that they can use developed countries’ wealth to fuel domestic investment and growth (Buera and Shin, 2010). China began to follow this strategy at the start of reform and opening in the 1980s. Beginning in 1992, however, domestic demand fell, the economy shifted toward exports, and China began running trade surpluses (Huang and Tao, 2010). While it is natural for some countries to temporarily run current account surpluses and some to run deficits, the magnitude and longevity of China’s surpluses are noteworthy, especially for a developing country.

The current account is the broadest measure of a nation’s economic relationships with the rest of the world. It puts the value of goods and services in the plus column and subtracts imports and returns on investments abroad. A negative current account balance means a country is importing more than it is exporting. Capital must come into the country to “pay for” the imbalance. Think of it this way: If a household spends $10,000 more than it earns, it must borrow the difference – for example, from a credit card company. The household has a current account deficit and a capital account surplus of $10,000. A country is no different. If it runs a current account deficit, it must compensate with a capital account surplus. In China’s case, the reverse is true. China exports much more than it imports and saves at a high rate rather than buying imports, thereby running large current account surpluses and capital account deficits. The extra money that China earns from abroad gets reinvested, among other places, in U.S. Treasuries.

What explains the unusual trade surpluses China has experienced? A number of factors have been identified as possible causes. Most prominently, the Chinese government’s intervention in exchange markets to maintain the RMB-dollar peg has been repeatedly cited as a key factor, since an undervalued RMB would be a type of subsidy on Chinese exports. As when any country pegs its exchange rate, the government maintains the peg by buying or selling foreign reserves to counter market changes in the demand and supply of the domestic currency. Given the demand for the RMB for trade and investment purposes, the Chinese government has been buying foreign exchange, mainly in the form of dollars, and selling RMB to counteract the rising demand for the RMB that would, in a free market system, drive up the value of the RMB (Krugman, 2010). This factor often generates headlines, such as when U.S. Secretary of Treasury Timothy Geithner publicly accuses the Chinese government of currency manipulation as he did in 2010, and when Congress introduces trade sanctions on China in response to currency value assumptions.

The question of whether the RMB is indeed undervalued, as well as whether the undervaluation has a significant impact, is debatable. Cheung, Chinn, and Fujii (2009) use cross-country purchasing power parity samples to evaluate whether the RMB was undervalued in 2006 as well as in 2008. They find the RMB to be five times more undervalued in 2006, yet neither of the tests was statistically significant. The econometric methods used in these tests were also found to lack robustness (Dunaway, Leigh, Li 2006). Moreover, it has been argued that a revaluation of the RMB would not significantly affect current accounts due a likely decrease in imports from Southeast Asian countries that would accompany an increase in exports from the West. The reasoning is that less demand for finished goods from China would cause China to import fewer intermediate goods and raw materials (Garcia-Herrero and Koivu, 2007). Finally, economic theory suggests that to keep its currency persistently undervalued, China would have to cope with devastating inflationary pressures. While inflation has been high, it seems the level of inflation does not reflect the degree to which some argue the RMB is undervalued. In addition, increasing pressures for capital to flow out of China is now suggesting that the currency could indeed be overvalued.¹ In sum, the idea that currency manipulation explains the entirety of the imbalance is not convincing.

Other Explanations

A second explanation, the savings-investment gap, suggests that Chinese people have a tendency to save more than they invest, which by definition creates current account surpluses. It could be that the Chinese government’s lack of proper social services causes people to save a larger portion of their incomes (Zhou, 2009), or that the underdevelopment of the financial sector causes Chinese to invest a high proportion of their savings abroad, as Corden’s “parking” theory argues (2009). While a current account surplus implies savings exceeding investment, it is still a source of debate as to how and why this gap exists.

