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Growth vs. Stagnation: Shanghai's Success and Valdivostok's Failure as Pacific Rim Business Centers

Martin H. Sours

International Studies Association
41st Annual Convention
Los Angeles, CA
March 14-18, 2000



Beginning with the Portuguese economic, commercial and military outreach (circa 1500) from the confines of Europe by sailing around Africa to reach Asia, a major thematic issue in international studies research has been the relative significance of continental/imperial systems (France, Russia, Germany, USSR, China, India) in international affairs, including international business, as contrasted with maritime, mobile trading systems dominated by a single great power (UK, USA) supported in particular by technology and sea power. More precisely, the writings of George Modelski and William Thompson have developed the concept of "long cycles" as they apply to the globalization of the international system. 1 Simply put, their analysis demonstrates that international affairs, particularly what has come to be known as "international political economy," has, since 1500, revolved around a series of approximately 100 year long periods of domination by a single maritime great power. 2

In summary fashion, these periods represented in rough chronology the ascendancy of Portugal (1500-1600), Holland (1600-1700), England (1700-1800/1800-1900) and the USA (1900-?). The first two hundred years may be characterized as "the Commercial Revolution," in which pure trade was the dominant activity; followed by the impact of the Industrial Revolution, when imperialism became ascendant. The issue for us as the new twenty-first century unfolds is to refocus and analyze the implications of this model but to do so toward the end of establishing a new and contemporary framework of analysis for understanding international relations and international economic and business affairs within the Asia-pacific region. That leads, in part, to an examination of key urban centers. Coastal cities are examples of nodes of interaction, and a comparison of the possible new (i.e. non-military) role for the city of Vladivostok as contrasted with the re-emergence of Shanghai, the central long cycle city of a previous era of regional economy, provides one way of gauging overall regional systemic change. 3

The monetary crisis (i.e. what is now generally termed "the Asian Financial Crisis") which unfolded in the Asia-Pacific region in 1977, beginning with the first decline/devaluation of the Thai Baht on July 2, 1997, may be seen as a modern manifestation of the ongoing long cycle process. That is, the entire long cycle globalization process contains within it a series of crises, such as the Opium Wars and the Pacific War (World War II). In one sense the Asia-Pacific region has yet to be "integrated" into the world economy. At the same time the worldwide globalization process is not discrete; it does not "stop and go." Rather the vary fact of recurring crisis means the process evolves in new and different ways as technology (in particular) changes. World affairs today may be said to be characterized by a lack of the "cold war" bipolarity, but in the absence of a military dimension, the difficulties of the economic and financial order become central, as in the case of the latter half of 1997.


Alternative Forms of Urban Analysis

I now will briefly outline some alternative implications concerning urban trade and business centers connected with the model delineated above. During the Commercial Revolution era, or cycles, for example, the Portuguese and Dutch concentrated on maritime routes around Africa, leading to European settlements in south Africa, and the establishment of European trading settlements in Malacca, Goa, Macao, Taiwan and Nagasaki (Deshima). The emphasis during this period was on the movement of finished goods and thus had limited impact upon the surrounding cultures and societies.

With the onset of the Industrial Revolution and the rise of Britain, several elements in this overall process changed. For example, the "great circle" route and the overland expansion of the United States brought the U.S. into the Asia-pacific region in a more forceful way, leading to the "opening" of Japan. Similarly, the British sought to establish permanent and in many instances original military/commercial bases in the region. Thus Penang, Singapore, and Hong Kong came to represent part of a network of centers of British military and commercial power, in most cases springing from geographic locations which previously were insignificant. This process was part of an imperial reach, which ultimately led to the domination of East Asia by all colonial and imperial powers, including Japan, which entered the process late and thus had to take what was available (Korea). This rapid colonial and imperial expansion lead to decades long conflict with emerging Chinese nationalism, ending with a communist revolution and the founding of the People’s Republic of China, as well as the concurrent struggle for national independence throughout colonial Southeast Asia.

