In the emerging markets today, state capitalism has become prevalent. As a result, managers are facing challenges when devising means to live with this phenomenon, solve and understand the issues it brings, and finding opportunities that would foster business relationship environments. In trying to understand the issue of state capitalism and state-owned enterprise reform in emerging markets, this paper will conduct a detailed analysis featuring opportunities and constraints of the investment models mentioned (Klimina, 2013). Recently, states have resumed control and influence of the economy and the activities herein. This can be attributed to the just concluded 2008-2009 global financial crisis where states in developed and emerging countries had to bail out corporations and large banks. The main affected corporations and banks include General Motors, Royal Bank of Scotland, AIG and Bank of America (Klimina, 2013). In light of this issue, business owners, managers and business stakeholders must fully understand the financial concept of State Capitalism in order to understand the rising implications where it is concerned.
In order to understand the opportunities presented as well as the constraints surrounding the financial model of state capitalism, understanding the characteristics of the same as presented by critics is mandatory. The funding and management of enterprises by the government result in increased degrees of political intervention in the daily running of the companies and businesses. In addition, state capitalism presents a structure where the government can directly and actively intervene in the running of the economy. As a result this may threaten or expropriate private investment and capital if it clashes with state interests. Lastly, there is a tendency by the big businesses to have deep connections with the state. This is manifested through industrial policies or protectionism measures that favor the firms in these unions with the government. The firms, as seen earlier, receive privileges and favors that are exclusive to them (Klimina, 2013). The favors include subsidized loans, tax exempts, and tariff protections.
Despite these constraints as presented above, state capitalism has a number of advantages. In a bid to fully grasp the concept of state capitalism, businesses must also explore the advantages in order to weigh on the way to react and move forward. In the 21st century, state capitalism has presented three main advantages. The main advantage of the financial model of state capitalism as adopted by governments lately is that it is able to avert risks and advocate for stability. Governments tend to favor stability for obvious reasons like favoring investments and for political growth and development. This tendency assures firms operating both privately and publicly less pronounced periods of recession. This is evident to companies operating in countries with heavy government presence and participation in the economy. The low tolerance by governments to risk under state capitalism financial model is an explanation as to why in the recent financial crisis corporate restructuring and bank bailouts were smoother and faster in countries where the system is favored. Here, China as an example of a country that advocates for state capitalism performed well than in the United States.
Still looking at the advantages, state capitalism offers patience to investors. The model offers more focus in the long run versus investments in the short run. The government main focus is on the long-term. Therefore it focuses energy patiently instead of running to simple expense cutting strategies that yield short term profits. their focus is on endeavors that yield on long maturities, long run social returns and high economic and social returns. Thirdly, firms that receive favors and privileges through state capitalism are efficient in their roles (Klimina, 2013). This model gives every firm an opportunity to be a global player through links with the government. Such firms rose to the dominant positions through state capitalism links that allows links that are beneficial between the government and the firms in general. State capitalism therefore gives firms a competitive edge since they receive privileges and favors unavailable to firms without such an arrangement. Although states are eventually blamed for offering unfair advantage and unleveled playing field for special firms, it is an advantage to large banks, corporate and businesses that are in collaboration with governments.
In conclusion, state capitalism in this day and age is a mixture of capitalism and government intervention over economic activities in a state. This is seen through by ownership as well as control of enterprises and allocation of credits to privileged or favored companies. Development and public banks are used as well as concessions and regulations in the endeavor to protect and control the actions of state owned or private companies (Klimina, 2013). As explained earlier, state capitalism is an organized structure where the government dominates the market with the sole aim of gaining politically. In the long run, political officials have no capacity to regulate economic activities better than the natural market forces. In emerging markets, the phenomenon of state capitalism can be described as the transfer of market powers from the capital of finance to that of political powers. The advantages explained above present opportunities for businesses to exploit (Li et al, 2014). Despite the mentioned challenges, state capitalism can be helpful to a business as they avert risks and focus more on the long term goals than the short term yields in profits.
Klimina, A. (2013). Placing the Analysis of Contemporary State Capitalism within an
Evolutionary Discourse. Journal Of Economic Issues (M.E. Sharpe Inc.), 47(2), 545-554.
Li, M. H., Cui, L., & Lu, J. (2014). Varieties in state capitalism: Outward FDI strategies of
central and local state-owned enterprises from emerging economy countries. Journal Of International Business Studies, 45(8), 980-1004.