A third set of explanations for China’s large trade surplus beginning in the 1990s focuses on industry and investment relocation. As manufacturing centers moved from Southeast Asia to China through the 1990s and 2000s, especially in final goods production, trade surpluses shifted from Southeast Asia to China (Huang and Tao, 2010). This theory is simple but empirically speaking is not sufficient to independently explain the magnitude of China’s current account surpluses over the 2000s. A similar theory proposes that Chinese government domestic policies emphasized growth without first creating a financial system capable of soaking up the excess savings produced by rising levels of national income. One of the most important goals of the central government is maintaining high levels of employment, which causes policymakers to focus on growth (Fan, 2008). The resultant growth yields high levels of savings that, in the absence of a sophisticated financial system with attractive home investment options, end up flooding abroad.

Finally, the demographics theory contends that the high number of Chinese of working age during the 1990s and 2000s resulted in high growth and high savings. The sheer size of the labor force produced excess output, making exports more viable and leading to high levels of national savings, two forces that jointly put upward pressure on current accounts. (Zhu, 2007)

These theories can be divided into those that impact exports and imports and those that impact savings and investment. Currency manipulation and industry relocation quite clearly affect a nation’s net exports, while growth policies and demographics theoretically influence both net export and net foreign investment.

Further, these theories are in many ways interrelated, and are certainly not mutually exclusive (Huang). For example, demography, exchange rate policy and pro-growth policy were motivating factors behind the relocation of manufacturing sectors from Southeast Asia to China. Demographics and pro-growth policies also both had an effect on the savings and investment gap. We might even argue that high levels of savings yielded a surplus of RMB, prompting the government to intervene in currency markets through the purchase of dollars. Any attempt to differentiate these effects would likely be in vain.

New Factor Market Distortion Theories

The newest theories of note attempting to explain the source of China’s current account surplus revolve around factor market distortions. The issue is explored in Song, Storesletten and Zilibotti’s “Growing Like China” (2011), published in the American Economic Review, and Huang and Tao’s “Factor Market Distortion and Current Account Surplus in China” (2010), published in Asian Economic Papers. The papers both identify uneven reform policies as the source of imbalances in the Chinese economy. While Song, Storesletten and Zilibotti’s model attributes imbalances to the transition from an economy dominated by State Owned Enterprises (SOEs) to an economy powered by private enterprises, Huang and Tao’s model considers imbalances in the liberalization of product and factor markets as a type of producer subsidy, which leads to high savings and therefore to high net exports.

The factor market is the market for factors of production. The principal factors of production in any economy are labor, capital and natural resources, but economists have more recently added human capital, intellectual capital and entrepreneurship to this group. Price distortions in factor markets can hugely impact an economy, because factor prices are a significant component in a firm’s decision about how much to produce. Huang and Tao (2010), economists at Peking University, argue that asymmetry between China’s liberalization of factor markets (the market for inputs) and product markets (the market for goods) cause domestic distortions that directly lead to a current account surplus. Similarly, Song, Storesletten and Zilibotti (2011) construct a model of asymmetries in China’s reform and opening in which they show that because China’s reform has been characterized by a transition from large SOEs to domestic private enterprises (DPEs), this has contributed to the current account surplus. Because DPEs are less dependent on external financing (financing from outside the firm), the authors argue that this transition reduced investment demand in China, producing current account surpluses.

Song, Storesletten, and Zilibotti’s Transition Model

Song et al. begin by considering the question of how China was able to maintain high growth and high return to capital while also sustaining current account surplus and amassing foreign reserves. Neoclassical open economy models would predict high returns to capital to attract foreign investment, causing current account deficits-not surpluses. The authors postulate that China’s bucking of the trend could be related to the nature of China’s reform. Their model shows that as a reforming economy (for example, China over the past two decades) reallocates resources from inefficient SOEs with access to financial markets to private enterprises with limited access to funding, domestic savings will increase faster than investment, causing a trade surplus.²

The authors construct a two-sector model of the Chinese economy, dividing Chinese firms into inefficient SOEs with access to finance and highly efficient private enterprises with limited financial access. Throughout the post-1992 reform period, China’s financial sector was still largely controlled by the government. As a result, loans were offered at will to SOEs with necessary connections, but not to private enterprises. According to the authors, SOEs grew inefficient, depending on their liquidity advantage to stay in the market, while private firms were forced to operate very efficiently to overcome financial constraints.

