State Capitalists: Overview

Although state-owned enterprises (SOEs) are diminishing, they still comprise one third of China's and Russia's Gross Domestic Product (Wooldridge, 2012). According to The Economist, China, alone, has 121 SOEs over which the government has direct control (2011). When bank loans are granted, the favored SOEs are the recipients and government controls the reins by retaining a controlling stake of shares. Likewise, SOEs are given preferential interest rates and allowed access to land at prices that are below market value (The Economist, 2011). With government backing these economic powerhouses, they are surely destined to succeed.

Government intervention affects the prospects for economic and business development in a negative way by encouraging inefficiency and biased decision-making that may not be in the long-run interests of the company. In China, favoritism is rampantly on display and the government picks the winner and losers (The Economist, 2011). Furthermore, while many free trade economies - like the United States - often encourage foreign investment, China only appears to do so. SOEs are often given preferential treatment while foreign investors are subject to over-regulation (The Economist, 2011).

2. The globalization of markets and of production has lowered the barriers to business development. These barriers stood in economic, political, and social sectors of the world market. This rise in free trade and has led to an increase in the private sector, but this is miniscule compared to the control and power of State Owned Enterprises (SOEs). For example, a little over twenty-five percent of the one-hundred largest companies in the emerging world are SOEs. The state owned sector has been challenged and forced to retreat by the rise in the private sector due to globalization, but collectively they still dominate the market capitalization of China's and Russia's stock markets. Even though over the last two decades they provide two-thirds less of those countries GDP, they still have sheer might in the emerging world because this decline is a result of pruning and not liberalization.

Aside from performing well and dominating industry in their respective countries, state capitalists also control and oversee sovereign-wealth funds (SWFs), which are basically enormous pools of capital. This means that state capitalists are running and controlling the areas of finance as well. Lyons Gerard, a writer for the Journal of Management Research, states that over the next decade SWFs could reach $13.4 trillion. All SWFs are government controlled and these funds will allow them to take bigger financial stakes in equity and bond markets across emerging economies. They will also allow for more money to be allocated towards alternative investments such as hedge funds and private equity; to generate strategic links with countries that have not shared fully in globalization or which have been denied by the West. (Gerard, 2007) SWFs also allow state capitalists to take more strategic stakes in volatile areas within developed countries. So the reason for increased

...