Each student will write a short research paper for a peer-reviewed research paper that pertains to the week’s assigned reading.  This will be a detailed summary of the research paper and what you gained from the research.  Each week, you will find an article/peer-reviewed research paper that pertains to the week’s assignment.  If you have a difficult time, Google Scholar is a wonderful location to find these types of articles:

https://scholar.google.com/

Once you find the article, you will simply read it and then write a review of it.  Think of it as an article review where you submit a short overview of the article.

Your paper should meet the following requirements:

• Be approximately 2-3 pages in length, not including the required cover page and reference page.

• Follow APA6 guidelines. Your paper should include an introduction, a body with fully developed content, and a conclusion.

• Support your answers with the readings from the course and at least two scholarly journal articles to support your positions, claims, and observations, in addition to your textbook. The UC Library is a great place to find resources.

• Be clearly and well-written, concise, and logical, using excellent grammar and style techniques. You are being graded in part on the quality of your writing.

11

Nothing has been more important since the beginning of my reign

than increasing the prosperity of my people. The introduction of
certain new manufacturing industries … enables thousands of
my people to gain their bread honorably, the raw material stays in
the country … and my subjects can easily pay their taxes. While
previously money left the country, it now stays within, making the
country richer and more populated. Leopold I, Emperor of Austria
(1640–1705)1

We quote Emperor Leopold here because his touching concern for his

subjects’ welfare (and their ability to pay their taxes) communicates

a clear message: the government needs to play a big role in expanding

his country’s economy. Instead of issuing a proclamation encour-

aging local entrepreneurs to innovate, he instituted an active policy,

backed by state funds, to create important new industries. The idea

of depending solely on local entrepreneurs to build such industries

would not have entered his head.

Leopold was neither the first nor, certainly, the last head of

state to hold such views. Rulers of his era were well aware that build-

ing a country’s economic prosperity had the desirable side-effect

of increasing its power in international affairs, and many acted

on that realization. In the late 1600s Sir Walter Raleigh observed,

“Whosoever commands the sea, commands the trade, whosoever

commands the trade of the world commands the riches of the world

and consequently the world itself.”2 As a result, the competitive race

1 Government: Boss, financial

partner, regulator – Entrepreneurs
in mixed economies

1 J. Berenger, Histoire de l’empire des Habsbourg 1273 –1918 (Paris: Librairie
Arthème Fayard, 1990), p. 331.

2 A. Herman, To rule the waves (New York: HarperCollins, 2004), p. 150.

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Gover nment: Boss, fina ncia l pa rtner, r egulator12

to industrialize and sustain national trade advantages was a con-

stant source of international friction, sometimes leading to war.

Statesmen have been involving themselves in their countries’

economies for centuries. They know that building and maintaining

a healthy industrial base is the key to growing national wealth and

sustaining prosperity. They are not about to leave the outcome of

this high-stakes game to chance. Naturally, the economic purists

who advocate totally free markets are perpetually distressed by this

state of affairs.

But these purists ignore the lessons of history. Free enterprise

cannot prosper without the infrastructure, investments, and rule of

law that government provides. Likewise, governments sabotage eco-

nomic growth – and their global influence in the bargain – when

they try to impose too many controls on business, or establish rigid

plans for its direction.

In other words, government and entrepreneurs need each other.

This does not imply that Emperor Leopold’s command-and-control

mode of economic planning is a model for our times. Economies

have evolved toward more open, mixed systems with complex inter-

play between the public and private sectors. Entrepreneurs may

exploit opportunities to build new companies or industries, but gov-

ernments still play a major role in charting the overall course of an

economy and supporting its growth. The only “pure” systems are

failed systems. Plenty of evidence is available to back this up.

Historical antecedents

National economic development programs have historically relied

on several stratagems:

investments in education and infrastructure;•
subsidies for exporters;•
state funding to help or even create new companies;•
erection of trade barriers to limit imports;•
establishment of local monopolies or cartels to reduce domestic •
competition and increase the ability to export.

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Histor ica l a ntecedents 13

This is as true for free-market countries as for nations with con-

trolled economies. A nation’s official commitment to free enterprise

has never stood in the way of a little cheating to help its preferred

industries.

For entrepreneurs, such government involvement – or “med-

dling,” as the purists would have it – is a decidedly mixed blessing.

Government influence over the economy can have a decisive impact

on the success of individual ventures, and decisions made at the

highest levels can foster or stifle entrepreneurial efforts.

Problems usually start for entrepreneurs when political leaders

are looking to jump-start their country’s industrialization process.

Politicians typically believe that national programs to promote rapid

industrial development (and exports) work faster than independ-

ent entrepreneurial enterprises acting in their own perceived best

interests.

