Friday, August 03, 2012

PROF. JAMES L. HESKETT, BAKER FOUNDATION PROFESSOR, EMERITUS, HARVARD BUSINESS SCHOOL

In State capitalism, does the operative word “capitalism” come in? State capitalism and State-run enterprises are neither to be applauded nor feared, writes prof. james l. Heskett of harvard business school

There seemed to be little concern among respondents that States will use their sovereign funds to foster their political interests. Russell Widener comments that ,“I would worry more if they began to use their scale of economy to shake and shift markets.” One advisor to two sovereign funds, Jack Cramer, points out that at least in his experience “the funds are... in no sense aggressive or eager to lead in a sector. As a rule, they want safe investments.”

The current boom in State capitalism stems, in part, from investment opportunities in developed countries. Nari Kannan suggests that it is a product of “thoughtless consumerism (the thirst for cheap Chinese goods) and dependence on foreign oil,” particularly in the United States. But the phenomenon isn’t limited to US. As Kamal Gupta comments, “Countries like India... need investments in infrastructure. Where does it get the money it needs? From the money owners. How does it matter who they are?”

Could global financial markets accommodating state (and private) capitalism be improved? Yes, according to several respondents. Shann Turnbull points out that “National governments can deal with globalisation as they can determine the rules of ownership and control applicable in their jurisdictions.” Nevertheless, he proposes the creation of a “Community Investment Code” to be administered by the World Trade Organisation. C. J. Cullinane comments, “We need global guidelines and regulations as well as transparency.” Jacoline Loewen, concurs, saying that “There may not be global rules for State Capitalism yet, but these will come because the market is demanding transparency.”

The question remains as to whether States make very good capitalists. As investors, they are “systematically inefficient – from a profit maximisation standpoint.” As Paulo Wilson Rodrigues puts it, “State-owned enterprises are less profitable... for one reason: State administrators are less motivated.” Mixed motives may get in the way of long-term financial performance. If this is the case, do we view the success or failure of State capitalism, even if the emphasis is on capitalism, through too narrow a prism? Are State capitalists a different breed of investors? Do their behaviours pose any kind of long-term challenge that needs to be addressed now? What do you think?


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