With democracy retreating worldwide, businesses with global aspirations increasingly face the challenge of setting up shop in geographies where autocrats rule. In doing so, they often lose the comforting assurances of democratic areas that enforce fair markets, guard their rights, and protect their safety.
In fact, the relationship between business entities and the state in autocracies can involve a delicate dance. While many authoritarian regimes desire capitalists for the growth and legitimacy they can generate, a tension of distrust can stand between them, as Harvard Business School professor Meg Rithmire describes in a recent book, Precarious Ties: Business and the State in Authoritarian Asia.
Complicating matters, the 80 or so existing autocracies come in all shapes and sizes, and are often described as either closed autocracies, such as in Saudi Arabia, China, and Vietnam where leaders have no political competition, or open autocracies like that of Russia, Turkey, and Malaysia, which hold elections but may lack safeguards and transparency that keep them fair.
The book investigates the relationship between capitalism and the state in three Asian autocracies, comparing China, Malaysia, and Indonesia from the early 1980s to the present. We asked Rithmire, the F. Warren MacFarlan Associate Professor at Harvard Business School, to provide insights on how business leaders might think about doing business in these areas.
“Capitalists, like all people, are safer in democracies, which are imperfect and messy, but endeavor to fundamentally protect the rights and safety of people.”
Sean Silverthorne: In general, what do business leaders need to know about operating in authoritarian regimes?
Meg Rithmire: Authoritarian regimes, by definition, do not feature political competition and do not commit to protecting fundamental rights. I find that, sometimes, businesspeople seem attracted to one-party regimes because they seem efficient or lack political conflict. But political conflict is always present in any society.
The question is: How is that conflict managed? In the case of China, businesspeople outside of China have found the regime’s efficiency and the country’s market size and innovation ecosystem attractive, and with good reason. But many people misunderstand how power is practiced in China.
The key technology of politics in China is the campaign, by which the Chinese Communist Party (CCP) declares transformational goals, such as “zero Covid,” “one child per family,” or even “made in China 2025.” Campaigns involve mobilization of resources and of the vast bureaucracy, but they are also coercive and involve excesses, as we have seen with zero Covid. Many around the world admired China’s strong response to the pandemic in 2020 and 2021, but Chinese citizens and global and domestic businesses then came to realize that a strong state with no accountability mechanisms and few limits on power can be incredibly dangerous.
This is also the message of the book: Capitalists, like all people, are safer in democracies, which are imperfect and messy, but endeavor to fundamentally protect the rights and safety of people.
I am not suggesting that no one should do business in regimes that are not healthy democracies, but they should do it with clear eyes about the potential dangers of unlimited states, and with deep knowledge of how power is practiced in whatever regime they are in.
“I suggest students think in terms of political empathy—asking how different constituencies that matter to them may think, what they fear, and whose esteem they want.”
Silverthorne: What skills do capitalists need to maneuver effectively in environments where laws may be absent, institutions are weak, and stability is more or less dependent on one person or party’s ability to hold power?
Rithmire: Capitalists need contextual knowledge about the specific environment they are in. No authoritarian regime is the same, and power is practiced differently everywhere, even in democracies with rule of law and transparent institutions.
In my teaching, I suggest students think in terms of political empathy—asking how different constituencies that matter to them may think, what they fear, and whose esteem they want. It is not enough to have a friend or an informal relationship to supplement the lack of formal protections; you need, in addition, to understand the moral economy of a place, meaning how market participants, societal groups, and political elites see the world and what they think is fair and unfair.
This requires more than reading a couple of books or knowing a few people. It requires deep, curious learning about who people think they are and where they have been. And, happily, it can be fun to do. Political empathy is a skill. It requires understanding people before you judge them and taking their pasts and experiences seriously.
Silverthorne: Can you explain the relationship between capitalists and autocrats?
Rithmire: Precarious Ties answers a series of theoretical questions about the delicate relationship between capitalists and autocrats. In most illiberal regimes, capitalists are described as “cronies” or “co-opted” by political elites, meaning they do the bidding of the political elites. But these characterizations do not account for how state–business relations change over time, for why some “cronies” become enemies of regimes and others do not, or for why some crony relationships facilitate growth and others create crisis or stagnation.
What strategies do authoritarian political elites adopt to manage the business class? What kinds of strategies succeed, for example by securing political stability and economic growth, and what kinds fail, either by stymieing economic growth or by generating political or economic instability?
I explore these questions by comparing state–business relations in Suharto’s Indonesia, Malaysia under the Barisan Nasional, and China under the CCP. The book draws on archival research, interviews, and several original datasets to first elaborate two ideal typical models of state-business relations under authoritarianism, and second, explains why relations appear closer to one pattern or another.
“Business elites can hold a 'disruptive' power over political elites, forcing them to change policies and address risks in ways they may not prefer.”
Silverthorne: To help explain these differences, you put forward a model that features “mutual alignment” and “mutual endangerment” as motivating forces. Can you explain?
Rithmire: The two ideal typical models are mutual alignment, whereby an authoritarian regime organizes its institutions or informal practices to serve the productive interests of business, and mutual endangerment, whereby economic elites and political elites are mutually entwined in corrupt dealings and invested in perpetuating each other’s dominance primarily because the loss of power on one side would bring about the demise of the other.
Both forms of state–business relations would be described as “cooptation,” but, as I show, they produce vastly different outcomes with regard to both economic growth and political stability. Mutual alignment can lead to eventual economic stagnation, while mutual endangerment can contribute to financial instability and erosion of regime political discipline. I explain the development of one pattern of relations over another by focusing on the interaction between two variables: trust or distrust between business and political elites and the regime’s ability to discipline the financial system.
The ultimate insights from the book include the idea that business elites can hold a “disruptive” power over political elites, forcing them to change policies and address risks in ways they may not prefer, and the observation that financial systems are not technocratic enterprises; rather, they are constructed based on political institutions. As such, building modern and effective financial institutions in the absence of rule of law and political competition has proven elusive for most authoritarian regimes.
Silverthorne: Why did you decide on China, Malaysia, and Indonesia as your study areas?
Rithmire: I was initially interested in the internationalization of firms from developing countries, especially in Asia. While I was exploring that topic, China experienced a stock market crisis in 2015, and my conversations with businesspeople and regulators in the summer of 2015 led me to ask: How much do business elites in China really trust the CCP? Is China like Indonesia, one major financial crisis away from political chaos, or like Malaysia, likely to muddle through crises with the regime intact but also with economic stagnation?
Silverthorne: What most surprised you about your research results?
Rithmire: The biggest puzzle was the one that yielded the biggest insight: Why did firms in Indonesia and China seem to purposefully expand and invest in a way that essentially threatened their survival?
In the book I call it “looting,” drawing on a well-known paper on US firms in the savings and loan crisis, among other episodes. That paper shows that firms loot their own assets in expectations of bailout, but I show that expectations of vulnerability produce the same incentives. Going deep into the inverted world of rational actors destroying their own firms’ balance sheets in late Suharto-era Indonesia and in contemporary China was fascinating and surprising. Once I understood the phenomenon, I saw it everywhere.
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Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.
Image: Oxford University Press/HBSWK