Mutuality with Chinese Characteristics

This is an executive summary of a report about the practice of mutuality in China.  The research is part of a CEIBS / Catalyst collaboration to investigate Economics of Mutuality.

For more information about the complete report, please contact Professor Lydia J Price plydia@ceibs.edu

Introduction to EoM

Economics of Mutuality (EoM) is a business innovation that helps companies to identify profitable avenues of growth by solving the problems of people and planet. The EoM model introduces practical metrics for companies to measure and manage their natural, human and social capitals in addition to the traditionally emphasized financial capital. Founded on well-defined performance metrics, novel management and accounting practices and new forms of profit construction, the model has demonstrated that companies investing in communities, people and environmental ecosystems, while measuring and managing performance with non-financial indicators, can find opportunities for value creation that contribute to financial performance.

Five key pillars underpin Economics of Mutuality:

• Purpose as Strategy – solving problems of people and planet opens opportunities for driving business strategy
• Ecosystem Mapping and Orchestration – mapping the ecosystem of relevant stakeholders (at business unit level) allows a company to identify gaps and unmet needs, and to orchestrate (as opposed to controlling or dominating) mutually beneficial solutions
• Non-Financial Performance Metrics – to achieve balance, a company must systematically measure the depletions and contributions to all four capitals (financial, human, social, environmental) that drive performance, using metrics that are simple, informative and linked to profits
• Mutual Profit – by growing profitability of the entire ecosystem, a company has opportunities to expand its individual profitability
• Expanding Leadership – align Purpose with Practice to deliver enhanced value across the company’s ecosystem and multiple forms of capital

EoM is an open platform, gaining recognition in business and academic communities as a result of extended research and discussion. It has been applied with success in different geographic settings but remains largely untested in China. CEIBS and Mars Catalyst have agreed to jointly explore the relevance, opportunities and challenges for companies, and society, to benefit from the application of EoM in contemporary China.

The China Context

Unlike western democracies that tend to differentiate the roles and responsibilities of private companies, government institutions and non-profits, China often blurs the distinctions in a deliberate attempt to build a modern socialist society. Accordingly, “mutuality with Chinese characteristics” can be seen in the guise of state-owned enterprises (SOEs) that actively implement government policy while simultaneously seeking profits; charities and non-government organizations (NGOs) that are closely supervised and even staffed by government officials; and private companies that open new lines of business at the direct behest of government officials. Overall, the Chinese government plays an important role in allocating resources and prioritizing various capital deficiencies (e.g., foreign currency, jobs, clean air, health care) for immediate development. Five year plans (FYP) communicate the constantly evolving targets to local government officials, businesses and citizens, who eventually must deliver the results by means of collective action.

The unique characteristics of the Chinese market presents both opportunities and challenges for putting EoM into practice. On one hand, China welcomes business participation in solving its many development challenges. Aligning with FYP priorities may bring access to important markets & projects, government funding, and various permits and operational licenses. Avenues of growth arise directly from joining China’s march toward a clean and inclusive economy and a moderately prosperous society. In recent years, private companies have helped the Chinese government to unlock the potential of rural farmers and land resources, entrepreneurially-minded and digitally-native youth, and most recently, the rapidly growing pool of digital technologies.  

But none of these wins have come easily. Companies pursuing mutually beneficial strategies struggle with issues of control, independence and alignment of short term financial and operational targets with those of local government leaders who can facilitate or hinder their progress. Furthermore, government policies and incentives are subject to change on short notice, altering a program’s attractiveness or financial returns. As an example, the unexpected discontinuation of around 18% of “private-public partnership” projects in order to curb the hidden buildup of local government debt greatly weakened the confidence of private sector investors to engage in such investment deals. Companies can expect surges, hiccups, reversals and retreats as Chinese priorities shift to meet emerging realities, and government leaders move to block the unintended exploitation of development programs by unscrupulous market players.

Understanding the needs and challenges of local government leaders is critical to the success of EoM application in China. In most cases, it is also necessary to gain the support of local NGOs to mitigate the challenges of goal alignment and coordination, and to smooth the process of program implementation. Unfortunately, however, companies often struggle to find appropriate and professional organizations for their needs. Multinationals (MNCs) who partner with global charities and NGOs to implement uniform projects on a wide geographic scale must often change their goals, objectives, and partners in order to implement their programs in China.   

Shifting FYP Priorities

Five-year plans give guidance to government officials and business executives about the central government’s development priorities. They are a signpost as to where the business community can contribute to capital creation and deployment. Since reform and opening up began in the late 1970s, China’s first priority has been to cultivate economic prosperity. Key contributions from MNCs in the early years of building a manufacturing economy were foreign currency investments, technology transfers, skills training and job creation. At the same time, China’s domestic companies were urged by government leaders to develop safe and defect-free products, pay wages to workers, pay government taxes and stamp out corruption. To some extent, these differences in perceived social responsibilities still persist, complicating the task of pairing MNCs and local companies on EoM initiatives. But partnering and collaboration are necessary to meet China’s current development goals, which seek to address the many shortages of social and environmental capital that have emerged from the single-minded decades-long race to grow the economy.    

