Strategic Capitalism: The New Economic Strategy for Winning the Capitalist Cold War: The New Economic Strategy for Winning the Capitalist Cold War

By Richard Anthony D'Aveni

Praise for Strategic Capitalism

“Richard D’Aveni understands that managing competition between the United States and China—and their quite different forms of capitalism—will occupy leaders on both sides of the Pacific for decades to come and will shape the first half of the 21st century more than any other factor. This book is a welcome addition to a vitally important debate.”
—Ian Bremmer, president of Eurasia Group and author of Every Nation for Itself

“Understanding the pluses and minuses of modern ‘capitalism,’ in more than a sloganeering way, is the great challenge for corporations and for government from North America to Europe to East Asia. Strategic Capitalism is a valuable contribution to clear thinking about this imperative.”
—James Fallows, The Atlantic, and author of China Airborne

“Professor D’Aveni is a business provocateur extraordinaire. He tells you the straight scoop and will never cave to conventional wisdom unless there is proof that it is right. Strategic Capitalism is another example of D’Aveni’s ability to synthesize a complex topic down to its key elements.”
—Bill Achtmeyer, Founder, Chairman, and Managing Partner of The Parthenon Group

The Capitalist Cold War Has Begun

The United States and its economic allies are under attack by a force unlike any they have ever faced. China and other emerging nations are competing for markets around the world using their own versions of capitalism—and, thus far, they are winning handily.

In Strategic Capitalism, one of the world’s leading authorities on global business strategy, Richard D’Aveni, describes how the “economic cold war” began, how it is being played out now, and how the West can change the course of events in its favor.

Brilliantly conceived—and sure to ignite passions on both sides of the political aisle—Strategic Capitalism calls for an end to the economic idealism that dominates the national dialog. It also calls for a cold, hard focus on reality, which is this: government-managed capitalist systems consistently outmaneuver and outperform the traditional laissez-faire capitalism of the West.

With refreshing levels of thoroughness, knowledge, and detachment, D’Aveni describes the competitive landscape today. These are the facts:

• The world’s best competitors—with China in the lead—have adopted elements of managed capitalism, in which government and businesses work together toward a single aim.
• China’s objective is clear—to displace the United States as the world’s economic leader by becoming the global rule maker.
• If the West does not act soon, it stands to lose everything it holds most dear: financial prosperity, economic freedom, geopolitical power, national security, and even democratic values.

This is disruptive innovation on a global scale. But instead of companies using breakthrough products and brands to gain market share, nations are devising “game-changing” economic systems to seize influence over—and beyond—the global economy.

Bleak as the situation may be, D’Aveni contends that the West can reverse the trends currently tilting the global balance of power.

In order to meet the challenges of the future, America must revisit long-held assumptions about economics and economies, seriously consider radical alternative policies, and embrace the concept of Strategic Capitalism.

• Language: English
• Publisher: McGraw-Hill Education
• Release date: Aug 24, 2012
• ISBN: 9780071781176

Book preview

In this new book, Richard D’Aveni identifies the rise of strategic capitalism as the fundamental threat to America’s future and national security and provides a four-pronged strategy for preserving the American Dream.

—Clyde Prestowitz

Author of The Betrayal of American Prosperity and President of the Economic Strategy Institute

The economic warfare China is engaging in through communist capitalism is extraordinarily seductive, and poses great risks to U.S. firms and the U.S. economy. But democratic capitalism works to its fullest potential when nimble and motivated capital markets and investors build upon consistent strategic federal investments in basic research, in a tax environment with internationally competitive corporate tax rates.

—Gregory T. Lucier

Chairman and Chief Executive Officer, Life Technologies, Inc.

The rise of China as a global economic power is one of the single greatest events in our lifetime. . . . We can’t [adopt] a defensive position. We must hold our place as the greatest economic power in the world; we must set the example and trust in the power of capitalism.

