Essay on Private Enterprises in Regulated Markets and Free Markets

Introduction

The significant role of state and private firms in explaining the recent rapid economic growth in the Asia-Pacific region continues to generate considerable debates. The role played by private firms in this region has been fundamental, and the markets have experienced significant advancement since the early 1980s. For example, China shifted from a framework in which the government developed all prices to a system in which markets decide the merits of virtually all products and services (Tian, 2011, p.82). Private companies have become the dominant source of production, employment, and export growth in this increasingly market-driven setting. Despite all this growth, the markets in this region are not entirely free, as some are regulated. Most national government policies favor state-held firms at the expense of private enterprises. But it is critical to note that state regulation can be a double-edged sword. To understand why economic growth is prevalent in the Asia-Pacific region, this paper will study the role of private enterprises in free and regulated markets. It also looks at the role of government regulation.

Private and State Enterprise in Asia-Pacific

The main distinction between private and state-owned enterprises in the Asia-Pacific region is unclear, so specifying each of these categories would be helpful. State enterprises began to expand from more traditional state-owned firms to modern state owned firms after implementing numerous market policies (Bruton et al., 2015, 103). In China, this reform came after with the implementation of the Company Law of 1993, which allowed the creation of different types of shareholding companies and limited liability companies (Bruton et al., 2015, p.105). As a result, an increasing number of conventional state-owned corporations were transformed into limited liability or limited liability shareholding corporations. The extent of state ownership and involvement in these companies reduced. More specifically, this idea created a notion of state-controlled corporations, shareholding companies in which the government is the single, most dominant owner. Previously state-owned firms started operating as private enterprises but with a guiding role from the government as the government-owned majority of the shares (Bruton et al., 2015, p.111). The main difference between these firms and private firms is that private enterprises are owned and managed by individuals; these individuals freely decide on their management systems. The government mostly has a limited role to play in such firms.

The Role of Private Enterprises

The private sector plays a crucial role in a country’s economic growth. Private enterprises are critical stakeholders in urban and economic development and, more importantly, contribute significantly to national income. In addition to contributing to the national income, they create and provide employment. In Indonesia, over 90 percent of the country’s employment comes from the private sector (Liang, Lu, and Wang, 2012, p.137). The more dynamic private sector in Indonesia has helped in developing health and improving educational outcomes. In Singapore, the private sector funds more than 60 percent of all investment (Liang, Lu, and Wang, 2012, p.138). Private corporations in all Asia-Pacific countries pay corporate taxes, employee payroll tax, property tax, and so on, which accounts for more than 80 percent of all nations.

But a critical role played by the private sector in the Asia-Pacific has been the reduction of poverty. When economies grow, people’s lives are alleviated; most move out of poverty. Between 1981 and 2010, over 700 million people in the growing Asian region were uplifted from poverty because of access to new opportunities (Liang, Lu, and Wang, 2012, p.137). Furthermore, it is worth noting that attaining sustainable economic growth can be challenging, but one thing is clear: the engine of growth no matter what country is the private sector. However, when the markets are regulated, this tends to change.

Regulated Markets

Moreover, market regulations can produce adverse and appropriate effects on the economy. More importantly, a society’s well-being depends on whether the members of a society can acquire the goods and services they need or want. In modern economies, these issues are settled by a recognized authoritative figure or institution. Market regulation is often inadequate when most national policies favor state entities rather than private enterprises (Hou, 2011, p.422). This is a critical explanation of why China was a less attractive destination for investment. Investors seeking to set up production facilities in the nation frequently faced high start-up costs, increased legal liability, and other regulatory entanglements. But it was Deng Xiaoping who helped in the transformation of the Chinese economy. Deng Xiaoping’s economic reforms established China as one of the largest socialist market economy (Hou, 2011, p.426). He helped develop an economy with dominant state-owned enterprises that existed in parallel with market capitalism and private ownership. Private enterprises were encouraged to invest in the region, which enabled China to kick start the long expansion boom that continues today. Currently, more than 50 percent of the country’s GDP comes from the private sector.

The government played a critical role in managing the economy through established strategies and objectives under the Chinese socialist market model. For example, in the 1980s and 1990s, the Chinese five-year plans centered on market-oriented reforms helped create more sustainable growth, bettered the distribution of wealth, and improved environmental protection (Hou, 2011, p.431). Most Chinese firms play a critical role in the economy, and the Chinese government ensures that it maintains direct control over all these firms. International governments also recognize the government’s influence in privately held firms. For instance, when the United States pressed Huawei, an independent privately owned Chinese company, to provide evidence that facilitated spying on the United States and its allies, the company stated that the Chinese government had already made their case by introducing the national intelligence law in 2017. The national intelligence law requires all individuals and organizations to support and cooperate with the government in national intelligence work.