With the end of the cold war (circa 1989) these models of analysis and tension which had come to be seen as "standard" have changed throughout the region. Now a new set of dualities for this region has emerged in the decade of the 1990s. The first is a debate about the degree of emphasis warranted in strategic planning, particularly corporate strategic planning, between a "Japan centered" view of Asia as contrasted with one focused upon "Big Emerging Markets ." 4

The Japan-centered view of Asia is articulated by James Abegglen, in which he states "if you (i.e. a multinational company) don’t have a Japan strategy, you don’t have an East Asia strategy." 5 By this Abegglen meant to emphasize the disproportionate economic and commercial power of the Japanese business system within the Asia Pacific region by the decade of the 1990’s. Because Japan represents three fourths of the entire East Asian economy, it is simply not possible to go around, ignore, or otherwise fail to take into account Japanese economic and commercial interests in any business ventures within the region. At the same time, manufacturing or other capital-intensive activities need not take place in Japan; quite the contrary. It makes more sense to manufacture elsewhere (as Japanese corporations themselves are doing) but with a keen understanding of Japanese business/corporate strategies and commercial activities.

Alternatively, Jeffrey E. Garten has developed a model based upon his concept of ten "Big Emerging Markets." A former Clinton administration trade official and now dean of the Yale School of Management, Garten approaches the post cold war political economy from the perspective of identifying key/select countries (i.e. national economies) which offer rapid and substantial market growth for relevant technologies and manufacturing exports from the developed world, especially the U.S. 6 Out of the ten, Garten has selected four key locations for economic and business growth within Asia: India, South Korea, the ASEAN region anchored by Indonesia, and "Greater China."

Multiple, but unspecified, reasons suggest themselves for this focus. First, these countries/economies are natural markets for the export of manufactures, thus providing jobs and an expanding economy for traditional manufacturing firms. Such expansion is still important to the stability and growth of industrial economies generally, whether they are emerging themselves or mature. Further, within the U.S. domestic political context, the traditional manufacturing jobs created by industrial expansion supports organized labor unions and other constituencies of the US Democratic Party, so for U.S. politics in particular such an orientation is politically useful to elites and leaders identified with the Democratic Party. On a more negative note, the sale of manufactures requires less global sophistication and thus increases the comfort of average citizens, who do not have to deal with the greater complexities, competition and stresses of service and knowledge-based businesses. Thus the Big Emerging Markets approach does not necessarily lead to urban, maritime strategic planning, but to a more traditional form of international business which was practiced throughout the cold war period.

Within the United States, another political economy debate revolves around the rejection of the long cycle approach in favor of looking at the underdeveloped former statist economies of Eurasia (Russia and China) as a new and emerging "economic continent" stretching from Berlin to Hong Kong. 7 Mr. Gosnell’s thesis rejects the relevance of what he calls the "clippership mentality" in favor of focusing strategic international business, not just on various world-wide emerging markets, but rather on the Eurasian continental economies which have been bypassed by the growth and economic/technological developments of the 20th century. This approach is extremely attractive to firms that manufacture for export, as it suggests virtually unlimited markets exist for all manner of goods currently in standard production in the factories of the developed world.


Moving to a New Point of Analysis

A more productive approach in my view is to reject the extremes of these dichotomies, and look instead at the original long cycle process as having evolved over three stages, not just the two stages suggested above (i.e. the Commercial Revolution followed by the Industrial Revolution). The advantages of business mobility and leverage are constants; therefore, it is important to see the changes that accompany the post cold war and postindustrial economic era. Both the original trading centers of the Commercial Revolution and the industrial business hubs and other national centers of trade and manufacturing (Tokyo, Osaka, Pusan, Inchon, Manila, Saigon, etc.), are in the process of being supplanted or replaced by a new and important third generation of coastal urban centers.

Precisely because of the Asian monetary/financial crisis of the second half of 1997, this third "generation" of Asian maritime coastal centers offer new business opportunities within the context of the economic and financial recovery of the region. Instead of accepting the crisis as a depression for the entire region, the crisis serves as a ‘breakpoint" of "opportunity" for a new generation of business interests to move beyond the constraints of the second generation of Asian urban centers, and the forms of economic activity which they represent, to a new era of economic development based upon new forms of business supported by the interaction of both industrial and post-industrial factor endowments.