—Michael T. Dan

Recently Retired Chairman, President, and CEO of The Brink’s Company

As competition around the globe continues to intensify, the United States can no longer take the approach that countries don’t compete and must create an innovation policy agenda that will advance their position on the global playing field.

—Bill Nuti

Chairman and Chief Executive Officer, NCR Corporation

It’s not too late for America to be the architect of [a] new economic order and create a more strategic form of capitalism. . . . The first step for American corporations in addressing China’s emerging economic strength is to understand the global playing fields and their new rules. America’s CEOs must learn firsthand what is driving this change and its long-term implications.

—Dinesh C. Paliwal

Chairman, President, and Chief Executive Officer Harman International Industries, Inc.

If we hope to mirror China’s success, America needs a wider application of public-private linkages that advance technology development . . .

—Michael Morris

Chairman and Former Chief Executive Officer

American Electric Power

While our nation has demonstrated a unique capacity to unite in times of crisis, we have also shown a tendency to undermine this attribute when under the strain of an impending crisis—highlighting our differences, rather than celebrating the potential for them to disappear. In these moments . . . we must be strong as a nation to resist behaviors which give fanaticism a voice . . . forcefully reject partisan behavior which demands blind adherence to orthodoxy, and . . . recognize that the politics of blame discourages bold risk taking and innovation which will be critical to generating economic growth and creating jobs.

—George S. Barrett

Chairman and Chief Executive Officer, Cardinal Health, Inc.

Only through the design and execution of a successful national growth strategy will we find solutions to our challenges. . . . If the President and Congress do not show the courage and the political will to do what must be done, our continuing trajectory toward second-class status in the world is assured.

—Peter Nicholas

Cofounder and Chairman, Boston Scientific Corporation

As free trade agreements multiply across the globe, a significant number of these arrangements outside the United States are falling short of WTO standards, discriminating against U.S. interests, and diverting trade. To prevent U.S. exports from being compromised by the growing spaghetti bowl of illegal trade preferences, the United States will need to insist that these illegitimate fair trade agreements be reformed.

—Fernando Aguirre

Chairman and Chief Executive Officer Chiquita Brands International

The solution to the emerging global economic threats is clear. Great leadership, the courage to lead and think differently, an audacious roadmap, and a partnership of government, people, and business can reverse the U.S. decline and position the country once again for growth and greatness.

—Salvatore D. Fazzolari

Former Chairman, President, and Chief Executive Officer, Harsco Corporation

We have many strengths in the U.S., but we also need to recognize that other countries are evolving to become more competitive. This new global competitiveness is a good phenomenon for us and the world.

—David M. Cote

Chairman and Chief Executive Officer, Honeywell Corporation

China is simply too large to ignore. . . . Clearly, U.S. multinational corporations have proven to be nimble and adaptable in determining what they need to do to win in China and other emerging economies around the world. The U.S. government must also do its part to help American corporations get access to and fair treatment in all of the emerging markets.

—Steve Angel

Chairman, President, and Chief Executive Officer, Praxair, Inc.

America needs a better economy. To achieve it, the United States must increase the quality of its labor pool, create greater efficiencies in the manufacturing environment—and direct its strengthened capabilities to a cause that the country can rally behind.

—Patrick M. Prevost

President and Chief Executive Officer, Cabot Corporation

America’s position as the leader in innovation isn’t just threatened; we’ve relinquished it. . . . I implore policy makers to make [advanced K–12 education] programs a top priority, [especially in science, technology, engineering, and math]. They are critical to keeping America not just as the leader in analytics, but the global leader in technology and innovation.

—Jim Goodnight

Chief Executive Officer, SAS Institute

For a free e-book featuring insights from CEOs about a strategy for America, please visit www.radstrat.com.

Copyright © 2012 by Richard A. D’Aveni. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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To my mother, Marion E. D’Aveni:

Thank you for giving me, by deed or genetics, the love, intelligence, logic, drive, mental discipline, organization, inquisitiveness, and counterintuitive insight that so greatly contributed to this book, and that have made me what I am.

