American companies state that their secrets are being stolen by Chinese hackers. US counter-intelligence says it has traced several of these attacks back to outfits sponsored by the People’s Liberation Army (PLA), and that designs stolen from American companies’ computers have shown up—sometimes barely disguised—in Chinese companies’ products and services. The Obama administration has threatened sanctions against hackers and Chinese firms that benefit from such intellectual property theft.
But wait a minute! Isn’t the “pot calling the kettle black”? The US has by far the best cyber-capability in the world and has used it to spy on millions of international communications, including Angela Merkel’s mobile phone—as well as to gather data from both European and Chinese companies’ computers. It can access any Internet-connected device, anywhere, to read its contents. So well-developed is the US government’s data-mining and cyber-capability that it has harvested detailed information, even family photos, on the very PLA hackers that penetrate American companies’ computers.
This is a “game” played by most major governments. So why single out China?
The “pot-and-kettle” analogy has a flaw: it is not symmetrical. The legal and political systems of the two nations tilt the game in China’s favor because:
The Chinese government can, and does, share its information with its companies—especially State Owned Enterprises (SOEs)—whereas the US government cannot, for a myriad of legal and ethical reasons.
SOEs, or government-controlled firms, still make up a major fraction of the Chinese economy, accounting for 34 percent of fixed total investment.Some observers indicate that state ownership in China has continued to grow, not shrink, especially in key sectors (although the growth rate of private enterprise is even higher). The government-owned sector in the US, by comparison, is minuscule.
As US firm CEOs made it clear to President Xi Jinping during his Seattle visit in September 2015, US companies in China are increasingly being squeezed and pressured to share technology and proprietary designs with Chinese partners as a precondition for doing business in China or getting access to markets. In brief, the Chinese government makes no bones about its drive to help its companies learn from US and European firms. Neither the US nor Europe makes any such demands on foreign investors.
The “pot calling the kettle black” notion does not, therefore, really hold up, even though the hacker abilities of US government or private experts are most likely superior to their counterparts in China. In the US, the role of government and its interests are separate from those of private business. The Chinese government sees its role as allied and interpenetrated with business, both SOEs and privately held companies. The Chinese have a very different notion of nationalism, and solidarity, that idealizes a utopian vision of all noses pointing in the same direction—one that promotes China. By contrast, the American War of Independence from Great Britain was fought largely on the very principle that government should keep its nose out of private business, and not tax or overly regulate commerce.
The farthest the US government goes in scrutinizing some incoming foreign direct investment (FDI) is through CFIUS (the Committee on Foreign Investment in the United States), chaired by the Treasury Secretary, that each year examines a handful of investment proposals that are sensitive in terms of defense or some vital strategic interest of the US.In 2010, Tangshan Caofedian of China wished to acquire Emcore, a US fiberoptics and solar panel producer, but scrapped the deal because of objections from CFIUS. In 2006, Dubai Ports World withdrew its agreement to take over the management of three US ports. Because of ideological embarrassment, the US government openly admits only to examining a handful of such sensitive cases each year, although CFIUS staffers, the Commerce Department, and the CIA probably cursorily and quietly screen thousands of FDI proposals behind the scenes. After all, the US is the world’s leading exponent of free markets and international business.
But the PLA-sponsored hacking poses a policy dilemma. What policy options does the US government have? Should the American government share commercial secrets it has gleaned from Chinese or European firms with US companies? Clearly, it cannot. Should the American government expand its scrutiny of incoming FDI, or even “encourage” foreign companies to share their technologies locally? That would be going against the principles and ideology of free markets, open entry, and separation between commerce and government. Should the American government sanction Chinese firms that have clandestinely appropriated American designs? That, too, is highly problematic since—in an interdependent world where US-China trade alone is worth half a trillion $US each year—sanctions would invite retaliation and a further squeeze on US companies invested in China. Retaliatory sanctions would further undermine the already fragile state of international business.
With the US and China alone making up approximately one-third of world’s gross domestic product (GDP), a commercial war between the two could be ruinous to the entire planet—leaving no more pots and no more kettles to judge each other.
For the past 30 years, India has been governed by a series of raucous coalition governments. At least some of the caution, vacillation, and even backtracking on investment and taxation policies that have dismayed foreign companies contemplating foreign direct investment (FDI) in India can be attributed to this. At the federal level (as well as in many states), coalition viewpoints had to be accommodated, often leading to legislative paralysis and lack of policy clarity.
In my April 12, 2014 post What the Indian Election Means for Foreign Direct Investment (FDI) in India, I described how India is a multicultural and multireligious pastiche, with more than 22 official languages (some say more than 780). Every religion on earth has adherents in India, although India’s 2011 census shows six major religions dominating. Even within Hinduism, which includes 81 percent of the population, the worldview varies depending on which of the 3,000 subcastes a person belongs to.
Democracy in India functions as a noisy forum for a thousand interests and viewpoints. Coalitions have been the political norm. Given India’s diversity, one party gaining a majority has been an unlikely event. However, in the 2014 election, the BJP (Bharatiya Janata Party) has been handed a rare opportunity—an outright majority, having captured 52 percent of the 543 lower house seats. With its coalition partners, Narendra Modi’s government will enjoy a comfortable 62 percent.
Under the previous Congress Party government, opening the gates to FDI and dismantling bureaucratic obstacles progressed well until 2008. The Indian economy grew at previously unprecedented rates of 7 or 8 percent annually. But after 2009, all reform came to a halt because of infighting among the ruling coalition, as well as the global slowdown. Each budget year saw backtracking and zig-zagging on taxation, industrial policy, and FDI policies, as well as hundreds of corruption cases. The slowing of economic growth to below 5 percent sealed the image of the Congress government as paralyzed, incompetent, and unable to meet the job aspirations of millions of new voters since 2009. Although India’s population growth has slowed, nevertheless as many as 150 million crossed the threshold from adolescence to adulthood in the last five years, during which time job creation has been inadequate.
The last five years also saw a number of well-publicized FDI disasters. Posco Steel of Korea would have made the largest investment in India to date, $12 billion, and Vedanta Resources based in London proposed FDI in the aluminum sector worth more than $8 billion. But both were torpedoed by regulatory and land acquisition snarls at the state level, with the federal government too weak to intervene. Tata Motors, part of the multinational Tata Group, had to withdraw from a partially initiated project to build Nano cars in West Bengal.
To the rescue came a decisive Gujarat State Chief Minister, Narendra Modi, who induced the Tata Group CEO, Ratan Tata, to switch his investment to Gujarat. Regulatory clearances and land were obtained in less than one month’s time. This is only the latest illustration of investment flocking to Gujarat State because of a dynamic leader who cuts through bureaucracy and is widely regarded as a decisive, straight-arrow, no-nonsense, pro-business leader. While over the past five years the rest of India grew only modestly at 5 percent per year (still a growth rate that would be the envy of most other nations in today’s economy), Gujarat State grew at more than 10 percent annually—a remarkable achievement.
Narendra Modi (center) with the CEOs of India’s two largest business conglomerates (Mukesh Ambani of the Reliance Group is at the extreme left and Ratan Tata from the Tata Group is second from the right) with other foreign executives.
With a comfortable outright majority in Parliament, Narendra Modi has been handed a historic opportunity in Indian politics. His singleness of vision, unsullied resumé (except for serious allegations of an anti-Muslim animus), insistence on quick action, and ability to cut through bureaucratic red tape all bode well for investment in India.
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