A key assumption for the model is that DPEs will choose to delegate rather than centralize, and young entrepreneurs benefiting from this delegation of responsibility are assumed to choose to invest in the business. Financing for DPEs thus comes from two sources: whatever funding they can extract from the government-controlled financial sector and the savings of entrepreneurs. DPEs will slowly replace SOEs in the economy as entrepreneurs amass higher savings, reducing the importance of the previous competitive advantage held by the SOEs in access to credit. In order for entrepreneurs to be able to save, we must also assume that excess profits are going to managers and owners, rather than to workers. This would lead to growing income inequality, a phenomenon that was indeed observed during the post-1992 reform period (Song et al, p.204).

During transition, as entrepreneurial savings grew, DPEs began replacing SOEs in many industries. The growing prominence of DPEs dependent on self-financing resulted in a reduced demand for domestic borrowing or investment. Recall that SOEs were absorbing the majority of liquidity. Meanwhile, economic growth fueled by DPEs was increasing gross national savings. People were earning more, while fewer people were benefiting from government social programs that reduced the need to save. While SOEs remained a significant part of the economy, their role continually decreased over the reform period. The result, the authors argue, was a high level of savings coupled with low investment demand. Banks were forced to invest extra funds abroad, leading to high current accounts and growing foreign reserves. One of the safest investments for banks was U.S. Treasury bonds, partially explaining how China owns such a large portion of U.S. sovereign debt. Song et al. consider their model to be a superior explanation to currency manipulation for China’s high growth and increasing foreign surplus, theoretically exonerating China of currency manipulation.

While the model is convincing in that trends it predicts match up nicely with true developments in the Chinese economy, there are several issues the authors fail to resolve. First, the model fails to address the issue of foreign direct investment (FDI). In the model, SOEs are given a low interest rate while DPEs are unable to obtain financing. If the returns to capital during reform were higher than the domestic real interest rate, as the authors’ model implies, FDI would theoretically flood in, correcting for the imbalances that theoretically created current account surplus. During the post-1992 reform period FDI into China did indeed increase rapidly (Garcia and Koivu, 2007, 17). The authors might respond that while FDI did increase, it was still regulated, maintaining imbalance in the credit market.

Second, at late stages of reform, when DPEs had already surpassed SOEs as the Chinese economy’s main source of growth, why would the government continue to maintain barriers limiting the amount of savings that could be invested domestically, where the returns are highest? In other words, it does not really make sense for the government to have continued to restrict financing for DPEs well into the reform period without some ulterior motive. One explanation, though, is that the motivation to continue to impose financial constraints came from maintaining the RMB’s peg, an issue considered in forthcoming sections.

Asymmetric Market Liberalization

A second paper looking at the factor market side, Huang and Tao’s 2010 “Factor Market Distortions and Current Account Surplus in China,” takes a different angle. Rather than considering frictions in the financial market as the source of imbalance, the authors focus on asymmetries in the reform of factor markets. In simple terms, their argument poses that asymmetric liberalization caused artificially low factor prices (for capital and labor) as compared to product markets, which made export of goods more economically viable. The artificially low factor prices acted as an implicit tax on workers and capital owners, reducing consumption and increasing savings. Huang and Tao argue that these two effects in concert increased the savings-investment gap and the export-import gap, boosting China’s current account surplus.

Huang and Tao begin with the observation that in the modern Chinese economy 95% of goods prices are determined by free markets, while the markets for factors of production such as labor, capital, land and energy are still highly regulated. The regulation, they argue, lowers factor prices below market levels, acting as an implicit subsidy for producers. In effect, producers pay a reduced price for factors, but are able to sell their products at near-market prices. This dynamic would lead to imbalances that are reflected in persistent current account surpluses.

