Thursday, May 31, 2012

In praise of public-private partnership

Today's splashdown of the SpaceX Dragon capsule off the coast of California completes the first successful visit of a private spacecraft to the International Space Station.

This news isn't really China-related, but it illustrates an important aspect of state vs private sector investment. To over-generalize a bit, (American) conservatives would prefer that the private sector do everything, and (American) liberals would prefer that the state do everything.

Here we have illustrated the importance of public-private partnership. Without the initial leadership of the state, the US would not have reached the moon in 1969. It took far more investment than any private sector investor would have been willing to risk for what was basically a huge experiment with no monetary payoff.

Based on a few decades of learning, a private company has now managed to come up with a solution far less expensive, and at least as effective, as anything the state could have come up with to send supplies to the space station. And this was apparently just the beginning; the Dragon capsule will someday ferry people too.

Bringing this lesson closer to my area of interest, perhaps it also makes sense that governments subsidize the development of alternative methods of fueling personal transportation. Right now, the economics of electric vehicles simply don't make sense. This is why it is important that governments step in to subsidize the experimental phase.

As with the original moon shot, alternative fuels and methods of propulsion are experimental (and arguably far more important), but no private sector investor would be willing to take such a risk to build a product that doesn't yet provide a positive return on investment.

This isn't to say that governments will always be right, but that's the nature of experimentation. Thomas Edison conducted over 3,000 experiments with different materials for filaments until he finally made a lightbulb that worked. For small experiments such as Edison's, no government help was needed, but without government regulation and assistance, we would never have moved beyond the traditional gas guzzlers we were driving back in the 1970s.

Scorn of conservatives: The Chevrolet Volt

When I began to research business-government relations in China's auto industry several years ago, I started with a question of why China seemed to be achieving such great success under the heavy hand of the state. What I have since learned is that, while, yes, the state can drive outstanding growth in an agrarian society with low living standards, the ability of the government to make good decisions declines as technology becomes more complex.

China has now reached a point where its government needs to be smart enough to step back and allow the private sector to compete freely (and not just talk about it). All the government assistance in the world will not make state-owned businesses competitive. They simply lack the proper incentives.

At the same time, the American people also need to realize that the US will never grow as fast as China has grown over the past three decades (and neither will China again). We also need to realize that there is a place for government to invest in experimentation that will result in much-needed future technology. Sometimes the government will make mistakes, but fear of making mistakes will deprive us of potential successes.

Being counted among the most advanced countries on earth is not easy, as the Chinese are about to discover, but the notion that either the government OR the private sector is best suited to drive future innovation is a false choice. We need both. We need the competitive zeal of the private sector, and, sometimes, we also need the deep pockets of the government to take on problems too big for the private sector.

The Chinese system of dominant state ownership is nearing the end of its usefulness, and if the Chinese don't figure that out, they are doomed to stagnation and chaos. US arguments over "socialism" vs "free-markets" are also pointless. Somewhere, in the middle, there is an ideal system in which ownership still lies primarily with the private sector, but the government takes the big risks that can potentially save the planet for our children and grandchildren.


  1. China isn't doomed so much as the party, which has a very limited bag of tricks. As for private-public partnership, the important question to ask is the motivation of the different parties? Wall St. has come up with a very bad system which uses bank deposits to fund bankers' gambling, with the bankers pocketing the profits, while the taxpayers get stuck with the losses. The party in China has come up with a system where corrupt party members can use public assets to make money, and depositing their ill-gotten gains overseas.

    1. You make a good point: both the public and the private sides of these partnerships need to be willing participants. In both the US and China examples you give, one side or the other is unwilling, or worse, unaware, of their role in the "partnership." :)

  2. China has tended to limit PPP's to relationships between it's own SOEs and China's banks. India on the other hand has opened them up, requiring some USD500 billion in infrastructure spending in the next 3 years, Indian PPP's are part Government funded and part coming from the private sector, typcially on a 50-50 basis. The difference in India is that the Indians will allow foreign investors to come in and for them to raise money from Indian banks to do so. More on that here:

    1. Thanks for your comments, Chris. I agree that China is wasting opportunity by not embracing its private sector as a source of innovation. The SOEs will never accomplish more than to copy whatever they see their foreign competitors doing. Of course, as long as China is able to successfully stack the deck against foreign multinationals, the SOEs will have a chance to succeed in China's very big domestic market. I think it is probably time that other countries began to demand reciprocity with China. For example, if foreign automakers continue to be forced into joint ventures with Chinese automakers as the price for entering China's market, then Chinese automakers should expect the same treatment when they go abroad.

  3. SpaceX dragon Vs. China Inc.

  4. Just found out about your work through the Sinica Podcast. I really enjoyed this post discussing the role of private and public enterprise in industry and innovations. Your ideas seem to be on the same wavelength as Amory Lovins at Rocky Mountain Institute.Have you done any work on Alternative Energy in China?

    1. Thanks, David.

      It's interesting that you would mention Amory Lovins. I just finished a book he coauthored, "Natural Capitalism."

      Until now I haven't really done any work on alternative energy in China except to the extent that it overlapped with my work on the auto industry. However, my research on autos and future demand for transportation fuel in Asia has opened my eyes to the lack of sustainability of our Western way of life which China unfortunately seems determined to follow.


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