foreign investment in russia and china: a long way to go, but reason for optimism

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367Thunderbird International Business Review, Vol. 45(3) 367–375 • May–June 2003

© 2003 Wiley Periodicals, Inc. • Published online at Wiley InterScience (www.interscience.wiley.com).

DOI: 10.1002/tie.10079

bookreviewsbookreviews

Foreign Investment inRussia and China: ALong Way to Go, butReason for Optimism

D. LeBaron, with D. Carpenter. 2002. Mao, Marx, and theMarket: Capitalist Adventures in Russia and China. NewYork: John Wiley & Sons, Inc. 303 pages; ISBN: 0-471-15315-X.B. Granville & P. Oppenheimer (Eds.). 2001. Russia’s Post-Communist Economy. Oxford, England: University Press.538 pages; ISBN 0-19-829525-1.H. Fung & K.H. Zhang (Eds.).2002. Financial Markets andForeign Direct Investment in Greater China. New York: M.E.Sharpe, Inc. 302 pages; ISBN: 0-7656-0804-9.

Eugene Clark is head of the School of Law and professor of law at the University ofCanberra. Formerly pro-vice chancellor and executive dean of the faculty of man-agement and law, on behalf of his university he has been actively teaching and work-ing in and with China and Hong Kong for the past 5 years.

These three books provide awealth of information, analysis,and insight into the degree ofreadiness of Russia and China forforeign direct investment. Thesepublications will be of specialinterest to investors who need toknow what to expect, the natureof the risks involved, and whatthey can hope for in return for

lobal economy will neverbecome reality without the fullparticipation of two of theworld’s most populous coun-tries and oldest cultures—Russiaand China. China and Russia, inturn, will not be able to join theranks of the fully developedcountries without significantforeign investment.

Reviewed by Eugene Clark

direct foreign investment inthese two important countries.

Mao, Marx, and the Market pro-vides a first-hand account ofDean LeBaron’s experiences asone of the earliest investors inRussia and China as they madetheir early attempts to converttheir planned state enterprisesinto free-market economies. Thebook serves as an importantreminder that making invest-ment decisions is as much art asscience. It is not enough tocrunch the numbers and do theeconomic analysis. One mustalso have a deep and practicalunderstanding of domestic poli-tics, culture, and peoples.

LeBaron provides a useful guide-book for investors on their eco-nomic journey in China andRussia, while the edited works byGranville and Oppenheimer onRussia, and Fung and Zhang onChina, give a detailed account ofrecent political, social, legal, andeconomic reforms in these twocountries.

RUSSIA

In Russia, LeBaron, through hisinvestment company, Batter-march Financial Management,tried unsuccessfully to establishthe Soviet Companies Fund dur-ing the early 1990s when Gor-bachev and glasnost prevailed.The author chronicles what

went wrong as Russia renegedon promises and the deal fellthrough. Despite the failures ofthis venture, the author remainsoptimistic. Among LeBaron’sconclusions are the following:

More than the other soviet bloccountries, Russian industry was tiedup with military production. Thechallenge for them is literally howto turn military factories into refrig-erator factories.

One of the problems/challengesfaced by tightly controlled soci-eties, such as Russia, is the needto relinquish some control toaddress society’s ills and givepeople the freedom to use theirtalents and energies in new andinnovative ways. Earlier signs ofthis existed, for example, whenLenin, faced with mass starvationand a devastated economy, intro-duced the New Economic Policy(NEP), which allowed peasantsto sell their produce and privatetrade flourished and privatebanks were re-opened. PresidentGorbachev, when introducinghis reforms 70 years later, citedLenin’s NEP as a precedent.

LeBaron also provides manyinsights into Russian culture.For example, when McDonald’sopened stores in Russia, con-sumers tended to join thelongest queue even thoughthere were 27 different registers.This dated back to times ofshortage when the longest linewas for the most desirable

Eugene Clark

368 Thunderbird International Business Review • May–June 2003

Despite thefailures of thisventure, theauthor remainsoptimistic.

goods. McDonald’s had to havespecial ushers to explain to cus-tomers that they would get thesame quality food from any ofthe lines. Even then the waitinglines were long, but consumerscontinued to come. Marketresearch showed that consumersfelt this was the only restaurantwhere the prices were reasonableand customers were greeted in afriendly, welcoming manner.