Contents

Foreword by Daniel R. DiMicco

Preface

Introduction: A Turning Point in History

Part 1. Analyzing Capitalist Systems and How They Act: The Four Cs of Capitalism

1 Competing Capitalisms: Hypercompetition and the Disruption of Superpowers

2 Combining Capitalisms: Comparative Advantage and Capitalist Systems

3 Controlling Capitalist Systems: At Home and Abroad

4 Capturing Other Capitalist Nations: The Struggle for Strategic Supremacy and Economic Spheres of Influence

Part 2. Crafting Capitalist Strategy: The Four Rs of Strategic Capitalism

5 Rebalancing Ambitions, Resources, and Threats: Constant Reallocation to Prevent Overstretch and Financial Paralysis or Collapse

6 Reinventing Capitalism: Constant Rejuvenation and Revolution of Capitalist Systems

7 Reenergizing the Capitalist System: Constant Proactive Strategies to Seize the Initiative

8 Restructuring the World Economic Order: Constant Struggle for Economic Leadership or Influence

Conclusion

Endnotes

Acknowledgments

Index

Foreword

We Are Already in a Trade War with China and We Are Losing, Badly

To remain economically competitive with other countries, particularly China, we need to deal with reality.

First, our leaders must realize that we are already in a trade war with China and we are losing, badly. Failing to address China’s unfair and protectionist trade practices has cost us millions of manufacturing jobs and devastated our middle class. We need to vigorously enforce our trade laws. This does not require a new program. We simply need to enforce the rules of existing trade agreements.

Critics will argue that this is protectionist, but there is nothing protectionist about holding other countries to their agreements. President Reagan understood this when he said, To make the international trading system work, all must abide by the rules. And if nations do not abide by the rules, we need to act with greater resolve.

Second, America needs a national industrial strategy. Our economic competitors have one. We must correct the mistake we made in believing that a service-based economy could replace a manufacturing-based one as the country’s wealth creation engine. Manufacturing used to account for over 30 percent of our GDP [gross domestic product]; today it has dropped to 9.9 percent. We need a strategy to get manufacturing back to 20 percent of GDP.

Finally, we must invest in our nation’s infrastructure. Investments the United States made during and after World War II fueled our economic growth in the second half of the twentieth century. Much of that infrastructure is reaching the end of its useful life and new investments are required.

A creative way to fund these investments would be to allow companies to repatriate overseas earnings, estimated at over $1 trillion, tax-free by putting that money into infrastructure bonds. Each $1 billion spent on infrastructure creates 35,000 jobs. Then, over time, multinationals would be able to draw that money back.

Remaining economically competitive requires focusing on three basic fundamentals: fighting unfair trade practices, boosting manufacturing, and improving infrastructure. These are among the many initiatives advocated by Richard D’Aveni in this thought-provoking—and controversial—book. Even if you don’t agree with Professor D’Aveni’s wide-ranging agenda for remaking American capitalism, you would do well to examine his no-holds-barred ideas. He grasps the new global reality like few other thinkers, and his passion for his subject is sure to stimulate needed debate over a fresh approach to assuring another century of prosperity for America.

Daniel R. DiMicco

Chairman and Chief Executive Officer

Nucor Corporation

As Chairman and CEO of North Carolina-based Nucor Corporation, Dan DiMicco runs a $15.8 billion Fortune 200 steel company. Mr. DiMicco is a member of the board of directors of Duke Energy, the American Iron & Steel Institute, and the World Steel Association. Mr. DiMicco also served for several years on the United States Manufacturing Council. In 2010, the Harvard Business Review named Mr. DiMicco as one of its 100 Best Performing CEOs in the World.

Nucor is North America’s largest steel manufacturer and largest recycler; it recycles one ton of steel every two seconds. It operates over 200 facilities primarily in the United States and Canada. Through the David J. Joseph Company, Nucor is also one of the leading scrap companies in the United States. Nucor is best known for its breakthrough technological firsts in mini-mill steel production, electric arc furnaces, thin slab casting for flat rolled steel, and thin strip casting for coiled steel.

