China’s competitiveness strategy is changing gear. Exporting “cheap and dirty” has underpinned several decades of successful, super-charged economic growth. But this development pathway is now reaching its limits for China and the rest of the world.
Forced closures of factories producing contaminated food, strengthened labour laws and harsh penalties for senior officials found to be corrupt are all signs of changing times. Official Chinese responses to environmental concerns by the international community are shifting from defensive references to the need to sustain growth to claims of responsibility. A recent handbook produced by the Chinese Forestry Ministry, in its own words, “positively guides and standardises Chinese companies' sustainable forestry activities overseas, promotes the sustainable development of forestry in those countries [and] protects the international image of our government being responsible.”
Chinese companies like China International Marine Containers ltd., Haier Group Company, and the China Ocean Shipping Group (Cosco) have embraced the UN Global Compact’s newly launched “Caring for Climate” initiative, thereby committing to make reversing climate change part of their long-term responsible competitiveness strategies. According to one recent survey by HSBC, the Chinese are among the world’s most concerned about climate change, and the most optimistic that it can be overcome. Premier Wen Jiabao said that China’s response to climate change is “a test of the government's accountability and also the responsibility China should bear for the international community.” Underlining the importance of responsible business practices, former president of SINOPEC Wang Jinming stated at the UN Global Compact’s Ministerial Roundtable “environmental protection and sustainable development is the duty-bound responsibility of the enterprises”.
Shifting gear towards a more “responsible competitiveness” makes economic sense. Allegations by competing nations of China’s social and environmental dumping creates barriers to trade; concerns over China’s unwillingness to apply social and environmental investment criteria may ultimately restrict access in its search for natural resources across Africa and elsewhere; and its growing appetite for acquiring global brands as a means of moving up the value chain may be frustrated in the face of powerful opposition from civil society organizations concerned over China’s record on labour standards and environmental security. Moving up the value chain is about productivity and innovation as well as reputation. Flexible manufacturing, just-in-time inventory management, working with highly mobile knowledge workers, developing a globally competitive service culture, and employing people closer to export markets, all require Chinese companies to move on from their current “command and control” management style associated with poor labour conditions and a disinterest in impacts on the wider community and environment.
Finally, responsible competitiveness is as much about domestic conditions in China as it is about export markets. China Construction Bank, in its first “corporate responsibility” report, sums up the challenge, “…our nation is still facing challenges on many fronts, such as imbalanced developments between cities and rural areas, the eastern regions and the western regions, economic growth and resource conservation…building of social harmony...remains a solemn mission which is not to be accomplished in the short term and which will require nothing less than participation and dedication of the society as a whole, including every individual enterprise and citizen”.
China’s strategic shift is timely. Three Chinese companies are now in the top 30 of the Fortune Global 500. Altogether the 24 Chinese companies in the ranking have joint revenues of US $838 billion. In four years, China has gone from having the eleventh largest GDP to standing at number four. Still, China’s current practice of “responsible competitiveness” remains weak by international standards.
AccountAbility, the international think-tank, recently launched its fourth bi-annual report, ‘The State of Responsible Competitiveness 2007’, at a Ministerial Roundtable at the UN Global Compact Leaders Summit in Geneva; a summit attended by over 100 Chinese delegates. The report includes a unique index measuring progress of 108 economies in advancing responsible business practices as a driver of national competitiveness. Data weaknesses and interpretation problems limit the Responsible Competitiveness Index (RCI)’s scientific precision. Caveats aside, however, the RCI 2007, the third AccountAbility has produced since 2003, has advanced considerably in applying sophisticated econometrics in blending 21 data streams from authoritative sources as diverse as the International Standards Organisation, the International Labour Organisation, Transparency International and the World Bank. The index also factors in the level of country development, thus creating the most comprehensive assessment of responsible business practices around the world to date.
The RCI seeks to measure how embedded responsible business practices are in a nation’s economy, and so the basis on which it builds its competitiveness in global markets. It is therefore particularly relevant to compare it with relevant measures of international competitiveness. The very high correlation between the RCI 2007 and the World Economic Forum’s Growth Competitiveness Index (R2=0.85) indicates a strong relationship between responsibility and the most authoritative measure of country competitiveness. This result is striking given the very different data being used by each index. Comparing the RCI 2007 with the World Bank’s annual ‘Ease of Doing Business’ country index also yields high correlations.