Investors dealing with Russiashould also be careful to do theirhomework and look behind thescenes. LeBaron notes that Rus-sians are noted for a struttingdisplay termed pokazukba. Themost famous example of this wasin 1787. Catherine the Greatwanted to see how her subjectswere getting along. Her formerlover, Prince Potemkin, showedher the peasants in new clothesand standing in front of freshlypainted houses. Yet, after shepassed, the peasants’ clotheswere ripped off and rushed byspeeding horse to the next vil-lage Catherine was about tovisit. The houses were paintedonly on the front side visible tothe Queen. Thus arose thephrase “Potemkin village.”

The author contends that fewAmericans understand howdeeply seated are the habits ofsarcasm, fatalism, and suspi-cion. This is seen in their senseof humor. “One Russiandeclared that going from capi-

Foreign Investment in Russia and China: A Long Way to Go, but Reason for Optimism

369Thunderbird International Business Review • May–June 2003

talism to a planned economywas simple, like making fishchowder. You catch some fish,chop them up, and cook themin broth. There’s your chowder.Going from central planning toa free market was even simpler,he assured me. Just turn thechowder back to broth andbring the fish back to life”(LeBaron, p. 45).

Another problem with Russia’splanned economy was thatonly quantity mattered. Aslong as the required quota wasmet, the quality did not mat-ter. Similarly, the gross pro-duction mentality meant thatmanagers resented anythingthat seemed to get in the way,including safety and environ-mental standards.

LeBaron concludes that is in theinterest of the West as much asRussia and China that theireconomies prosper. In the caseof Russia, this was so for manyreasons. Economic collapse waslikely to lead to even more auto-cratic rule, or even worse, anar-chy. This is a haunting thought,with so many nuclear weaponsand nuclear power plants inexistence inside Russia. More-over, as trade with the Sovietsgrew, then so would world tradeas a whole. Russia is rich in nat-ural resources such as oil, whichis desperately needed by othercountries—for example, Japanand the United States.

The authorcontends that

few Ameri-cans under-

stand howdeeply seatedare the habits

of sarcasm,fatalism, and

suspicion.

Complementing the qualitativeand intuitive LeBaron, Granvilleand Oppenheimer’s edited col-lection provides a detailed picture of Russia’s post-Com-munist economy since the col-lapse of Communism in and thebreakup of the Soviet Union1989–1991. The adjustmentrequired of all former commu-nist/socialist countries in Cen-tral and Eastern Europe wassignificant, as they experienced a20–40% fall in national output atthe outset of the transition. Adecade later, only one country,Poland, had a GDP significantlyabove its 1989 figures, while theCzech and Slovak Republics,Hungary, and Slovenia hadroughly recovered to their 1989levels. Russia’s recovery hasbeen among the slowest, furtherinterrupted as it was by bankfailures in 1998 and the sharpdevaluation of the rouble.

Detailed chapters of Granville andOppenheimer focus on specificsectors of the Russian economy,but the first two chapters by theeditors paint the broad economiclandscape that was left after thecollapse of Communism.

The reasons for the slow recov-ery of Russia’s economy after thecollapse of Communism aremany. First, the magnitude of thechange required in moving froma planned to a free market econ-omy was huge. The problem wascomplicated by the fact thatbefore the collapse, the Soviet

Eugene Clark


Bloc countries were all requiredto trade with each other. Afterthe collapse, these countries allsought to trade with the Westwith its higher quality of goodsand greater variety. In additionto the upheaval of demand, thebreakup of the Soviet Union alsointerrupted traditional supplylinks and marketing channels.

Second, there was considerablenaïve thinking of the West thatthe command economy that pre-existed the collapse was so badthat its demise would bringinstant improvement. Unfortu-nately, this was not the case.

Third, there was a problem withsequencing—in what order to putinto place the elements of a freemarket economy. Everything can-not be done at once. But do youstart with price liberalization, offoreign trade, privatization, com-petition, banking, reform of thelegal system, and strengthening ofthe rule of law, or what? Forexample, to facilitate trade, thenew Russian Governmentretained some central control,and organization of external tradevia government agencies or gov-ernment-approved private ones.Unfortunately, without other freemarket institutions in place, thesenew structures became only vehi-cles for corruption and rent-seek-ing, a phenomena experienced byLeBaron’s investment group.