Before commenting on Shanghai and Vladivostok in particular, I want to make note of the new role of Xiamen in Chinese political economy. In the case of Xiamen, its new emergence is precisely a result of the transfer of Hong Kong back to PRC sovereignty on July 1, 1997. Also, the reports (in the early months of the year 2000) of corruption probes in Xiamen are significant because of that city's key historic role in connecting China with the global economy turning the treaty-port era. Not that corruption is generally viewed as a "positive" but rather it is a sing that "something is happening." Also Hong Kong has ceased by be a separate and detached center of international business under British colonial rule, but rather it has become the business hub of the entire Pearl River Delta Region, much as Shanghai has reasserted itself (through all the publicity concerning the development of Pudong across the river from the old city) as the centerpiece of central coastal China and its interior.

This city (i.e. Xiamen), one of the original 5 "treaty ports" under the name Amoy, has China’s largest passenger ferry terminal, an international airport, and steady investment inflows from the Republic of China on Taiwan which account for 40 percent of its local industrial output. All of this development is in preparation for the mutual attraction between Taiwan and the mainland. 8 Thus, just as Singapore has upgraded its cargo handling capacity to a fully integrated and computer-driven system in order to remain competitive within the context of the southeast Asian region, Xaimen represents a form of peaceful unification strategy by the Chinese government toward the end of resolving the political divisions which remain between the two rival Chinese governments of the twentieth century.


Meaning for Vladivostok

Vladivostok has always been the historic Russian territorial gateway to the Pacific Rim, in that other attempts to reach the region through Manchuria involved occupying and operating in a truly foreign country, i.e. China. The port of Valdivostok was founded shortly after 1860, when the city of Valdivostok was founded. Being the terminus for the trans-Siberian Railroad, it was both a military and commercial center under the Czars, then a closed Soviet military base, and now is a center of raw materials exports from the Russian Far East. Without going into the historic issues of the Russian annexation of the Primorsky Krai Territory (which happened in much the same way as the U.S. annexation of the American Southwest from Mexico), Vladivostok, eleven time zones and 4,500 miles to the east of Moscow, is a world unto itself, yet a part of Russia, as articulated by The New York Times. 9 Now that both the cold war and the Soviet Union have passed away, four-way trade and business operations (between Russia, China, Japan and South Korea) represent the new, non-ideological core of economic/commercial activity for the city, replacing its former status and a closed, military center, which ended when the port was officially opened to the world, January 1993. It is a shock to note the Russian influences in the South Korean port city of Pusan, where Russian language signs abound on office and shop windows and Russians crowd into hotels. The ferry boat service from Vladivostok to Pusan is a key indicator of the inter-connection of these two countries within the region as a whole

Of particular note is the Hyundai corporate project, which, along with the city government, has launch a Korean Business Center consisting of a hotel, recreational complex, office building, conference center, restaurants and a shopping mall. 10 This facility is to act as a spring board for the Hyundai chaebol to expand into other business and commercial ventures, such as the construction of upgraded seaport facilities, plant construction, and even aircraft production as well as maintenance. The South Korean government, through its state-run Korean Land Development Corporation, is concurrently planning to invest several hundred million dollars in the construction of a one million square meter Russian-Korean industrial park at the neighboring open port city of Nakhodka's Free Trade Zone. 11 That city, located 100 km east of Valdivostok, is scheduled to become a center of Korean manufacturing by 1999. Nakhodka was the region's open port city during the cold war, when Vladivostok, a military base, was closed to the outside world. Together, the region is now called the "Vladivostok Port Cluster," containing port facilities in Vladivostok itself, the port of Vostochny and Nakhodka.