Preface

In the 1990s, my research revealed that companies were competing with one another in a radically different way. Rather than competing to create enduring advantages or to form oligopolies that would reduce rivalry and increase profits, companies were using sequences of bold, aggressive, surprisingly temporary advantages to achieve dominance over their rivals. They were not suing for peaceful coexistence among oligopolists. They were competing to create disruptive advantages that constantly undermined, neutralized, or made obsolete the key advantages of industry leaders. They had harsh new strategic tools that broke earlier rules of the game.

Once heresy, in my view—that competitive advantage is much less sustainable given fierce and escalating competition—is now commonly held. Indeed, what I labeled hypercompetition has now moved up a level—from competition among corporations to competition among nations.

With the rise of the new economic powerhouses, especially China, we are witnessing a new form of capitalism in which states compete against other states—or, more accurately, in which the various states’ forms of capitalism compete with one another for economic success.

Joseph Schumpeter argued that the forces of creative destruction are integral to the efficient working of a capitalist system. Schumpeter’s ideas are widely accepted. I am arguing that those same forces work upon the system itself, so that a better-adapted form of capitalism will eventually destroy or displace the incumbent system. This dynamic process is at work around the world.

No capitalist system that succeeds in the global economy lasts for long in the same form. China has shunted aside the notion of continuity over millennia, as dynasties disintegrated and new ones eventually replaced them. To gain an advantage, competitors have to disrupt the disruptor. And creating disruptive competitive advantage is what the national agenda must be about. What are we the best in the world at? The competitive advantages of nations determine how, and how much, wealth is distributed.

The United States in particular has still not adapted to this new world, insisting that corporations should compete with one another without excessive help from their governments. Meanwhile, China in particular has coordinated the efforts of its business entities for state purposes and introduced a slew of new competitive weapons.

The United States is facing a China that has marched onto the global playing field aiming to win by changing the rules of competition in a way that breaks the United States’ most basic rules of capitalism. What we are witnessing are the first moves in what I call the capitalist cold war. This book is my response to that threat. In it, I set out my analysis and conclusions and offer some (deliberately radical and provocative) solutions. I do this not out of some misguided notion that I have all the answers, but out of a deeply held conviction that the United States is in danger of sleepwalking off the edge of a cliff.

My argument is simple: that the traditional view of capitalism as practiced in America and most of the West is outdated and inadequate to explain the situation we find ourselves in. It is only by challenging long-held assumptions and considering radical alternative policies that we can hope to understand and respond to the new world order.

I have spent the last five years collecting facts, doing strategic analyses, and coming up with implications and strategies that are being used in this competition among different types of capitalism. This book is the result.

It comes to four important conclusions. First, the countries that compete most effectively have adopted elements of managed capitalism. This approach, my research makes plain, need not be the sole preserve of emerging markets. Second, the country that sets the standard of success at managed capitalism is China. Third, China is playing to win—to become the world hegemon. That is, it aims to displace the United States as the world’s economic leader by becoming the global rule maker and privilege taker. My fourth conclusion—perhaps the most obvious, but also the most worrying—is that the United States and its allies in the free world have a lot to lose in terms of prosperity, economic freedom, geopolitical power, national security, and even democratic values if China becomes the world leader.

Strategy, Not Ideology

I approach the subject of the different types of capitalism as a strategist. I don’t argue for one pet ideological approach or another, as if I were in a theoretical or imaginary world. I also do not argue that one solution—one type of capitalism—works better than others in all places or in all circumstances. I argue for what works in an imperfect world, a world in which many countries are vying for the biggest share of the global economic pie.

Because of my pragmatic approach, I know this book will be controversial. I challenge the widespread belief in the importance and efficacy of free markets, open trade, stockholder-oriented corporate governance, social programs, wealth transfers, and the stimulation of artificial demand through massive government borrowing and easy credit. I believe that national leaders, like many professors in the classroom, have limited the debate needed on capitalism by sticking to politically correct discussions. They have tied their hands and closed their minds.