Fourth, Granville and Oppen-heimer argue that institutions

Russia’s recov-ery has beenamong the slow-est, furtherinterrupted as itwas by bankfailures in 1998and the sharpdevaluation ofthe rouble.

such as banking, an independentjudiciary, bankruptcy laws, protec-tion of property, enforcement ofcontract rights, protection ofminority shareholders, accountingstandards, and so on, take consid-erable time to develop. As theauthors state: “All in all, law in theeconomic domain is viewed inRussia as an obstacle to be manip-ulated or sidestepped, and respect-ed only if it happens to serve one’simmediate interest” (Granville &Oppenheimer, p. 10).

A fourth problem is the shortageof capital required to undertakesuch a monumental economic,political, and social change.

A fifth problem is geography.Much of Russia’s manufacturingbase is widely dispersed and poor-ly located. The manufacturingcenters are mostly in the Westwith the population mostly in theeastern part of Russia. The dis-tances are large, and the transportand communication infrastruc-ture inadequate to the needs ofthe economy.

Other contributing factors tothe slow recovery have beensocial and political. In otherand smaller Soviet Bloc coun-tries the elite have bandedtogether to support economicreform. In Russia, the elitehave, until recently, been, atbest, ambivalent about eco-nomic reform. Many harbornostalgic sentiments for the



previous regime where theyenjoyed rank and privilege, andorder prevailed. Still othermembers of the elite tookadvantage of the dismantling ofthe State to enrich themselves.

Last, Granville and Oppen-heimer’s book notes the culturalvalues of nihilism and amoralityprevalent in Russian society. Tra-ditional moral values remainedconfined to family and a smallcircle of close friends.

Unfortunately, the investmentprojects picked by LeBaron’scompany did not eventuate.Although it is true that earlyinvestors can often form animportant relationship that willgive them a long-term tradingedge, this venture was prema-ture, and failed amidst the crisisoccurring in the years betweenGorbachev and Putin. Gor-bachev had outlined conditionsfor the regeneration of Russia.These included Western expert-ise, stabilization of the rouble,reduced deficit, budget cuts, anda “social safety net” for low-income groups and de-control ofretail prices. He also promisedthat loans would be repaid, theenvironment cleaned, and cropyields improved, and an emer-gent Russia would result with afirst-rate transportation andcommunications system. By early1992, Russia and Gorbachevwere once again undergoing arevolution. There were at least

Other contribut-ing factors to the

slow recoveryhave been social

and political.

three governments in con-tention. Russians were unwillingto accept their own currency anddemanded to be paid in foreigncash rather than the agreed uponRussian roubles. The new gov-ernment effectively denouncedthe existence of the original con-tract and violated many of its keyterms, thus leading LeBaron andhis company to withdraw.

Notwithstanding the difficulty ofthe tasks, it seems to this readerthat most of the authors remaincautiously optimistic about Rus-sia’s future, and this optimismseems warranted, for example, ifwe look at Russia’s oil produc-tion. After years of turbulentchange, Russian oil companiesare now rivalling Saudi Arabia forenergy dominance on the worldstage. They seem to have tran-scended their robber-baron days.Backed by improved rule of law,they are seeking to protect theirnew wealth and meet the per-formance criteria dictated by thefinancial markets, especiallybecause their firms’ shares arenow publicly offered. Thanks tothem, Moscow is poised toassume a far more significantposition in the world petroleumsector than ever before (Morse &Richard, 2002, p. 2).

CHINA

Turning from Russia to China, abroad picture is again painted byLeBaron, who depicts three

Eugene Clark


images of China. “The first is ofinventive China. The Chinese cre-ated paper and paper money, andwere the first to cast iron and thenmake steel. The Chinese engi-neered the crossbow in the 4th-century BC and invented theumbrella, the seismograph, spin-ning reel, fishing reel, playingcards, and whisky. Their firstdesign for the steam engine datesback to 600 AD. They had kites2,000 years before any Europeanflew one. They were using print-ing presses in the 11th centuryand built the first suspensionbridge. There are also over 30 mil-lion Chinese live outside of China,and have played major roles in thesuccess of other Asian economies.For example, the 1.5 million Chi-nese citizens of the United Statesboast the highest median incomeof any ethnic group in the UnitedStates. The second image is that ofMao’s China and his belief in thepeasants and their ability toaccomplish anything they wereinspired to. At the same time,Mao’s excessive ideology andparanoia also brought the countryto the edge. The third image isthat of a new and evolving societyas it struggles to bring about thedismantling of its inefficient stateowned enterprises as well as signif-icant banking (Lou, 2001), agri-cultural, legal (e.g., Nelson,2002), and other reforms.