China’s leaders have prioritized “green economy” developments in the three most recent FYPs, especially regarding resource use efficiency and pollution control. Rapid depletion of many resources including freshwater, arable land, forest, grassland and minerals has raised the urgency of natural capital cultivation. FYPs set targets for boosting forest cover and renewable energy use, as well as lowering the economy’s overall energy and carbon intensity, and the concentrations of pollutants (e.g., SO2 and NOX).  Companies and entrepreneurs are urged to invest in innovating clean tech, modern agriculture, and environmental protection solutions.

In terms of human and social capitals, China is struggling to tackle both “developing-” and “developed-economy” problems simultaneously. Like other developing economies, China faces ongoing problems of poverty, access to education and healthcare, and social inequality. Though decades of economic growth have pulled hundreds of millions of Chinese citizens out of poverty, pockets remain in geographic areas with few exploitable resources. The government has called for targeted campaigns that pull these communities into a state of economic self-sufficiency. Agriculture, tourism and digital commerce have been recognized for holding strong development possibilities. Many company-led poverty alleviation campaigns provide market access and logistics services to remote regions, often by leveraging China’s state-of-the-art digital technologies. Digital tech is also used to promote and aggregate charitable contributions from individual members of society. Thanks to deep penetration of digital tech in the life of Chinese citizens, online public fundraising platforms attracted RMB 3.17 billion in year 2018 alone, vastly raising public awareness and participation in philanthropy. Nonetheless, it is important to note that only a small number of social organizations have won government approval to seek online donations.

In terms of “developed-economy” problems, China faces growing concerns about lifestyle diseases (e.g., diabetes and cancer), an aging workforce, urban congestion and the corresponding loss of community. Furthermore, the benefits of mass digitalization are offset by rising risks of data privacy infringement and the loss of jobs to machines. Moreover, as China’s economy transforms from a manufacturing and export base to one driven by domestic consumption, there are fears that the first wave of factory and construction workers could once again join the ranks of the jobless. Current trade tensions and the accelerating shift of manufacturing to other Asian countries add even more pressure on this front.   

China’s Unique Ecosystem Players

With so many different problems to solve and a fragmented base of potential solutions, it can be challenging to find suitable ecosystem partners, and even more challenging to manage the relationships once established. As mentioned, domestic companies and MNCs often vary widely in what they deem to be corporate responsibility. The complexity is even greater when seeking partners in the non-profit sector. Though charities and other non-profits are typically non-governmental in other parts of the world, in China they are subject to strong oversight and influence. Foreign NGOs must register with China’s public security administration, and they face limits on the number of non-local staff. Domestic NGOs are restricted in their scope of operations and ability to raise funds. All of these institutions face difficulties in finding knowledgeable and experienced staff and managers. As a result, most charities and non-profits operating in China are small, under-funded, and/or limited in capabilities. The most professional and competent NGOs are therefore those with close governmental ties. Often referred to as GONGOs (Government-Organized Non-Governmental Organizations), these organizations tend to focus on the needs of specific beneficiary groups (e.g., All China Women’s Federation and China Youth Development Foundation) or national development targets (e.g., China Foundation for Poverty Alleviation).

To bypass controls and regulations imposed on non-profit entities in China, many social purpose organizations register as profit making companies. Hence, social enterprise (SE) which is broadly defined as “a business venture or economic activities driven by social objectives” and impact investing (II) which is investing with a social purpose, are both on the rise. According to China Social Enterprise and Social Investment Landscape Report (2019), the top eight social objectives engaged by the surveyed SEs in China are Education (21%), Community development (13.4%), Employment and skills (12.3%), Environment and energy (9.8%), Professional services for social innovation and entrepreneurship (9.3%), Healthcare (7.4%), Elderly care (6.5%), and Poverty alleviation (5.7%). The innovative nature of the SE and II business models holds promise for bringing business solutions to social purpose problems, yet like other avenues of EoM application, there is still a long journey to success. Investors bemoan a dearth of scalable and sustainable investment targets, and investees in turn bemoan the pressures to perform on business metrics like operating margin and scale. Deeper public recognition, knowledge and favorable policy support are all needed to cultivate this sector.

Putting it all together

Despite the difficulties and challenges, companies are finding ways to practice mutuality for win-win outcomes in China. Our ongoing research explores companies cases and examples in detail to identify the links between company investments in mutuality and business performance.