In the labor market, China’s Hukou (household registration) system results in migrant workers often being paid below their marginal product, or the true value they contribute to production. Migrant workers from the countryside are not eligible for benefits or labor protections. As a result, abundant cheap labor is readily available. In the capital market, as emphasized in the previous paper, the government-controlled financial system continues to offer low interest loans to SOEs, while regulating foreign investment and loans to DPEs. The authors argue that this results in an artificially low real interest rate. Regarding natural resource inputs, the authors show that the government often offers land to Party members with connections rather than through a true market system. In addition, the central government controls prices of other important inputs, such as energy, and keeps that price relatively low for major producers (Huang and Tao, 2010, p.23)³.

Artificially low factor prices not only act as a subsidy for producers, but also as a tax on laborers and owners of capital. This tax reduces consumption, which by nature increases savings as a fraction of income. The authors argue that this contributes to the savings-investment gap.

In summary, Huang and Tao argue that government regulation in factor markets subsidizes industry production while taxing labor and capital. The subsidy effect increases net exports at a given exchange rate, while the tax increases net foreign investment at a given real interest rate through its effect on savings, jointly causing current account surplus. The strength of the paper is that it points to one element that is clearly observed in the Chinese economy that affects both the export-import gap and savings-investment gap that contribute to current account surplus.

On the other hand, it is unclear whether the government’s interference in the financial market, the market in which the authors estimate the largest distortion, subsidizes or taxes production. The authors argue that government regulation of financial markets artificially lowers the price of capital, subsidizing production. However, Song et al. demonstrate that the regulation also decreases the liquidity available for DPEs, the major source of growth in the Chinese economy. If this were the case, it would seem that government interference on aggregate may have an ambiguous effect on producers, helping enterprises that have connections, but hurting most private firms without access to funding. Given that financial markets are estimated to contain the largest distortions, this ambiguity is troublesome for the authors’ results.

Furthermore, if the Hukou system were reformed and labor mobility improved, while certain industries may be forced to pay higher wages, it may on aggregate benefit economic production. The reasoning is that greater labor mobility would allow workers to seek out industries in which they are most productive. In sum, whether the imperfections illuminated by the authors concretely act to help producers, or whether their effects are ambiguous, is crucial. If the effects are ambiguous, the model does little to explain China’s current account surplus.

Conclusion

The current account balance reflects import-export and savings-investment dynamics. The two models analyzed above jointly have explanatory power regarding both of these dynamics. Song et al. demonstrate how financial frictions during the reform period caused lower investment demand and higher savings. Huang and Tao consider imperfections in Chinese factor markets as producer subsidies, causing excess production that affects the import-export dynamic. In this sense, these models can be seen as complements.

As far as how these models relate to the earlier theories explaining trade surpluses, they are not mutually exclusive. However, the relationship between currency manipulation theories and factor market distortion theories does prompt a chicken-egg question.

It could be argued that by pegging the RMB to the dollar at an artificially low rate, the Chinese government has forced itself to introduce subsequent imperfections. The financial market is a good example. Both papers discuss how interest rates are artificially low in China. The theory posed in Song et al. depends on the assumption that the Chinese financial market exhibits certain frictions. As open-economy models tell us, pegging one’s currency necessitates loss of control over domestic real interest rates. It could be that financial market imperfections that form the basis for these theories arise out of the government’s maintenance of an artificially low currency peg. Perhaps the reason that the government limited DPEs’ access to credit was to reduce demand for the RMB and maintain the peg. This reasoning would indicate that revaluing the currency would correct the imbalances in the economy that produce persistent trade surpluses. The authors, though, claim that their theory shows currency revaluation is not a magic bullet.

On the other hand, it could be that market imperfections of the sort illuminated in Song et al. and Huang and Tao caused currency intervention policies. Perhaps the government ended up having to purchase U.S. Treasury bonds because of the excess savings predicted in the “factor market distortion” models. If this is the case, the government should worry less about revaluing and more about fixing internal market imperfections. Deciding which phenomenon causes the other is extremely difficult. In reality, the currency intervention and factor market distortion are likely closely intertwined.