Fung and Zhang’s edited work,Financial Markets and ForeignDirect Investment in GreaterChina, is an excellent value. The

Notwithstandingthe difficulty ofthe tasks, itseems to thisreader that mostof the authorsremain cautious-ly optimisticabout Russia’sfuture. . .

work charts the ongoing reformof China’s legal, economic, social,and political systems that have ledit to be “the most dynamic FDI-host country.” Indeed, Chinaranks second only to the UnitedStates as a source of FDI.

The work provides an excellentpolicy guide to China’s finan-cial market reforms shapingmultinational firms’ activities; italso provides investment guid-ance for foreign investors. Thebook contains 16 chaptersdivided into four parts: (1)financial markets, institutions,regulation, and policy; (2)recent developments in stockmarkets; (3) foreign directinvestment; and (4) businessenvironment and policy issues.

A major focus of the book is onthe impact of China’s entry intothe WTO. As part of entering theWTO, China has promised to:

• Lower average tariffs from15% to 9%

• Eliminate all quotas and dis-crimination against foreignfirms by 2005

• Allow duty-free import ofcomputers and telecommu-nications equipment

• Relent on requiring technol-ogy transfer and domesticcontent

• Allow foreign companies toinvest in telecommunications

• Permit foreign banks toestablish themselves any-where in China



• Allow accounting, legal,engineering consulting, andmedical services to havemajority non-Chinese own-ership (Hoekman, 2001;Smith & Guobin, 2002).

The authors give special attentionto the implications of these devel-opments for Taiwan, the UnitedStates, and Hong Kong. Forexample, in regard to HongKong, the authors conclude:

China’s accession to the WTO willsee increased competition andmany multinationals will dealdirectly with the mainland. Howev-er, Hong Kong remains a uniqueplace—politically, economically,geographically, and constitutional-ly. It has free and open markets, therule of law, an independent judici-ary, a level playing field for busi-ness, and a low and simple tax sys-tem. It also has freedom of speechand a free and unfettered flow ofnews and information, which isvital to today’s global business envi-ronment . . . Hong Kong compa-nies will continue to play an impor-tant intermediary function insourcing and marketing mainlandproducts. And given its long expe-rience in China business, HongKong companies will be the idealjoint-venture partners for foreigninvestors, especially small andmedium sized enterprises wishingto enter the China market. (Fung& Zhang, pp. 292–293)

For Taiwan, China representsboth threat and opportunity.The obvious threat is a reunifica-tion of Taiwan against its wishesand contrary to the democraticspirit that has been so strong forso many decades. The opportu-

A major focus ofthe book is onthe impact ofChina’s entryinto the WTO.

nity lies in the complementarynature of its two economies.

The mainland possesses theland, the workforce, andincreasingly a major market,while Taiwan provides theentrepreneurial and businessskills enhanced by very substan-tial flows (over $40 billion todate) (Fung & Zhang, p. 259).

A recent example of Taiwan’srecognition of the importance ofmainland China is the agreementby the Taiwanese Government toallow the island’s giant semicon-ductor manufacturers to establishchip plants in mainland China(Dwyer, 2002). The commonlanguage and shared culturebetween the two countries alsogives Taiwan a special advantage.

For the United States, theauthors conclude that there hasbeen much hype regarding theopportunities for trade. It seemscertain that China will be a majoreconomic force (Brahm, 2001).However, apart from low-pricedclothing, toys, and electronicparts, trade with China is not amajor part of the U.S. economy.Yet, from China’s perspective,one-third of China’s exports aredestined for the United States.

The real challenge for the UnitedStates is whether China is tobecome partner or political andmilitary rival. “The limitedamount of individual liberty inChina galls many Americans.