Whether or not leaders say so in public, the reality is that China and the United States are fighting with different forms of capitalism, and they are vying to shape a new world economic order. This means that national leaders who are concerned about the nation’s competitive strength should think about how to modify their versions of capitalism to provide companies with the best backing possible. National leaders cannot force their economies to fit their ideological ideas of what’s supposedly best. Instead, they have to take the time to understand the transformation of capitalism that is underway and then devise pragmatic ways to manage the transformation in their favor.

A lot is at stake. The leaders of the United States have to win if they are to preserve our fragile democracy. That means not just raising the return on capital, but creating a strategy to raise the fortunes of the population as a whole. From the perspective of the nation, it makes no sense to have a capitalist system that maximizes stockholder wealth by transferring capital to foreign markets where the growth and costs are better, while leaving the vast majority of the nation’s people without jobs and unable to pay their mortgages. Stockholder-oriented corporate governance has become a formula for the milking of a mature nation (the cash cow) to invest in emerging nations (the stars). If there are no limits on the milking, the cow ultimately is milked dry and dies.

The evidence shows that the nation with the strongest capitalist model will lead the world. China today has seized the initiative from the United States. But this is not an issue for America alone. National leaders of countries throughout the world face the challenge of using a smart capitalist strategy to take back control over the next version of capitalism employed in the world economy. Where will the new rules of capitalism come from? Will they come from the United States, or from China? Will a mix occur? Where will other nations fit in?

Strategic Capitalism outlines a specific plan for how the United States can restore itself to economic greatness. If acted upon, the plan would not trigger global recession, as some might fear or suggest. Instead, it would accelerate the process of change so that China focuses more on production for its internal markets than on exporting, and we in the West reallocate and better focus our own efforts, resources, and budgets. The book also provides a logical framework, strategy analysis tools, and strategy proposals for use by other countries seeking to establish their capitalist strategies. I believe that the issue of making our brand of capitalism more strategic should dominate the debate in future U.S. presidential elections and will dominate the debate in the halls of Congress and the White House for the next two decades. The struggle for world economic leadership will continue, and nations must prepare for the competition—and clash—of capitalisms that is already in progress. In many ways, the survival of the democratic world depends on it.

Richard D’Aveni

Bakala Professor of Strategy

Tuck School of Business at Dartmouth College

Hanover, New Hampshire, USA

August 2012

Introduction

A Turning Point in History

Today, we face a turning point in American history—a time requiring reinvention. Even as the job market picks up temporarily, we are warned of a new normal, an economy in which good jobs are disappearing overseas and average wages are depressed by foreign competition. We are warned about tepid growth, unstable careers, fewer opportunities, and dependence on foreign imports for survival, and even the loss of America’s position as leader of the global economy is foretold.

Underlying the new normal are two central players: the United States and China. Today we face a crisis in our ability to compete, particularly with China. China has emerged from a meager capitalist adolescence to vibrant adulthood. It has mastered manufacturing so quickly that even companies as American as Apple now make almost everything they sell in Chinese plants. China has acted so aggressively to build its manufacturing enterprises that it has taken more than two million American jobs in the last decade. It has grown at such speed that, if its current growth rates continue, its economy will surpass that of the United States before 2030. Meanwhile, the United States has spent a decade sitting idle, distracted by wars and terrorism.

There are alternative explanations for America’s current ills. Some commentators point to an aging population, for example, or technological unemployment—the tendency for information and communications technology and other technologies to replace human labor. But my focus is on the impact of China’s system of capitalism on U.S. competitiveness. My research indicates that this is a major contributing factor.

China is what one might call a hypercompetitor. It has a new system of capitalism that is disrupting America’s system—some would even say undermining it. In industry after industry, it has many countries on the run, often with hard-boiled business practices that most developed countries would not accept if China were not so large.