The observations made in both Song et al. and Huang and Tao’s papers are helpful in understanding the source of China’s high current account surpluses throughout the 2000s. While it is difficult to know the true magnitude of the effect of the theoretical imbalances the papers describe, they provide a conceptual framework for understanding Chinese current account surpluses outside of the tired currency manipulation narrative. There are indeed deeper issues at play. In this vein, China should focus both on managed exchange rate revaluation and reducing domestic financial frictions and factor market distortions to correct imbalances in the future. Moreover, the U.S. government should understand that the root of imbalances likely digs deeper than simple currency controls.

References

Huang, Yiping, and Kunyu Tao. “Factor Market Distortion and Current Account Surplus in China.” Asian Economic Papers. 9.3 (2010)

Song, Zheng Storesletten, Kjetil and Zilibotti, Fabrizio. “Growing Like China.” American Economic Review. (2011) 196-233.

Krugman, Paul. “Chinese New Year.” New York Times 31 Dec 2010.

Corden, Max. “China’s Exchange Rate Policy, Its Current Account Surplus and Global Imbalances.” Royal Economic Society. (2009) 103-199.

Dunaway, Steven, Leigh, Lamin, and Li Xiangming. “How Robust are Estimates of Equilibrium Real Exchange Rates: The Case of China.” International Monetary Fund. (2006)

Garcia-Herrero, Alicia and Koivu, Tuuli. “Can the Chinese Trade Surplus be Reduced Through Exchange Rate Policy.” Bank of Finland Discussion Papers. (2007)

Buera, Francesco and Shin, Yongseok. “Productivity Growth and Capital Flows: The Dynamics of Reforms.” National Bureau of Economic Research. (2010)

Huang, Yiping and Wang, Bijun. “Cost Distortions and Structural Imbalances in China.” China and the World Economy. (2010)

Cheung, Yin-Wong, Chinn, Menzie David and Fujii, Eiji. “China’s Current Account and Exchange Rate.” National Bureau of Economic Research. (2009)

Zhou, Xiaochuan. “Some Observations and Analyses on Saving Ratio.” People’s Bank of China. (2009)

Fan, Gang. “Debating China’s Exchange Rate Policy, Commentary.” Peterson Institute for International Economics. (2008)

Zhu, Qing. “Analysis on Chinese Special International Income and Expenditure Structure.” World Economy Study. (2007)

Allen, Franklin, Jun, Qian, and Mei, Qian. “China’s Financial System: Past, Present, and Future.” “The Transition that Worked: Origins, Mechanism, and Consequences of

China’s Long Boom.” (2005)

Yongding, Yu. “Global Imbalances and China.” Australian Economic Review. Vol. 40, p. 2-23.

“China’s Trade Surplus to Shrink this Year, Deficits Likely for Some Months.” English.xinhua.com. Xinhua, 03/07/2011. Web. 26 Apr 2011. .

“China posts a surprise trade deficit as exports slow.” BBC News . BBC, 12/03/2011. Web. 26 Apr 2011. .

Frankel, Jeffrey, Wei, Shang-jin. “Assessing China’s Exchange Rate Regime.” National Bureau of Economic Research. (2007)

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In this paper, I seek to offer a brief explanation of the development of the two regions since the handover and explore some of the challenges each has experienced in the search for new and productive roles as Special Administrative Regions within the PRC. This search has provided an urgent impetus for both cities not only to identify and follow an appropriate and effective track on which to return to China, but more immediately to seek the appropriate role for their evolving integration into what has emerged as one of China’s most dynamic city-regions – the Pearl River Delta (PRD).

Today the PRD, if we include the more than 7 million people in Hong Kong and the more than half-a-million in Macau, comprises a booming city-region with a population of more than 50 million. Its economic output and linkage to the global economy puts it at the leading edge of China’s remarkable economic growth. We estimate its contribution to China’s gross domestic product as roughly 10% of the nation’s total output.

Hong Kong and Macau are located on the east and west flanks respectively of China’s Pearl River Delta. (Fig. 1) They are located at what may be viewed as the feet of two legs of a triangle with Guangzhou (Canton) at the head. These are three of the core cities of the booming city-region surrounding the estuary of the Pearl River in southeastern China’s Guangdong Province.

