Creating the right scale for growth

Industry competitiveness on an international scale usually requires a critical mass of small to medium-sized competitors or a fast-growing, acquisitive larger industry player.

Emerging market economies that have produced global competitors often followed the former path, e.g. Japan with its keiretsu industry clusters and South Korea with its family-owned chaebol. The likes of brands such as Sony and Samsung have emerged on the world stage as a result.

But the way forward for the internationalization of Chinese industry, especially the State-owned sector, may require industry consolidation to create a single corporate structure that is capable of expanding internationally. The recent restructuring within the nation's railway and nuclear power sectors would suggest this path is already being pursued.

The merger of two nuclear giants, the China Power Investment Corp and the State Nuclear Power Technology Corp, has been approved. This should lead to a more internationally competitive corporation with the size and financial clout to attract further investment and expand overseas using many market entry strategies from partnerships and alliances to full-blown takeovers.

A similar consolidation is imminent across the railway industry involving CNR Corp and CSR Corp. Again, this restructuring is aimed at building a single entity that carries considerably more commercial power, with international expansion being the immediate and long-term vision.

Media reports that present these mergers as a possible step backward and a signal of the end of SOE reforms are totally misguided.

It is simplistic to assume that consolidation, particularly in the State sector, will inevitably lead to increased bureaucracy and inefficiency. In these cases, the focus on international expansion and development should produce increased competitiveness and more market-oriented SOEs. It is the outward orientation and drive that is key here and that justifies the nature of this reform.

Mergers that lack international expansion objectives may well stumble. That is especially true of the State sector. But in these two cases, the mergers are predicated on rapid overseas growth.

Such an acquisitive and aggressive approach to global growth can only lead to the emergence of a more market-oriented corporate culture that bears close similarities to the private sector.

Going global in this fashion will support the introduction of more modern business management, across very different business and national cultures, which will help in the modernization process for SOEs.

Without such mergers, it is highly unlikely that significant global expansion would be considered feasible.

The author is a visiting professor at the University of International Business and Economics in Beijing and a senior lecturer on marketing at Southampton Solent University's School of Business. The views do not necessarily reflect those of China Daily.