Doing business in China: Being efficient isn’t enough

The business world is often ruled by natural selection. Efficient new companies thrive. Stodgy old ones go bankrupt. But that’s less likely to happen in China, says Brian Wu, an assistant professor of strategy at the University of Michigan’s Ross School of Business.

Newer companies have a difficult time competing in China because of institutional barriers, Wu says. These include building relationships with government officials, dealing with local regulations and getting loans from banks.

Wu discussed his latest research on the issue in an April 2 talk, sponsored by U-M’s Center for Chinese Studies at the International Institute.

Here’s an excerpt from his lecture:

“More efficient firms, they grow, expand and prosper. Less efficient ones just exit the market. In other words, there’s a one-to-one correspondence between economic efficiency and survival. It’s Darwin’s survival of the fittest idea.

“But what we find in China based on Chinese census data is almost the opposite. We see a divergence between efficiency and survival. More efficient companies are more likely to exit the market.

“Incumbent firms have an advantage in terms of survival. They can survive even if they are less efficient because they already have social, institutional, governmental connections. They can get better loans more easily. They can sell to another region more easily. So all these factors can increase their chances of survival.”