Globalization and Competitive Disparity among Enterprises

He Jun / No Comments Share:
(Xinhua/Bao Dandan)

An important cause for the rise of anti-globalization is that economic globalization has brought about new inequalities. Most of the wealth created by globalization has flowed to multinational corporations and a few wealthy strata, which has widened the gap between the rich and the poor in the society.

Attention is more often paid to the wealth difference between individuals and the resulting inequality, while the inequality between enterprises received less attention. In fact, apart from the inequality between large enterprises and small to medium enterprises, there is a significant “inequality” among large enterprises as well.

Bloomberg Businessweek recently cited a study published by McKinsey Global Institute in 2018, which analyzed 5,750 companies whose annual revenues exceeding US$1 billion and pre-tax profits accounting for about two-thirds of the total pre-tax profits of all companies in the world. The result shows that between 2014 and 2016, one tenth of the best performing companies accounted for 80% of all economic profits, an increase of 75% compares with 10 years ago. The top 1% companies captured 36% of all economic profits. McKinsey also noted that “the bottom 10 percent destroy as much value as superstars create”. The bottom 2% are the worst; they are technically “zombies” with cash flow insufficient to cover their interest expenses.

McKinsey’s research above uses “economic profit” as an index to measure the performance of enterprises. Economic profit measures how much profit the company can make over the cost of capital, and this is the real focus of investors’ attention. The development goal of enterprises should also be maximizing long-term economic profit. Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University, found out that corporate earnings show bimodal distribution: as of January this year, economic profits of 8,300 large companies were significantly positive (returns on investment exceeded the weighted average cost of capital by 5 percentage points or more), while those of about 17,000 companies were very negative (the return on investment is five percentage points or more lower than the weighted average capital cost). There are only 11,000 companies in between the poles, and they are less than one third of the total.

Why “inequalities” in companies is getting more and more obvious? Some researchers explain this at a micro-level. For instance, superstar companies can pay higher salaries and attract more high-quality talents. Large enterprises often have more input in R&D, as well as more investment in innovation, which is remarkably higher than the average value of R&D. Surveys also found that companies with average profit of the bottom 10% have higher conventional capital expenditure than large companies. This shows that such companies relied more on conventional tangible capital than on innovation and creativity.

Anbound’s researchers believe that macroscopically speaking the inequality among enterprises is also related to two global factors: globalization and excess capital. In the era of globalization, large enterprises can invest and allocate resources in the global market. The improvement of transportation, communication and network conditions reduces the differences between different countries and markets. Globalized production strengthens the standardization of products. The information society further strengthens the convergence of consumer fashion and consumption habits. Take smartphones as an example; smartphones in the era of globalization have high correlation. The mobile phones you buy locally often face global competition, therefore the brands that have enough ability to survival the competition are very limited. If an enterprise can only produce average products, it will be difficult to gain a foothold in the global market. This phenomenon also exists in many industrial and consumer products. Obviously,
globalization has aggravated the phenomenon of “winner-take-all” in enterprise competition.

Excess capital is another reason for increasing inequality among companies. Such phenomenon is related to urbanization, hence to some extent it can be regarded as a by-product of urbanization. Excess capital not only changes the characteristics of market economy, but also affects the goals and rules of enterprise development. For example, in the era of excess capital, the influence of capital on the development of enterprises has increased dramatically. Enterprise management pays more attention to the change of stock price and the income from capital market. Large enterprises with capital advantages tend to invest more capital in stock repurchase or asset mergers and acquisitions. There is a “secret” that professional managers in some huge Western companies have discovered, that is mergers and acquisitions can dramatically increase stock prices, while capital markets seem to care little about what you actually buy.

Under the background of globalization and capital surplus, inequality among enterprises also exists in China to a certain extent. For example, in the internet sector, some internet giants in China have developed rapidly. They have already taken the lead in some areas of the internet market segmentation (e.g. e-commerce, online games, online social networking, search, internet payment, etc.), and have also formed a de facto “oligopoly”. Such oligopoly, or even monopoly not only reflects the characteristics of the internet sector, but also the impacts of such internet giants on the real economy, and such impact will cause damage to urban commerce, urban vitality, street prosperity and others.

There is another manifestation of inequality among enterprises in China and it is specific to the Chinese society, namely the privileges of state-owned enterprises. The problem of state-owned enterprises is very old. These giants rely on special rights to maintain certain special position in the market and obtain special benefits. It should also be pointed out that after decades of being in the market economy, state-owned enterprises have been able to obtain special rights and benefits of market economy at the same time. After many years of reform, state-owned enterprises have solidified their special status. On the micro-level, there is no problem for these enterprises to become bigger and stronger as, but they develop and grow in an unequal way, which in fact leads to inequality for other economic entities. In recent years, when China’s economy is facing downward pressure, a large number of private economic entities goes bankrupt. This with the shrinkage of the non-public economy is the manifestation of inequality between state-owned and private enterprises.

Final analysis conclusion:

Enterprises are the main body of supporting market economy. The healthy development of market economy is marked by the diversification of large enterprises and small to medium sized enterprises to create prosperity supported by both competition and mutual winning situation. However, under globalization and capital surplus, the conventional market economy system has been distorted to certain extent, and in the case of China there is the distortion of special institutional power as well. Such market economy is creating more and more contradictions, which will snowball into larger problems in the future.

He Jun is a master in the Institute for the History of Natural Sciences, Chinese Academy of Sciences, majoring in intellectual history of science and is a senior researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.

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