Both cities share a European colonial heritage, but they are remarkably different in size, historical role and development, and economic trajectory. Hong Kong was returned to Chinese sovereignty in July, 1997; Macau followed two years later in December, 1999. Upon their return, both cities were awarded status as Special Administrative Regions (SAR). Their status as SARs, governed by a “Basic Law,” similar to a constitution, has allowed each to have 50 years of separate and semi-autonomous development within the larger context of being a legal part of China.

Hong Kong’s colonial development began in 1842 following the Opium War and Britain’s desire for a commercial beachhead and deep port to advance its ambitions for the China trade. Initially limited to Hong Kong Island and a small piece of the Kowloon Peninsula, later treaties added offshore islands and the New Territories. Its growth and development progressed dynamically, although sometimes erratically, thereafter. Hong Kong’s role as gateway and sentinel for the China trade was rapidly propelled following the establishment of the People’s Republic of China (PRC) in 1949 and new China’s efforts to end the extensive commercial activities of Shanghai and other treaty ports along China’s coast. Once adjacent locations such as Zhuhai and Shenzhen were designated as Special Economic Zones (SEZ) in the early 1980s when China began its serious economic reforms, Hong Kong’s role as a source of capital, commercial knowledge and knowhow, and ties to the world economic system were crucial to China’s modernization efforts. These were greatly intensified after the two southern trips of paramount leader Deng Xiaoping in the early 1990s. Hong Kong has indeed been the tip of the commercial spear for China’s extraordinary economic development of the last 30 years.

Macau was first established in 1557 as a tiny port and residential center for Portuguese traders who periodically visited the trade fairs in Canton (Guangzhou). The Chinese allowed them to stay there, although they exercised no sovereignty over the territory for more than three centuries. As was typical of both Portuguese and Spanish colonial efforts, Catholic missionaries soon followed, and Macau became a center for the activities for the Jesuits in East Asia. Throughout much of its history, Macau has struggled for financial resources to support itself. Traditional forms of Chinese gambling were tolerated early, and eventually these became a source of revenue. Hong Kong’s rise undermined the port and trading functions of Macau, and after 1842 Macau quickly became a stagnant backwater for a century-and-a-half. In 1962 a gambling monopoly was established with improved casinos and hotels; gambling was taxed and became an important source of revenue. At the same time, crime flourished and Macau developed a seedy reputation for its smoky and rough gambling casinos. Following the handover to China in 1999, the monopoly was ended and modern Las Vegas-style casinos were invited to share in the development of a new Macau. This has led to new prosperity and a transformation Macau has never before witnessed.

Hong Kong and its recent path

In the 21st Century Hong Kong faces a number of challenges, and many emanate from the adjacent booming industrial and port cities next door, such as Shenzhen and Dongguan. What has happened since the Chinese economic reforms of the late 1970s, and more rapidly since Deng Xiaoping’s southern trip in 1992 where he implored China’s citizens that to get rich was glorious, is an explosion in the economic development of the Pearl River Delta. Manufacturing migrated from Hong Kong to the PRD where the costs of land, construction, waste removal and especially labor were much less expensive than in Hong Kong. Over three decades the PRD became the factory engine of China for many consumer products that were then re-exported through Hong Kong and more recently shipped directly from the PRD through container ports such as those attached to Shenzhen.

Hong Kong has continued to prosper as it retained the headquarters role with management, finance, marketing and research and development functions of industrial enterprises still based there. The model became front office (Hong Kong ) and rear factory (Dongguan and Shenzhen in the PRD). The port of Hong Kong with its very modern container facilities burgeoned initially and became the world’s largest at the turn of the century. In recent years, this function has slipped relatively as Shanghai, Singapore and Shenzhen have enlarged their container shipping facilities and operations. Shenzhen, immediately adjacent to Hong Kong, is a serious rival, as its labor, port handling and transfer costs are lower than Hong Kong’s, and it continues to improve the quality of its customer services. Hong Kong’s shipping functions, while continuing to be very important to its economy, nevertheless are gradually diminishing, as their neighboring competitors ramp up their operations and efficiencies.

