NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, March 17, 2015

Today, we hear a great deal about Chinese M&A deals, Chinese money and investment pouring into diverse markets, and even Chinese loans being used to bail out struggling economies.

Combined with press coverage of Chinese tourists and elites rushing abroad to spend lots of cash on real estate and luxury goods, the world must be wondering: Is China really that rich? The short answer is, yes – some Chinese companies and citizens have been able to use the country’s remarkable development momentum and trade surplus to accumulate tremendous financial assets.

When you look at the 2014 Global Fortune 500 list, 95 companies from China made it onto the prestigious ranking, a big jump from only nine in 2000. However, the majority of these companies are state-owned enterprises (SOEs) and three giants in monopoly industries – Sinopec, CNPC and State Grid – rank among Fortune’s top 10. So Chinese companies are getting rich, but are they actually competitive globally? This is perhaps a more important question when assessing the relative strength of Chinese companies in an increasingly globalized economy.

While the sales and financial assets of Chinese companies have continued to grow for the past decade, the spotlight has increasingly focused on their domestic and global performance in the realm of corporate social responsibility (CSR). While wealth has great influence, as reflected in the old saying “money talks”, the leading companies from China have been forced to make a fundamental change in their strategic thinking.

The days when organizations focused solely on becoming the country’s most profitable are long gone. Today, leading Chinese companies seek to become some of the world’s most reputable and pre-eminent brands and view CSR as a critical part of their transformation. During face-to-face interviews carried out by the United Nations Global Compact, some Chinese business leaders echoed this sentiment, saying that being on the Fortune 500 list is not sufficient in maintaining competitiveness in global markets and that their companies must evolve, particularly in the area of CSR, if they are to achieve their lofty goals.

“Social licence to operate” under threat

CSR is widely seen as the way to help companies operate responsibly and in an environmentally sustainable way. Positive performance in these areas in return for consumer and local community support, or a “social licence”, is viewed as an informal contract between companies and local stakeholders. For example, an area of recent interest to the Chinese public is product safety, particularly regarding food and drug safety. This topic has caused heated domestic discussion and companies have faced a backlash amid broad public scrutiny since 2003.