In order for Vladivostok to achieve the fullness of its transformation from a military to post-industrial business center its institutions of international business and finance need to mature. A currency and financial exchange already exist in the city, but it is just beginning to attract international participation. 12 Regionally based (in this case Hong Kong) Regent European Securities, part of the Regent Pacific Group, now sells Russian stocks to other Asia/Pacific Rim investors. The principal attraction of Vladivostok-based investments, in addition to the proximity of natural resources, is the strategic linkages by air to key business centers in Japan and South Korea, as well as the extensive shipping capabilities of the port, as the base for three of Russia’s largest sea shipping firms. 13

Clearly, enhancing the capabilities as well as maintaining a year around, all weather, shipping capability for the city is central to keeping the area from being marginalized within the greater northeast Asian region. The port is kept open currently by icebreakers, and rail and road systems from the Soviet military era are in place. Additionally, a level of skill exists in the city’s workforce from the era of military construction, maintenance and repair. In one sense Vladivostok resembles Subic Bay in the Philippines, which existed in the cold war era as a military base, but has been successfully converted into an economic and business zone (with the help of lead investors such as Federal Express). The challenge is to translate this degree of infrastructure elements/components into an actual advanced setting for modern and commercial business activity, because the city is currently not at the level that exists in other business centers of the Pacific Rim. A major distraction is the unreliable power system, a serious weakness because all business functions electronically through information systems and data processing. The weak power generation capabilities at present are not just a minor distraction but a serious barrier to growth, transformation and development.

Such a problem in turn hinges on the irregularity of tax collection and funding from the central government. With the breakup of the USSR, and the loss of direct Russian political control over the Baltic Sea ports to independent Estonia, Latvia and Lithuania (all countries with historic links to other countries and not to Russia), as well as the loss of direct control of the Black Sea shipping facilities which now belong to Ukraine, logically the Russian central government would want to strengthen its "Far Eastern connection," but it is difficult to do so. Vladivostok is far away, the central government itself has difficulties collecting and distribution revenues rationally, and local organized (and disorganized) crime make the rational handling of infrastructure support projects in the Russian Far East difficult.

Japanese firms, the natural private sector actors in this region, are withdrawing investment from the area precisely because the nature of their past business operations was not proactive, and now they have difficulty with the complexity of the present day business context. While Japanese firms had a history, even during the cold war, of over 250 joint ventures in the region, their business activities were dominated by the traditional sogo shosha, i.e. the trading companies of Sumitomo, Mitsui, and Mitsubishi, which focused on the export from Russia of raw materials, and in return transported and sold used Japanese automobiles into the Russian Far East, in large part because the strict inspection system in Japan has made owning and maintaining an older used car in Japan impractical. 14 That accounts for the preponderance of right hand drive Japanese cars on the streets of Valdivostok today.

In sum, the American and South Korean firms, for different but complementary reasons, are more active in Valdivostok/Primorsky Krai Territory than Japanese firms, which have a well documented pattern of region-wide business and direct foreign investment activities throughout the Asia Pacific region (i.e. East Asia and Southeast Asia). Also, the unresolved territorial dispute between Russia and Japan over the southern Kurile Islands makes it difficult for Japanese firms to factor in (i.e. quantify) the business and investment risk of doing business in Russia. At the same time, Japanese firms have always been sensitive to the appearance of patriotic national interest, and so they do not wish to appear to be investing in an environment (country) which is politically hostile to Japan.

The importance of these trends is particularly important to American or South Korean firms. The core issues of importance for them revolve around standard business risks. First among these are taxes and the lack of transparencies within the tax code and system. The tax laws are frequently changed, leading to multiple and differing computations of tax liability. These differences make profit projections impossible, and the employees of American firms have to be compensated for excessive individual tax liabilities which may be assessed over and above those assessed by the American IRS (Internal Revenue Service). In addition to discouraging new business ventures, such problems encourage (some would argue require) tax avoidance and corruption, which brings U.S. firms into conflict with the U.S. Foreign Corrupt Practices Act (FCPA). In response, a new Russian tax code was drafted in 1996, but as in many emerging markets with a socialist legacy, it is difficult to implement this new legislation. Such problems have in turn led to capital flight, creating a greater financial risk to foreign direct investment.