At a country-level, the RCI 2007 headline results are that:
* China is placed 87th in the RCI, the lowest of the BRICS (South Africa leads in 28th with India in 70th), and above many ‘less developed’ African nations and a number of South Asian countries (Pakistan in 103rd, Bangladesh in 106th)
* Several emerging economies perform well within the top quartile, notably Chile,
Malaysia and Rep. of Korea (24th, 25th and 27th respectively). Thirteen of the ‘Top 20’ are European countries, Asian high-scorers include Hong Kong (treated separately from mainland China), Japan and Singapore, with the US trailing at 18th position.
Headline results disguise considerable variation across specific indicators and domains.
* China, for example, scores well on wage equality between men and women, above average on occupational fatalities, just below average on the strength of auditing and accounting standards and staff training, and poorly on corruption and CO2 emissions.
* Comparing China’s performance against the other BRICS (Brazil, Russia, India and South Africa) across the three principles domains (policy, business, and societal) quickly reveals that it performs best in the policy domain, and worst on social enablers, whilst India and South Africa outperform the other BRICS on the business action domain.
Such analysis must be treated with some caution given the enormous differences between the 108 countries included in the RCI 2007, such as their economic structures, stages of development, and size. One particular problem is that wealthy countries can achieve high scores by externalizing negative social and environmental impacts into their global supply chains, which in turn counts against countries hosting major parts of those supply chains (the so-called “pollution haven hypothesis”). One recent study showed that up to 40% of air pollutants in the Pearl River Delta in low-scoring China are directly linked to exports to high-scoring importers across Europe and North America. Unfortunately, at this stage there is inadequate systematic data across our large country sample to test this hypothesis within the main RCI. We did explore this issue by correlating a subset of RCI countries against data from UNCTAD of imports of polluting goods and services, but the results were statistically too weak to provide insights or policy-relevant results. We are committed to doing more work on this issue in future editions.
Complementing and going beyond the data, the report includes 15 essays from world leading experts exploring the potential for responsible competitiveness strategies to deliver economic success. Sir Nicholas Stern, until recently the UK Treasury’s Chief Economist and author of the ground-breaking study of the economic consequences of climate change, along with Jonathan Lash, President of the prestigious World Resources Institute, highlight how aligning smart business strategies and public policies could give nations and businesses a first mover advantage in an emerging US$500 billion a year market driving adjustments to climate change. Jean-Philippe Courtois, President of Microsoft International, details how these practices are benefiting their business. Guy Ryder, General Secretary of the International Trade Union Confederation, and Ros Harvey from the International Labour Organisation provide convincing evidence that improved labour standards drive up productivity and enhance nations’ attractiveness for risk-free procurement by reputation-conscious global brands. And Peter Eigen, Chair of Transparency International’s Advisory Council, and Anwar Ibrahim, formerly Malaysia’s Deputy Prime Minister and now AccountAbility’s Honorary President, drive home the argument that overcoming corruption must lie at the heart of any national strategy for achieving sustained competitiveness.
Responsible competitiveness, the report stresses, is not just a matter of being ethical in dealing with social and environmental issues. Gaining competitive advantage through responsibility requires smart strategies in practice. As the Honourable Al Gore emphasises in his foreword to the report:
“A sustainable future means markets that reward long-term performance. It means seeing responsible business practice as the guide to the quality of the business and its management. It means public policies and citizen action that help businesses do the right thing”
And such strategies vary between countries and over time. For example, Günter Verheugen, vice-president of the European Commission in charge of Enterprise and Industry, highlights in the report the role of responsible business practices in enhancing European competitiveness:
“…the key word for competitiveness in today’s knowledge-based economy is innovation, and the best enterprises have realised that CSR and innovation are intimately linked”.
The report identifies four country clusters, each distinguished by their strategies towards responsible competitiveness:
* Starters: comprising 31 low scorers, including China, Bangladesh and the Russian Federation. Many have signalled a commitment to responsibility through signing and ratifying international treaties, and other policy drivers, but struggle to implement the basics, like worker health and safety and corruption.
* Compliers: Excepting India, this cluster of 32 countries are middle-income, including Brazil, Turkey and Mexico, accounting for US$1 trillion of global trade. Compliers focus on demonstrating progress on meeting international quality, labour and environmental standards, already seeking to capture share of quality-conscious branded markets.