But China is also what a sporting person might call a worthy competitor. It challenges all comers to raise their game. As for the United States, I believe that China is doing the American people a favor. It is delivering a timely economic kick in the pants. The big controversy rests on whether the United States will be able to get up after it is kicked in ways that are much more severe than ever before.

Strategic Capitalism—The Way Back to Greatness

So, what are we to do? Now is not the time to rely on ideological or theory-based ideas that encapsulate what used to work. Most ideologies and theories are not appropriate anymore. They freeze a nation’s thinking, paralyze its ability to adjust, and doom the nation to continued decline. Only a fool continues doing the same thing and expects different results. Now is the time to devise new mechanisms and systemic innovations.

That is the subject of this book: how to fix America’s capitalist system so that it can win in a much more competitive world—how to restore the nation’s finances, reinvent the nation’s economic system, reseize the initiative from rivals, and remake the global economic world order for economic gain. I call this strategic capitalism.

The pages ahead amount to a guidebook to strategic capitalism. They urge leaders to look at the future strategically, and to craft a strategy for winning over the long term. Unlike many books, this one does not promote an ideology, whether from the left, right, or center. It promotes pragmatic thinking that comes from anyone with good ideas. It champions the need for new conversations about our competitors. It urges leaders to step over the party lines and do what is necessary and what works.

The need for a new capitalist strategy would not be so great if the United States and other developed countries didn’t face such a crisis. But a grave economic threat has enveloped us, and the nature of it is hard to dismiss: at this moment in time, China’s version of capitalism is allowing it to grow much faster than the United States, albeit from a much lower base. Of course, it is an oversimplification to say that China does capitalism better than the United States. The wealth of the United States and other Western nations was built on a highly effective form of capitalism. It is the desire to replicate that sort of wealth creation that is driving China’s current dynamism. But it is also clear that the form of capitalism that China is pursuing is very different from the one that brought the United States its success in the twentieth century.

The writing is on the wall. While the United States once ruled global trade, as of 2011, China exported to the United States $295 billion more in goods than the United States exported to China. Meanwhile, China has become the top trading partner with seven of the G-20 countries.¹ Modern China plays capitalist hardball better than the United States does. Its momentum is palpable.

At the start of this century, Western economists argued that China’s economic miracle would not last. China would adopt Western-style democracy and free markets, or it would not be able to handle the stresses and strains of the country’s growing pains. But the economists were wrong. What’s more, China has not just become a manufacturing hub for low-tech goods that poor peasants can make. It has leaped to the top rungs of manufacturing sophistication. In many cases, China makes things that the United States no longer can—laptops and lithium-ion batteries, for instance. The U.S. Department of Defense estimates that China’s technology lags that of the United States by only five years.

The era of hypercompetition has highlighted another fact of life among competing nations: few national leaders are playing by win-win rules. They are playing by win-lose rules. When Chinese negotiators get together with their U.S. counterparts, they invariably issue press releases that gush about mutual benefit. Both countries reap big returns from economic interchange, the thinking goes. But the negotiators always try to get more for their nation. The benefit is mutual for some industries, but it is unequal for nations as a whole. China’s goliath trade surpluses are testimony to that fact. The truth is, the United States has dawdled in showing that it is up to the task of competing with China. The trade deficit with China in 2011 was the biggest ever, up 8 percent from the year before.² Alarm bells have sounded in Washington, but no cogent strategy has emerged.

Deadlock—Disaster or Decision?

Several things have impeded action. One is that the United States is short of cash. Indeed, the United States and Europe are effectively bankrupt. The twin Ds, deficits and debt, have put tight financial handcuffs on the United States. With no money, there’s no action. And the situation is worsening. The Congressional Budget Office estimates that by 2020, U.S. debt payments will consume so much of the government budget that the only things the country will be able to pay for are defense and interest on borrowing. No money will remain for healthcare, welfare, education, safety, environmental protection, or entitlement programs, assuming a balanced budget. Worse than the lack of money is that the debate over taxes completely distracts politicians from looking past the next budget battle to the global economic