Similarly, the country interferes with the market by managing the currency. China maintains a strict rule for organizations holding foreign currency. In China, foreign currency is not considered to be fully convertible. Organizations holding a dollar or any other foreign currency must sell them for yuan directly to China’s central bank. The government then prints local money for use by the organizations (Zhou, 2011, p.854). Also, and unlike many other international partners, most countries in the Asia-Pacific strictly control currency policy. They regulate trading activity and emphasize control of the daily movement of their currencies on the forex market. This move stimulates exports and ensures that the countries’ goods and services are cheaper for the international market, which directly influences production and the level of employment in the region.

Free Markets

In a free-market economy, the exchange of goods and services happens with no governmental control or involvement. Power and order in a free market are decentralized, and individuals and organizations are allowed to make their own voluntary choices. Private enterprises, in this case, also play a vital role in economic development. For instance, and just like in regulated environments, these companies provide jobs and engage in infrastructure development (Koetter, Kolari, and Spierdijk, 2012, p.463). A free market provides space for innovation and competition, ensuring that the best goods and services are always offered to consumers at lowered prices. However, this competitive environment can trigger an atmosphere of survival for the fittest. This aspect can cause many businesses to disregard the need for safety in order to increase the bottom line.

Reducing government interference and control within a company has many advantages. For instance, in the 1980s, American banks sought deregulation to compete with less regulated financial enterprises (Koetter, Kolari, and Spierdijk, 2012, p.467). Most American retail banks were prohibited from using deposits to fund risky stock purchases. This regulation protected investors from risks and fraud. In 1999 this financial regulation was repealed. As a result, banks heavily invested in risky derivatives in order to increase profits and shareholder value. It is such instances that led to the 2008 global financial crisis. Nevertheless, there is evidence that shows that deregulation works and improves economic growth. For example, the deregulation of the American corporation, AT&T, helped in providing consumers with more competitive long-distance telephone rates. Similarly, the deregulation of United States airlines in the 1970s provided customers with more choices and lower-priced air travel tickets, which was critical for the economic growth experienced in the period.

Conclusion

Private enterprises have played a significant role in the economic growth experienced in most Asia-Pacific countries. Similarly, the government’s role in providing and lessening market regulation has been vital in the region’s economic advancement. But from the research conducted in this paper, it is clear that Government regulations can be a double edged sword. These regulations can help develop the economy, and in like manner, they can trigger detrimental instances. For instance, the Chinese currency exchange policy, which allows individuals and organizations to sell foreign currency at a lower fixed directly to China’s central bank, helps in stimulation exports. It ensures that the country’s goods and services are cheap for foreign traders. As a result, this attracts investments and creates jobs. Free markets can be practical for an economy as they increase productivity and competition, but it can also be detrimental. The American financial deregulation in the 1990s increases investment risks for investors. Therefore, it would be right to say that there should be some form of market freedom and regulation for maximum economic growth. This way, when private enterprises misuse their freedom or gain significant monopolistic powers, government regulations can help soften them.

References List

Bruton, G., Peng, M., Ahlstrom, D., Stan, C. and Xu, K., 2015. State-owned enterprises around the world as hybrid organizations. Academy of Management Perspectives, 29(1), pp.92-114.

Hou, J., 2011. Economic reform of China: Cause and effects. The Social Science Journal, 48(3), pp.419-434.

Koetter, M., Kolari, J. and Spierdijk, L., 2012. Enjoying the quiet life under deregulation? Evidence from adjusted lerner indices for U.S. Banks. Review of Economics and Statistics, 94(2), pp.462-480.

Liang, X., Lu, X. and Wang, L., 2012. Outward internationalization of private enterprises in China: The effect of competitive advantages and disadvantages compared to home market rivals. Journal of World Business, 47(1), pp.134-144.

Tian, L., 2011. Regulatory underpricing: Determinants of Chinese extreme IPO returns. Journal of Empirical Finance, 18(1), pp.78-90.

Zhou, W., 2011. Regional deregulation and entrepreneurial growth in China’s transition economy. Entrepreneurship & Regional Development, 23(9-10), pp.853-876.