With such difficulties, the importance of multiple transnational linkages grow. For example, serious speculation began in early 1997 concerning a visa-free border trade zone between China and Russia at the Inner Mongolian city of Manzhouli, and its counterpart Russian city of Zabajkal’sk. 15 The real point of this effort is to replicate the cross-border trade centers which have flourished between the U.S. and Mexico, for example, at such U.S. trade centers as San Diego and El Paso. Further, this development complements the expansion of the Chinese city of Suifenhe, which is the closest point of connection for China to Valdivostok. Such developments directly counter the long held Chinese view that Russia is a traditional and natural threat, and represents a continuous move away from not only a cold war paradigm for international issues, but also a general weakening of the national-interest paradigm for international dispute resolution.

Air travel over the North Pole between the continents of North America and Asia offers another arena for expanded commercial links. 16 Fees, royalties and other hard currency charges are seen by Russian officials as another source of revenue for economic development, but more significantly, the travel time between the two regions is shortened, with the potential savings of millions of dollars in fuel costs. That is "the power of the market" which is really driving the current interest in codifying new air routs. The recent international discussions held in August 1997 between the governments of Japan, China, Russia, Mongolia and the U.S. in Irkutsk signal the true internationalization of this issue.

Finally, as suggested above, the financial crisis in South Korea in late 1997, coupled with the election in December of Kim Dae Jung as the next South Korean president means that Korean corporate interests can not expend capital to further the business development of the Russian Far East. This creates a "window of opportunity" for US corporate interests to become more active in the region, at precisely the time when increased nationalism throughout the core of the Asia-pacific region will complicate the environment for US business ventures. 17


Shanghai Keeps Growing

Shanghai has continued to grow through the last two reporting periods. In 1998 exports through its port grew at 113%, followed in the calendar year 1999 by growth of 186%. 18 Using PRC General Administration of Customs data, the time period January to November 1999 showed a 20% increase over the same period of the previous year. 19 Observers simply point out that the commitment to Pudong development, plus the entire historic role of central China in its overall economy (to say nothing of the key Shanghai officials in top leadership positions of the PRC, continues to propel the region. The widely quoted Washington Post story 20 at the time of the 50th anniversary of the founding of the PRC shows the focus on material wealth and in the Shanghai region, and the irreversible trend of globalization.


The Central Role of Managerial Talent

Increasingly, the emphasis on economic and business transformation within the Asia-Pacific region revolves around questions of the availability, quality and maturity of managerial talent. For the dynamic core of the region, sometimes labeled "Greater China" 21 the central issue, as identifies in the Far Eastern Economic Review 22 is the professionalization of the traditional, family owned business. But the economies of the Russian Far East, as well as China (and North and South Korea, for that matter 23 ) are actually increasingly dominated by large-scale enterprises linked to or directed by the state, so the introduction of professional managerial talent into North China and Russia is fundamentally a political question--more so than a purely economic or social/societal one (i.e. the Chinese "family owned business" as an East Asian model is not obsolete, but it is being replaced by the legalistic, professionally-managed large scale enterprise).

In the classic Russian/Chinese communist model, the engineering disciplines were favored as "proper" career paths. With the end of the cold war, a managerial degree on top of engineering skills came to be important, but this combination has traditionally led to an inflexible, production orientation individual focusing on process technology. Even the expression "pick up an MBA degree" connotes not only the negative, second class nature of the degree itself, but defines the degree (implicitly) as the result of training , not education. Thus it is not hard to see that such "managers" are really technicians, not leaders.

Without the leadership dimension, two negative consequences emerge. First, the instability and "job hopping" currently observed in Asia are not simply a function of a shortage of managers (although that is certainly a factor), but more importantly reflects a technical/laborer mindset which simply treats a position as a job. Thus the instability created by job hopping, roughly defined as simply leaving a job for more money, is effecting the long range planning and transformational capacities of firms in the region.

Related to job-hopping is the need within regional corporations which are transforming themselves for senior managers with skill. In response to this dynamic, some managers are being promoted before they are ready for broader managerial responsibilities. In some ways this is more serious than the instability of job-hopping, because the loss of a manager through his/her movement outside of a firm is an external act or occurrence. Internally, a manager who is promoted beyond his or her capabilities internalizes the weaknesses of the present professional staffing situation. These hidden faults create deep-seated, festering problems resulting from lack of strategic vision and will.


