David Kelly’s translation of Ma Yu on Chinese investments overseas

In my 17 July post I discussed Ma Yu’s writings on Chinese investments overseas. Professor David Kelly has kindly offered to post the translation of a recent article by Ma Yu in Southern Weekend (Ma Yu, “Haiwai touzi de ‘zhidu bufu’,” Nanfang Zhoumo, 18 March 2010 [马宇: “海外投资的‘制度不服’”, 南方周末,2010年3月 18日). Here it is:

Ma Yu, ‘Institutional maladaptation’ in overseas investment


China is in reality already a newly emerging major force in global cross-border investment, but the shortcomings of its institutional factors are all the more prominent.


Unable to compensate for these shortcomings, China’s foreign investments have so far constantly run into trouble, and fatal flaws and serious constraints persist in them. But such flaws and constraints don’t lie principally in the host country’s discrimination and restrictions on Chinese firms, but rather in ourselves; in our own terms, the main thing is neither the capacity of capital or of management, or the gap between the technical level, brand value, etc. of our TNCs and those of developed countries. It is rather at the system level, i.e., the macro-and micro-defects and shortcomings of our institutions.

我国经济现在最重要特点就是仍然处在转轨过程中。这意味着,市场经济的体制和规则并未完全建立,企业尤其是国有企业也并没有完全转变成为真正的市场化的企业。虽然我们说已经“初步建立了社会主义市场经济体制”,但我们都知道,这种带有中国特色的市场经济从它的基础到它的表现、从它的规则体系到它的运行主体,仍然与其它的市场经济有极大的不同——这种不同,在我们国内还可以忽略,但到了国外,却就让我们自己的企业不能适应另外一种制度环境了—— 在我们这种制度环境中诞生并且发展起来的中国企业,不管是国有企业还是民营企业,已经在骨子里带有这种制度要素的基因, 因而难以适应国外的另外的一种市场经济环境。

The most important feature of China’s economy is that it is still in the transition process. This means that the market economy system and game-rules are not fully established, and enterprises, especially SOEs, have not fully transformed into a true market-oriented enter¬prises. While we say we have “initially established a socialist market economic system”, we all know that this market economy with Chinese characteristics, from its foundation to its performance, from its system of rules to its main operation is still vastly different to other market economies—such a difference can be ignored in our country, but abroad, it renders our own businesses unable to adapt to other kinds of institutional environment—China’s firms born and raised in our institutional environment, whether SOEs or private, carry the genes of such institutional elements in their bones, making it difficult to adapt to another, market economy environment abroad.


If we say that widespread cross-border investment, “inability to adapt”, then it is generally cultural traditions, ways of thinking and the social environment, “dissatisfied,” while foreign enterprises to invest in China or overseas Chinese enterprises to invest in this “ not agree with, ”added“ system not agree with.”

于是我们看到,我国的一些优秀企业,在进行海外投资时,犯了颇多不可思议的小儿科或者说是常识性错误。 TCL海外投资所犯的错误,难道仅仅是因为李东生个人的阅历和见识缺陷吗?收购一个过气的品牌,仅仅是因为对于这个品牌和对于国际市场的判断不准吗?

So we see that some of our finest firms have committed many incredibly childish errors, errors of common sense, when investing overseas. Were the mistakes in TCL overseas investment due simply to flaws in Li Dongsheng’s personal experience and insight? Did they acquire some has-been brand simply because their judgment about this brand and its international market were inaccurate?

为何收购的主要动机之一是为了对方的技术和研发力量,到最后研发人员却成了收购的最大包袱和收购失败的根源, 以至于不得不付出更大代价进行剥离? 难道仅仅是因为对于东道国的劳工法不清楚吗?

Was the target’s technical and R&D strength one of the main motives for acquisition, but in the final result, R&D personnel became the M&A’s largest burden and the source of its failure, to the extent that a higher price had to be paid to strip them off? Was it simply because of ignorance of the host country’s labour laws?

我不相信我们的企业在进行海外并购的时候会不做可行性研究,但我同时也不相信我们的企业会认真地进行可行性研究评估,从而对于并购对象有清晰准确的认识和判断,在这基础上做出是否值得并购的决策,并制定有效的并购整合方案。其中的理由也很简单———在我们国内,不管是国有企业还是民营企业,不管是那些优秀的企业还是失败的企业,有几个不是拍脑袋进行投资决策的?我在多年的中国经济研究中接触了数以百计的国内外企业以及大大小小的企业家,国外跨国公司和国内企业对于可行性研究的基本态度明显有天壤之别:跨国公司(尤其是欧美日的,华人跨国公司有所不同)对于可行性研究的态度近于古板、苛刻 我们中国人以为是显而易见根本不需要再做研究的,他们也要找出绝对的支撑依据才会认可,因而都会根据项目投资规模的大小拨出一定比例的专门经费进行严格、科学的可行性研究;而我们国内的绝大多数企业(官员、企业家)对于可行性研究是颇不以为然的,甚至基本认为是浪费资金、贻误战机。

I’m sure our enterprises do carry out feasibility studies for their overseas M&As, but I’m also sure they don’t do them carefully, or gain a clear and accurate understanding of and judgment about the objects of M&A, or decide whether the M&A is worthwhile on this basis, or formulate effective merger integration programs. The reasons for this are simple: in China, what firms—state-owned or private, good or failed—are not in a frenzy to come up with investment policies? Studying the Chinese economy over the years I’ve made contact with hundreds of domestic and foreign enterprises and small and large entrepreneurs. The basic attitudes of foreign multinationals and domestic enterprises towards feasibility studies are clearly worlds apart: the attitude of transnational corporations (especially Europe, American and Japanese: the Chinese MNCs are different) towards feasibility studies borders on being rigid and strict, whereas we Chinese think it obvious that no further research needs be done; they will approve it on finding absolute support, and hence a certain percentage of special funding will be set aside for strict, scientific feasibility studies based on the on the scale of the investment project; while for the vast majority of domestic enterprises (government officials, entrepreneurs) in China find feasibility studies quite objectionable, and in fact see them as basically a waste of money and strategic opportunity.