Other key aspects of Hong Kong’s economy such as banking and finance, commercial services, tourism and retail continue to flourish, but they too are facing new challenges. While Hong Kong traditionally has been a key center for capital accumulation and the transfer of foreign direct investment into the Pearl River region, China today has accumulated huge foreign reserves and its dependence on Hong Kong to lead the way into linkages with the global economy has declined. Hong Kong’s role as a key banking and finance center remains in the lead, but again as China increasingly embeds itself in the global financial system, Hong Kong must move nimbly to ensure it has a role as interlocutor and middleman, providing negotiating skills and a vast array of brokerage services between China and other global economic powers. This role was crucial for China’s economic success in the 1980s and 1990s, but the maturing and expanding of economic reforms throughout China have reduced the importance of this need for Hong Kong’s intercession.

Among Hong Kong’s challenges are the issues of its continuing democratic institutions as well as the social welfare of all its citizens. While its 50 years of separate development allow for the continuation of free elections and determining its own governance structure and processes, the shadow of mainland China always looms, and the extent of Hong Kong autonomy has never been entirely clear. At the same time enormous wealth has been created. There are many extremely rich people, yet there is also a substantial number of low-income people, and the distribution of wealth is very uneven. Hong Kong people see themselves as somewhat different from their mainland cousins, nevertheless their destinies are closely intertwined and mutually dependent. It seems clear that Hong Kongers must increasingly accept the reality of their gradual reintegration into China while working diligently to ensure it is a productive reintegration.

Yet Hong Kong has many special and distinctive attributes that indicate it will continue to play a special role in China’s future. For example, it has placed increasing emphasis and investment in higher education through funding and expansion of its universities. This has included increasing stress on technical areas such as medicine, engineering, science and research. Many more students from the China mainland are coming to Hong Kong, and the Times of London Higher Education Supplement has given very high marks to some of the universities such as the University of Hong Kong for the quality of its programs, faculty, students and its research productivity. In this role Hong Kong, with its emphasis on the continued use of the English language as an international medium of communication for education, business, science and culture has been successful in maintaining a special role both within the Pearl River Delta Region as well as within the broader framework of developing China.

Macau’s Amazing Ascent

Hong Kong’s story of growth and expansion as a British colony and its subsequent return to China is oft told and well-known. Among the most frequently discussed topics about Hong Kong is how it has fared under Chinese sovereignty. Macau’s is, in many ways, a much more intriguing and dramatic tale, especially since its return to the motherland. Ever since the establishment of Hong Kong around 1840, Macau has suffered from the presence of its larger neighbor. Small, and with a shallow harbor that was increasingly silted up, Macau formally came under Portuguese sovereignty in 1888, after almost three-and-a-half centuries of legal ambiguity about its status as way station for Portuguese and other foreign traders seeking entry to the Canton trading fairs. During Hong Kong’s rise, Macau became a poor backwater with a limited economic base, always searching for some way to make money and support itself. Gambling in dirty, dimly lit gaming houses and other sometimes nefarious activities resulted, and over time the territory earned a seedy reputation.

Some improvements in the quality of gambling houses led to a few casinos after the appointment of a monopoly in 1962 to the Sociedade de Tourismo e Diversoes de Macau (Macau Tourist and Amusement Company) which introduced some of the western gambling games and provided new monies to improve infrastructure in the harbor and ferry landings. Yet during the last years of Portuguese rule, organized crime flourished, and the power of Chinese Triads grew. That led to shootings in the casinos and on the streets. After China took over in 1999, a more effective local administration quickly put a stop to the open crime and moved to improve the gambling scene. The STDM monopoly was ended, and new licenses were awarded in 2002 to a successor of the STDM as well as to two Western syndicates, Galaxy and Wynn, with the goal of expanding and modernizing the casino/gaming scene based on the Las Vegas model. Growing the gaming (now the preferred terminology for gambling, with gamblers now called “players”) industry in this way would also lead to increased fiscal resources and an attendant increase in public funding to develop Macau’s infrastructure and social services.

