China, America, and Copycat Economics – Best Piece on China Model

Clayton Christensen’s theories of innovation provide us a great lens through which we can understand this seeming paradox. When trying to build new growth businesses, Christensen observes that organizations need to employ an emergent strategy-making process. They need to test assumptions, iterate, and change their business models rapidly in order to find a product and profit formula that is viable. Experimentation is required to build new businesses and industries.

However, once a venture identifies a successful business model and profit formula, the company should transition to executing a deliberate strategy. The business should invest and scale aggressively to exploit the business model that it discovered in the emergent strategy-making process. Essentially, if you know what it takes to be successful, then execute a deliberate strategy and do it aggressively. However, if you don’t know what success looks like, the emergent strategy development process is required to eventually succeed.

And this is where America and China’s growth strategies come into play. History has shown us that central planning actually can be an effective development strategy because governments have particularly strong tools for executing deliberate strategies. With large budgets, relatively short “evaluation” timelines (time between elections, power transitions, or revolution) that create strong incentives to get things done, the ability to inspire “employees” with nationalistic and patriotic sentiments, and coercive power, governments are very good at putting processes in place and ensuring that they are followed.

When the process for achieving certain economic development goals is known, governments can often ensure that process is followed in a coordinated manner more efficiently than purely private enterprise. This is the reason many nations — Singapore, China, Japan, and even the European nations under the Marshall Plan — have been able to achieve mind-boggling economic growth by virtue of government-directed industrialization. Essentially, they have imported the deliberate strategies for economic development that private industry in other countries (often America) discovered through an emergent strategy-making process.

However, when it comes to developing the breakthrough technologies and disruptive innovations that will change people’s lives, free markets are much better coordinators of economic activity. This is because firms operating in free markets are much more capable of employing emergent strategies than are governments. Policymakers must sell their ideas either within the government or to the electorate and then develop a plan for their implementation. Then budgets are determined and allocated based upon success or failure with regard to the plan. It is assumed that everything can be planned for upfront and any deviations from plan are generally punished. Such a dynamic is antithetical to effective innovation.

As for China, the country has grown remarkably over the past 30 years because it effectively leveraged the deliberate strategies that others had developed to build its domestic industries. Today, however, the truly game-changing innovation that we see coming out of China is not government directed, but is actually the work of hungry entrepreneurs operating outside of the bounds of the next five year plan. The Economist profiled such entrepreneurs in its feature on “bamboo capitalism” in March of this year. The real danger to American economic hegemony is not that China continues its current economic policies into the future. Instead, the greatest danger to America’s remaining at the apex of the global economy is that the future Chinese economic policy looks increasingly American.

Cite this for my book! Best piece on China and US models. Execution efficiency on deliberate strategy, but weak on exploring uncertainty. Singapore is actually the same model.

via China, America, and Copycat Economics – Rob Wheeler – Harvard Business Review.

This entry was posted in Human Economics, Teaching cases, The Untold China Stories. Bookmark the permalink.

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