Uber has decided to sell off its Chinese arm to dominant local ride share player, Didi Chuxing Technology in return for 20% stake in Didi. This comes after intense price war fought between Didi and Uber for the last three years. Uber struggled to penetrate the Chinese market despite running at a heavy loss and finally decided to exit.
This is not the first time when a Western giant has had to beat a retreat from the Chinese market. Recently, Wal-Mart decided to exit Chinese operations for 5% stake in local retailer JD.com. Similarly, Facebook has been banned since 2009 and Google since 2010.
The entry of foreign players does offer short-term benefits to consumers, but it cripples the long-term technological capabilities of a nation.
So why is China so aggressively pursuing protectionism and creating monopolies in the digital world? It defies neo-liberal economics for sure -- ultimately, lack of foreign competition means that the Chinese consumer gets inferior products and services at a higher cost. China has long back realized that the road to national prosperity is in developing the technological capabilities of the nation rather than passing on immediate benefits to consumers. China has given preference to the technological sovereignty of the nation over the consumer's sovereignty. The recent protectionist approach in internet and e-commerce business is indicative of a learning growth curve from low- to mid-level technology in manufacturing towards higher-end technologies and the digital world. They are now all poised to create Chinese equivalent of Western stalwarts -- Baidu for Google, RenRen for Facebook, Weibo for Twitter, Alibaba for Amazon, Didi for Uber.
In fact, China is not the first country to adopt protectionism to benefit local players, and it vindicates the kind of economic nationalism advocated by Friedrich List in 19th century. He argued that nations must adopt protectionism when their industries are at a nascent stage. Protection from global giants allows domestic companies assured access to local markets and allows them economy of scale to develop financial, technological and operational competitiveness on the international stage. If not restricted, foreign MNCs can cause pre-mature exit of local players, which hampers developing domestic capabilities of a nation (Flipkart's struggle amid Amazon's entry in India is a classic example). As a rule, MNCs keep their core activities (esp. R&D) in their home country and only peripheral activities are carried out by their foreign subsidiaries. Further, since they have already culled local competition, the prospect of local players emerging and engaging in higher-level activities is negligible. The entry of foreign players does offer short-term benefits when the consumer gets quality products at cheaper rates, but it cripples the long-term technological capabilities of a nation. So, it is not surprising that even after two-and-a-half decades of liberalization we are still second-rate producers but first-rate consumers as a nation.
It is not surprising that even after two-and-a-half decades of liberalization we are still second-rate producers but first-rate consumers as a nation.
Providing protection to local players is not enough. To avoid a situation such as Nehruvian socialism to come back to haunt us again, the technological progress of "protected" domestic companies must be ensured at all costs -- using Chanakya's sutra of Saam-Daam-Dand-Bhed to get things done. Further, technological competitiveness must be tested in international markets -- this is something that can be monitored through growth in exports. Technological progress and exports are central to national wealth creation, a fact recently highlighted by the Singapore Deputy PM. These two aspects are what distinguish Nehruvian socialism's failure and the success of China and East Asian economies.
Is India willing to lean?
Though we are obsessed with Chinese growth story, we seem to learn little from our arch rival. We are doing exactly the opposite of what China is by allowing foreign companies access to the Indian market, thus hobbling the progress of home-grown companies. Let's look at Flipkart again. It did all the hard work of changing Indian consumer behaviour and just as it was reaping the fruits, there came Amazon, thundering in from the West. Using its deep pockets and superior technological and infrastructural capabilities, Amazon has already started snatching away the market shares of Flipkart and Snapdeal. Amazon founder Jeff Bezos announcing a $3 billion investment in the presence of our Prime Minister encapsulates our failure on nationalist economic policy. With Alibaba (which in its infancy was protected from Amazon by the Chinese government!) also ready to enter Indian market, it will be painful to see two giants slugging it out on Indian soil for global supremacy and our companies dying a slow death in their infancy. All this because of successive governments' misinformed development economics.
Don't be surprised if few years from now we see Uber and Didi fighting for Indian market share at the cost of Ola.
Uber's exit from China and renewed focus on India doesn't augur well for local player Ola in the ride-share sector. Don't be surprised if few years from now we see Uber and Didi fighting for Indian market share at the cost of Ola.
In the case of Patanjali, we don't even need protectionism to create the Indian equivalent of Unilever and P&G. It has already created a unique brand position in the FMCG market which has ensured steady growth in its domestic share. With some government support we can see Patanjali taking on the likes of P&G and Unilever in international market. Unfortunately, regulating bodies such as the FSSAI and ASCI, which should be used as tools to restrict MNCs' access in Indian market, are instead being used to bombard Patanjali with notices -- arguably by vested interests.
The above examples clearly show that successive governments have failed to develop a truly nationalist economic policy. Ideological battle between leftists and neo-liberals has polarized the discourse on the political economy. This has consequently led to a selection of the worst from both worlds. The leftists oppose all kinds of private enterprise irrespective of nationality hurting prospects of domestic enterprises. So they oppose Wal-Mart not to protect domestic organized retail but to safeguard the interests of middlemen and small shopkeepers, implicitly ensuring the status quo of poor productivity and technological backwardness in the sector.
Only if we abandon both leftism and neo-liberalism and embrace economic nationalism, will we see the rise of India as a super-power.
On the other hand, neo-liberals see technological backwardness and low productivity as outcomes of protectionism. For them the solution is FDI and liberalization, ensuring the slow death of domestic companies. Ultimately, we end up either restricting the entry of foreign players if the political opposition is strong (e.g. Wal-Mart) or giving in to the pressure of developed nations, neo-liberal economists and MNCs and allow foreign companies access to the Indian market at the cost of domestic ones ( for e.g. Amazon). Interestingly, for the sake of national interest, China as well as neoliberal Western countries have adopted protectionism at different historical periods. Unfortunately, it appears that Indian leftists and neo-liberals are "more Catholic than the Pope." Together, they have made the Indian market a laboratory for globe debate between left and right, each zealously trying to implement their ideology here. Indeed, a lose-lose situation for us.
Unsurprisingly, discourse on nationalism in India is as clouded as development economics. Nationalism has taken the shape of jingoism within the political and cultural sphere while the economic domain is completely excluded from the debate. Nationalism today has to be fought on the economic battlefield -- where the "enemies" would be developed nations, foreign MNCs and international bodies such as the IMF and World Bank. Only if we abandon both leftism and neo-liberalism and embrace economic nationalism, will we see the rise of India as a super-power.