The results have been astounding! With the introduction of the new casinos and hotels, tourist visits surged, and the casinos were doing a bumper business. Gross gaming revenues also accelerated. From 2003 to 2008 the gross gaming revenue increased four-fold, rising from $3.6 billion to $13.7 billion; gaming revenues surpassed those of Las Vegas in 2006. This number exceeded the combined revenue of all the casinos in Las Vegas and Atlantic City by 2008 and established Macau as the leading gaming city in the world. In 2010, Macau’s gross gaming revenues hit $23.5 billion, and the monthly revenue from February to May 2011 has grown by at least 42% (Table 1)

Table 1: Comparative Casino Revenue: Macau, Las Vegas, and Singapore, 2010

Source: Loughlin and Pannell, 2010; The Associated Press, 2011

Perhaps the most striking transformation is in the cityscape. New casinos and hotels are springing up, especially in the area called Cotai, a place created with landfill between the two islands of Taipa and Coloane that sit south of the Macau peninsula (Fig.2).

New roads, causeways and bridges link this new area with its grand hotels and casinos – Venetian, Galaxy, Hard Rock and others – to the Macau peninsula where a number of new casino/hotel complexes also have appeared around the Grand Lisboa and Wynn Macau. The annual number of visitors also has increased dramatically and exceeded 21 million in 2009. This number may someday reach the number of tourists in Hong Kong, a much larger and better known place. Yet these tourists are different. Many of them are day-trippers or stay only one night. The visitors to Hong Kong

usually stay at least three nights. They come to Macau primarily to gamble. Shopping, sightseeing and other recreational pursuits are low on the list of things to do. Most Macau visitors are also from China, and many literally walk into the SAR from nearby Zhuhai, as they pass through the China Gate where buses from the casinos will meet them and whisk them directly to a casino of their choice.

Macau has never witnessed anything like what is happening today during its 450 years of colonial history. This new, unprecedented wealth and prosperity have changed this one-time backwater to the most favored spot in Asia and perhaps the world for those who wish to try their luck at roulette, baccarat, blackjack or a traditional Chinese game such as Sic Bo or even the old favorite of Fan Tan. A fiscal policy that imposed a gambling tax of 35% of gross casino revenue has provided the SAR with more than 75% of its overall revenues and allowed it to greatly upgrade infrastructure and increase the support of social services for the residents while keeping other taxes low.

While the new wealth and prosperity have done many good things for Macau, there are also questions as to the social costs of gambling. Given that most of the gamblers come from China and Hong Kong, however, these costs are not likely to show up in Macau, but issues such as seriously addicted gamblers do not disappear, and the costs must be borne somewhere. Another emerging issue resulting from Macau’s new wealth is ensuring all citizens benefit. Improved social welfare programs and educational opportunities offer new prospects, but these must be comprehensive and sustained if they are to succeed. Meanwhile, the good times are rolling in Macau. Gambling is forbidden in mainland China, and the future looks very bright for continued growth in gaming and Macau’s related prosperity. While other competitors have recently emerged in Singapore, Taiwan, Philippines and Korea, Macau has established its reputation as the world’s premier gaming center, and its challengers can only marvel at its success.

Today Hong Kong and Macau are both in the process of establishing their revised identities as Special Administrative Regions of China. Their colonial heritage and historical evolution give them a distinct character that offers both promise and challenge. Hong Kong’s role has been primarily commercial, and it was very important during the first three decades of economic reform in China. Today Hong Kong is expanding its role and identity as a global financial, commercial and educational center for southeast China and is a world city offering leadership for its neighbors in the Pearl River Delta region as they strive to integrate more closely with the global economy.

Macau by contrast muddled along until after the handover in 1999. Its new identity has become that of China’s leading recreational and tourist center for gambling. So successful has this been that Macau has emerged as the world’s greatest and most advanced gaming center when measured by revenue turnover. The last decade has brought remarkable new prosperity but also new challenges in maintaining its distinctive and special character. It seems China is satisfied with the evolving role of both places and the gradual shifts in their functions and character as they renew their ties and establish their revised identities under the motherland.

References and Bibliography:

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