Eugene Clark


Especially upsetting is the perse-cution of Christian groups andthe jailing of political dissidents.It is difficult for the United Statesto accept the idea of a ‘partner-ship’ with a nation that engages insuch offensive practices” (p. 260).

In reality, the biggest gains fromChina’s entry into the WTO arelikely to be made by North Asianmultinationals providing prod-ucts/services that China needs:telecommunications, petrochem-icals, parts manufacturers, andfinancial services (Kirkman &Sachs, 2002). At the same time,China’s WTO admission is likelyto threaten other Asian competi-tors. China’s share of world tradeis predicted to go from 2% to6.8% over the 10-year periodfrom 1995, while imports shouldrise by 1.3% to 6.6%. AlreadyChina is attracting about 80% ofthe foreign investment into Asia.In other words, the investmentgrowth into China will, to someextent, come at the expense ofinvestment that may have other-wise gone to Thailand, Malaysia,etc.

For China itself, a major chal-lenge is to relinquish enough con-trol such that economic dreamswill become reality. A good exam-ple of its willingness to do so isBeijing’s promotion of the use ofe-business to modernize businessand government practices,notwithstanding its concernsabout Internet content (Callick,2002). There is a fear among

For the UnitedStates, theauthors concludethat there hasbeen much hyperegarding theopportunities fortrade.

some that the pace of change willbe too fast, and that a nervousGovernment will overreact, clampdown, and initiate major rebellionthat will threaten the stability ofChina and the entire region.

CONCLUSION

LeBaron explains his choice ofinvestment in Russia and Chinain these terms:

The United States, Japan and thecountries of Western Europe,who have been trading primarilyamong themselves for the pastdecade or more, were laying azero-sum game in which onecountry’s gain has been anothercountry’s loss. It was much thesame with the European tradingrivals in the 16th century, beforetrade routes to the New Worldand Asia opened. The new accessto markets, natural resources, andproduction that bringing Chinaand Russia into the modern glob-al economy would have a similareffect. Yoking their under usedhuman and natural resources tothe West’s dynamic productionand trading systems could poten-tially enable those countries toproduce the world’s next eco-nomic miracle . . . [T]hey wouldnot merely join the community offree trading nations: their size,resources, and potential wouldenable them to transform theworld. (LeBaron, p. 2)

But if this is to happen we mustrealize that Russia and China willcontinue to change in their ownway and at their own pace, evolv-ing economic, political, and soci-etal forms. These forms in many



cases will vary from the ratherfixed view of modern democraticeconomies we have in the West.We have to be prepared for “sur-prises, ironies, paradoxes andcontradictions” (Kahal, 2001;LeBaron, p. 2).

Investing in countries undergo-ing structural change requiresdirect personal associations anda major commitment of time,energy, and resources. Thesethree books will go along way inhelping investors, policy ana-lysts, and others prepare for thechallenges ahead.

REFERENCES

Brahm, L. (Ed.). (2001). China’s century.New York: John Wiley.Callick, R. (2002). China’s ebusiness revolu-tion. The Australian Financial Review, Tues-day, 2 April, p. 40.Dwyer, M. (2002). Taipei tries to save itsgolden goose. The Australian FinancialReview, Tuesday, 2 April, p. 13.Hoekman, B. (2001). The political econo-my of the world trading system: The WTOand beyond. Oxford: Oxford UniversityPress.Kahal, S. (2001). Business in the Asia Pacific.Oxford: Oxford University Press.Kirkman, G., & Sachs, J. (Ed.). (2002).Global information technology readinessreport 2001–02. Oxford: Oxford UniversityPress.Lou, J. (2001). China’s troubled bank loans:Workout and prevention. The Hague: Kluw-er Law International.Morse, E.L., & Richard, J. (2002). Roll outthe barrels. The Australian Financial Review,VIEW: Your Guide to the World of Issues,Ideas & Opinion, 22 February, pp. 2–3.Nelson, S.M. (2002). Beijing’s experiment inforeign investment. Asia Pacific Legal Devel-opment Bulletin, 15(3), 15–16.Smith, D., & Guobin, Z. (Ed.). (2002).China and the WTO: Going west. HongKong: Sweet & Maxwell Asia.

foreign investment in russia and china: a long way to go, but reason for optimism

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