Conclusion: Where to Go?

This paper has set forth a tentative model of a Vladivostok-centered Northeast Asian mainland that can not hope to replace or surpass developments in Shanghai. Vladivostok is lacking in infrastructure, both material and human; but may yet become a node in future international business operations. Difficult choices remain ahead, especially with regard to investment decisions at a time of financial restructuring, for any private sector investment entity needs to have some assurances that investments in long pay-back period infrastructure and knowledge-intensive service operations will generate measurable and predictable returns. The most obvious ways to create the necessary conditions for these types of long-term infrastructure investment lie in the synergistic concurrent investment in for-profit ventures, such as telecommunications and air travel, in other words, copy the Shanghai model. International consortium investments offer a way to spread risk and internationalize the region, so that the legacies of national rivalries and militarism can be laid aside permanently.



Note 1: See, for example, their work, Leading Sectors and World Powers, Columbia, South Carolina; Univ. of South Carolina Press; 1996, and more recently "The Long and the Short of Global Politics in the Twenty-first Century: An Evolutionary Approach," International Studies Review, Special Issue, Vol. 1, Issue 2, Summer 1999. Back.

Note 2: Shanghai was one of the five original "treaty ports" under the Treaty of Nanjing. Back.

Note 3: Back.

Note 4: Details on both perspectives follow. Back.

Note 5: See James Abegglen, Sea Change, New York; Free Press, 1994. The full quotation is located on pages 51 & 52. Back.

Note 6: Jeffrey E. Garten, The Big Ten: The Big Emerging Markets and How They Will Change Our Lives, New York: Basic Books, 1997. Back.

Note 7: This formulation was presented by Jack Gosnell, Senior Counselor-Minister at the U.S. Embassy in Beijing, China, at symposia on the Thunderbird Campus, Spring, 1997. Back.

Note 8: For details see "Mainland Port Gets Ready to Welcome Taiwanese Trade," Financial Times, June 20, 1997, p. 9. Back.

Note 9: James Brooke, "Despite Setbacks, Foreign Investors Still Drawn to Vladivostok," The New York Times, On-line, August 11, 1996. Back.

Note 10: "Russian Far East Welcomes Ties to South Korea," The New York Times, On-line, July 3, 1996. Back.

Note 11: Masato Ishizawa, "Companies Cut Back; Rivals from U.S., South Korea Build Up," Nikkei Weekly, p. 19, Nov. 11, 1996. Back.

Note 12: Reuters Asia-Pacific Business Report, September 19, 1995, INTERNET. Back.

Note 13: Reuters World Service, June 1, 1997, INTERNET. Back.

Note 14: Mark White House, " Despite Huge Potential, San Francisco Dreams of Vladivostok Unlikely to be Fulfilled Soon," The St. Petersburg Times, August 4-10, 1997. Back.

Note 15: Agence France Press, May 14, 1997, INTERNET. Back.

Note 16: "Siberians Look for Pie in the Sky by Marketing New, Shorter Air Routs over the North Pole," The Wall Street Journal, August 20, 1997, page A-16. Back.

Note 17: Nationalistic feelings among some opinion leaders in Asia has already led to a view in some Asian circles that the late-1997 Asian financial/monetary crisis was orchestrated by the US government in order to use the International Monetary Fund (IMF) as a means to secure US commercial domination in Asia in the post-cold war era. Back.

Note 18: ISI Emerging Markets Data, "China Facts & Figures," Feb. 2, 2000. Back.

Note 19: Xinhua News Agency, January 25, 2000. Back.

Note 20: The Washington Post, "In 2 Chinese Cities, Celebration and Contradiction," September 29,1999. Back.

Note 21: It is beyond the scope of this paper to get into a discussion of what constitutes "East Asia," Greater China" of other such popular titles. Back.

Note 22: See the lead article in the August 28, 1997, issue. Back.

Note 23: The South Korean case may be truly unique. The chaebol are family owned and run, but developed under state guidance, so they resemble the state-owned enterprises of the former and present communist regimes of the region. Back.