* Asserters: comprising 24 countries seeking to seize opportunities in responsible competitiveness. Some, like Chile and South Africa, actively promote international standards to gain competitive advantage. Some are building national ‘responsibility’ brands to attract foreign direct investment and export a first generation of global product and corporate brands.
* Innovators: this most developed cluster of 20 countries are embedding responsibility in the core of their domestic economies, stewarded by relatively well-enforced statutory regulation, reinforced in most instances by ethics-conscious consumers underpinned by civil activism. Knowledge-based innovation is key to the competitiveness of these economies, which requires flexible working conditions, and dynamic, trusted public and private institutions.
Responsible competitiveness will have to underpin any sustainable future, and China’s strategy for securing long-term competitiveness in the global economy will be key to achieving such a future, for China and for the rest of the world. Collaborative approaches to governing markets involving private and public actors are likely to be most effective in achieving responsible competitiveness. As Pascal Lamy, Director General of the World Trade Organisation, pinpoints in his opening comments in the report:
“Responsible competitiveness…blends forward-looking corporate strategies, innovative public policies and engaged and vibrant civil societies. It is about creating a new generation of profitable products and business processes underpinned by rules that support societies’ broader social, environmental and economic aims”
Designing and implementing such strategies will require business leaders to rise to the challenge and associated opportunities. New knowledge and competencies are needed for the world’s business communities to become skilled in turning social and environmental costs into profitable products and processes. It has become a core business competency to be able to build partnerships involving public and private, commercial and non-profit organizations that are effective in creating new standards, networks of relationships and sources of innovation. As Aron Cramer, President and CEO of Business for Social Responsibility, writes in the report, “China’s approach to responsible business is now evolving in a way that marries local perspectives and global debates.” The Chinese Federation for Corporate Social Responsibility (CFCSR), launched in October 2006, is one of several new business coalitions that are emerging in China to help businesses share experiences and grow relevant competencies. The CFCSR’s alliance with the international business network, the Global Leadership Network exemplifies the learning and relationship building networks that will help the next generation of successful Chinese businesses to learn the art of responsible competitiveness.
There is considerable opportunity for the most innovative businesses in joining with government and non-profit organisations in raising the consciousness of Chinese citizens towards these issues. As elsewhere in the world, they will drive business’ responsible competitiveness strategies and practices by demanding improved standards from the businesses they buy from or work for. This will improve the effectiveness of Chinese legislation by creating in effect an army of ‘market-based inspectors’, at considerably reduced enforcement costs to the government. But as important is that it will improve the Chinese business community’s ability to compete globally higher up the value chain where premium products can capture premium prices. Strengthening China’s ‘social enablers’ in such ways will accelerate China’s shifting gear towards a higher value-added economy.
Internationally, China could influence the next generation of standards that will reshape global markets towards more responsible competitiveness practices. Its dominance of global supply chains across many sectors provides it with a unique window of opportunity to actively ‘export’ good practices, much as Europe has done in exporting its domestic standards through its ability to provide access to the region’s wealthy markets. China is already engaging in this agenda for example through its involvement in ISO’s work on ISO 26000 Social Responsibility. Domestically, China has gained great experience with the China Social Compliance 9000 for the Textile and Apparel Industry (CSC9000T). China’s economy would now benefit, and create broader international benefits, in deepening its engagement in ‘soft regulatory’ standards initiatives related to trade and investment, such as the Equator Principles (on project finance), the Extractive Industries Transparency Initiative, Forest Stewardship Council, and MFA Forum (on responsible textiles). Engagement in such “collaborative governance” ventures will enable China to be at the heart of the design of the next generation of rules for the global economy, some of which will involve “soft regulation” alongside the rule of law.
Responsible competitiveness, in short, spells out the economic case for advancing responsible business practices at the heart of a nation’s economic development strategy. AccountAbility’s State of Responsible Competitiveness 2007 spells out global progress in doing just that, and illuminates China’s unique opportunity to take global leadership in advancing this agenda.
Homepage photo by tuija
Simon Zadek is AccountAbility’s Chief Executive, Senior Fellow at Harvard University’s John F Kennedy School for Government, and co-author of ‘The State of Responsible Competitiveness 2007’, which can be downloaded or hard copies ordered at www.accountability21.net
This article first appeared in Fortune China
Copyright Fortune China 2007