The vast majority of Chinese entrepreneurs, especially those who have been successful entrepreneurs in the domestic market, have always believed in their own “intuition” and “market savvy”, and do not believe in rigorous feasibility studies. Many people may think this is caused by the low-levels of competition in China’s markets—the success rate of investment decisions that do not bother with feasibility studies is quite high—but I think more or institutional reasons.


SOEs failing to do (or really do) feasibility studies can be understood, because the reform of SOEs has so far failed to address the internal root causes. It’s quite normal for market decision-making to be replaced by CEO or administrative decision-making; whereas it makes little sense to talk of private enterprises attaching no importance to feasibility studies—after all, it’s their own money.


However, can their scientific decision-making withstand government administrative approval? Under China’s current investment management system, slightly more important projects require government investment approval, but the criteria of eligibility are vague, flexible, changeable, and beyond companies’ ability to grasp. Sometimes, no matter how well a firm has done a feasibility study, the Government may still reject it on the one-size-fits-all grounds that it is “infeasible,” and it is far from uncommon for an official with no market experience to reject a project report done by professionals; and as long as the firms decision-making is consistent with the government’s likes and dislikes, or follows the “hidden rules,” then even blatantly infeasible projects will be approved—The final result of all this is that not only domestic enterprises, but even foreign-invested enterprises, in order to be approved by the Government, turn their “feasibility studies” into “approvability studies.”


Imagine, in the long run, which Chinese companies and Chinese entrepreneurs will genuinely focus on feasibility studies? If one undertook cross-border investment in the international market with such intellectual inertia and operating mode, wouldn’t one expect to commit errors of common sense? Our firms and entrepreneurs attach no importance to feasibility studies in the domestic market: they can after all use their own “entrepreneurial intuition,” and market decisions based on their basic understanding of China’s institutional environment with reasonably accurate results; an even if mistakes are made, the cost can be contained or made up for. But these errors may well prove when overseas.

比如让中国企业在海外投资中一再栽跟头的劳工问题,就是一个典型例子: 在我们国内,我们的企业会如此受制于雇员吗?我们的工会都是企业的附属机构,怎么会像国外那样跟老板作对呢?我们的法律,虽然也保护劳工权益,资方不能随便解雇员工,但众所周知,雇员与企业完全不可能平等博弈,基本还是想解雇就解雇,即使付出代价也很小,哪会像在国外那样让工会把老板逼疯、让雇员把企业拖死?这种既定制度导致的思维惯性和行为模式已经根深蒂固,是不会随着中国企业到境外去投资制度环境发生变化而马上消失的,必然还会延续国内的惯性,所以一而再再而三的失误就不可避免。

For example the labour issue, which has constantly led Chinese enterprises come a cropper in their overseas investment, is a typical example: in this country, how could firms ever be so restricted by their employees? Our unions are subsidiary agencies of the corporation, how could they oppose the boss as happens overseas? Our laws also protect labour rights, [so that] employers can not arbitrarily dismiss employees, but as we all know, employees cannot play the game on equal terms with the enterprises, who can basically dismiss them if they wish, even if the price paid is very small, how could it resemble what happens in foreign countries where trade unions are allowed to drive the boss crazy, and employees drag enterprises to destruction? The intellectual inertia and behavior patterns of such a well-established system have become entrenched. They won’t disappear the moment Chinese enterprises change their institutional environment by going overseas to invest: they will necessarily extend the domestic inertia, making it inevitable that they make endless mistakes.


As Ge You said, the most important thing in the 21st century is talent. But the question must be asked: where does human talent come from? It comes from good institutions. There is no doubting that Chinese people are intelligent, but in recent years, the decline in S&T standards and lack of high level talent has been discouraging, puzzling and downright infuriating. China’s most eminent scientist, Qian Xuesen, who rose to the rank of state leader, asked on his deathbed, “Why are our schools unable to produce talented people?” This is a great irony for us in this country with such an ancient civilization and with greatest number of talented people in history .


In the perspective human history, courage and strength were what counted in the age of cold steel; but strategy and technology are what count in modern warfare. What counts in market economic competition is not simply material elements such as manpower, capital, technology, products or resources, but institutional elements. What counts in competition between nations are institutions. Institutions can gather and use resources, as in the case of Japan; institutions can develop and attract qualified personnel, as in the case of the United States; institutions can also waste and destroy resources, and suppress and suffocate talent. Our 30 years of institutional reform and opening up released productive forces that promoted sustained and rapid economic growth; but deep institutional roots can be found as well for problems in our development that existed in the past and present.


Today, with our increasing national strength, we actually have in place some production factors for foreign investment, such as 2.4 trillion in foreign exchange reserves,  China has become a newly rising major force in global cross-border investment, but the shortage of institutional elements has thereby become even more prominent. If it cannot be made up for, China’s foreign investment will be in endless trouble.


2 Responses to David Kelly’s translation of Ma Yu on Chinese investments overseas

  1. Ali Adolf Wu says:

    For a counterpoint, see an article in the 30 August New York Times on the expansion of state enterprise in China: http://www.nytimes.com/2010/08/30/world/asia/30china.html?pagewanted=3&_r=1&th&emc=th

  2. […] decision-making process. (The syndrome diagnosed as “state enterprise disease” by Ma Yu. As a result, most companies have been unable to retain their Western staff. As to whether they […]

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