Richard A. D'Aveni, Professor of Strategic Management

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How America Can Beat China’s State Capitalism

With the rise of China as an economy, a question hangs in the air: Can America beat state capitalism? The evidence is not encouraging. The U.S. has lost millions of jobs to the Chinese. It will lose millions more if China, as it proposes, turns itself into a high-tech giant in critical industries ranging from telecommunications to aviation.

The rise of state capitalism has put the U.S. at a competitive disadvantage. State capitalism operates with zero-sum rules, in which one country gains as another loses. This is hardball competition, dog eat dog. And the Chinese dog is eating the American one in products ranging from cell phones to steel.

Zero-sum capitalism is not the form of capitalism U.S. policymakers see as the challenge in global markets. U.S. policymakers are guided instead by the idea of a win-win world. When everyone trades freely, business expands across the board. Every country wins. This free-market, open-trade approach is enshrined in the World Trade Organization.

But policymakers awkwardly straddle a gap in logic. A win-win is possible only if everyone wants to cooperate. China doesn’t. True, trade negotiators issue press releases hailing cooperation. But on the ground China keeps foreign companies from competing freely. It appropriates technology from foreign joint-venture partners without compensation. It regulates foreign firms with rules not faced by domestic ones. It bestows goodies on its firms—free land, cheap loans—to give them an edge.

This is not a record of a country that believes in a cooperative approach to the marketplace.

U.S. policymakers face the question of how else to beat state capitalism. Should we double down on laissez-faire capitalism, in which we count on a system akin to economic Darwinism? In which government stays on the sidelines? In which companies survive if they can evolve fast enough?

Or should we adopt the Chinese approach, in which we count on a system akin to economic intelligent design? In which companies benefit from divine intervention by the government on high? In which technocrats guide industries critical to the nation?

Neither approach recommends itself in a win-lose world.

State capitalism has its failings. It works perfectly only when an omniscient power guides it, which doesn’t fit a democratic society. Laissez-faire capitalism has its failings, too. It pits a nation of unorganized companies against a nation of companies organized and backed by the state. It demands that companies enrich shareholders, as opposed to the nation. And it can oblige companies, in search of profits, to become tools of other nations’ leaders.

What we need is a mix of capitalism. Here are four specific actions the U.S. could take to gain from managed capitalism:

  • Federal Industrial Policy Board: Establish an independent agency, like the Federal Reserve, to craft national economic strategy. Solicit input from the nation’s best scientists, strategists, and thinkers. Keep politicians out of the process.
  • Manufacturing Advanced Research Projects Agency (MARPA): Establish a development lab like DARPA (Defense Advanced Research Projects Agency) to create next-generation technologies for U.S. factories.

  • Alignment of government policy: Establish an agency, like Homeland Security, to consolidate government departments—Commerce, Energy, Education, Agriculture, Labor, and agencies charged with regulation and science research—to speak with one voice toward China.
  • Actively manage national industry portfolio: Analyze U.S. industry makeup and invest in—or give trade protection to—industries due for rapid growth or high profits. My analysis shows the U.S. today is short on industry “stars” and “cash cows,” long on industry “dogs” and “question marks.” With portfolio management we can protect industries that provide lots of jobs and give breathing room to companies that need to regroup from global competition.

    We should all revere the magic of the free market. But today the U.S. has the chance to create a better form of capitalism. We can outmaneuver the powers in Beijing because Chinese leaders are stuck in a rut worn deep by their obsession for control—and because China is temporarily constrained from moving its economy to higher technology by a lack of the culture and research centers to do so. This window of opportunity will close soon. Beforehand, the U.S. must come up with a dynamic reformulation of our capitalist system.

    To hear our presidential candidates, you would think the mission of the U.S. is to establish one party or the other’s chosen capitalist system, as if we were trying to reaffirm our national identity. This is a tragedy of parochialism. We need to move from slogans to government solutions. We need to move from looking inside for answers to looking to the rest of the world to see what it takes to compete and win. And we need a serious strategy to fulfill the real mission of the U.S.: create wealth and power for the nation.

    Richard A. D'Aveni is the Bakala Professor of Strategy at the Tuck School of Business at Dartmouth College and author of Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War
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Research Awards

  • Academy of Management Hall of Fame
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