It follows that the establishment of state-owned corporations

to address critical industrial needs has been a recurring theme in

countries that are seeking to accelerate their industrialization.

Clearly, the heads of these state-owned enterprises are bureaucrats,

not entrepreneurs, in the context of our discussion.

But real entrepreneurs who build new industries with direct or

indirect state help have also emerged in most industrializing coun-

tries. Entrepreneurs have learned to live with whatever hand the

government deals them and find ways to prosper, which is part of

the definition of being an entrepreneur.

For example, during Leopold’s reign Austria began producing

textiles and arms in privately owned factories. At the start of the

process, the country lacked the knowledge and expertise to build

and operate these industries. So it set about attracting the talent it

needed.

Its appeal was simple. The government promised to grant local

monopolies, place import restrictions on competitive products, and

give business people access to some state capital to establish their

industries. These incentives lured experienced entrepreneurs and

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Gover nment: Boss, fina ncia l pa rtner, r egulator14

skilled technicians from elsewhere to set up shop in Austria. If you

were an entrepreneur, seventeenth-century Austria was a good place

to be, not in spite of government meddling, but because of it.

England, the birthplace of the Industrial Revolution, may have led

the way in the race to industrialize in the seventeenth and eighteenth

centuries, but over the next 200 years its increasing prosperity encour-

aged others to follow its example. France, the US, Germany, Russia,

Japan, and other countries industrialized in turn, each at its own pace,

and with varying degrees of government oversight and support.

Since the 1960s it has been the turn of Asian countries to join

the ranks of industrialized nations, and they have done so with a

high level of government involvement. These newcomers have

learned from history, and have no hesitation in using aggressive

national economic strategies to hasten their growth. China, India,

South Korea, and Taiwan have all emerged as industrial powers,

with exports that compete successfully with the most sophisticated

products of the developed world. Their emergence has revolutionized

the world economy and trade patterns.

China has been the most closely watched of all the Asian suc-

cess stories, because of both its size and its extraordinary industrial

progress. It launched its industrial program in earnest only in the

late 1970s, but by 2010 it moved from the back bench to second place

in the world economy, displacing Japan. It now has prospects of sur-

passing even the US.

China’s industrialization process has been a forced march, con-

trolled by an omnipotent Communist Party. Individual entrepreneur-

ship has played a minor role. The term “state capitalism” has been

applied to the current Chinese model because of its combination of

state and private capital. But this policy is actually a modern form of

an old system called mercantilism. It should be seen in that context.

Early mercantilism

Mercantilism has a long history. The term is commonly applied to

national economic policies that encourage exports and discourage

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Histor ica l a ntecedents 15

imports. The ultimate goal is to produce a trade surplus. Such pol-

icies were roundly condemned as long ago as 1776 by Adam Smith in

The Wealth of Nations.

Smith advocated free trade of complementary products among

nations. But as we have already noted, very few statesmen are will-

ing to leave economic development hostage to the vagaries of the free

market when vital national interests are at stake.

Mercantilism as a policy was widely practiced from the seven-

teenth to the nineteenth century, particularly as countries with

agrarian economies sought to industrialize. It protected fledgling

domestic industries from being crushed by outside competition.

Governments would provide state support to build locally important

industries where the market risk was very low and the technology

well established. Once these industries had succeeded in replacing

imported products, the state could then promote exports and hope-

fully generate a trade surplus.

Does this sound familiar? It should. Classic mercantilism

bears a striking resemblance to policies being pursued by developing

countries to this day, including China.

Colbert launches modern French industry

Mercantilist policy was first deployed on a large scale by Jean-Baptiste

Colbert (1619–1683), finance minister of France for twenty-two years

under Louis XIV.

Leopold I expressed pride in the growing prosperity of his

Austrian subjects. Whether Colbert worried much about the wel-

fare of his fellow Frenchmen is highly debatable. What is certain is

that Colbert’s big problem was financing the aggressive wars of his

king.3

Four years after Louis XIV personally took over the reins of

government in 1661, he chose Colbert to rescue France from near

3 For a summary of Colbert’s career and influence, see I. Murat, Colbert (Paris:
Librairie Arthème Fayard, 1980), pp. 225–263.

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Gover nment: Boss, fina ncia l pa rtner, r egulator16

bankruptcy, mostly brought on by previous military adventures. But

this did not stop the “Sun King” from enmeshing France in conflicts

of his own making. In the succeeding fifty years of his reign France

was involved in three major and two minor wars, creating a nearly

constant need for cash.

During this era soldiers and foreign allies had to be paid in

gold and silver. Since France lacked mines for precious metals, the

only way to accumulate bullion was by building a trade surplus, and

the structure of the economy made that impossible. French industry

was underdeveloped and backward, in the hands of small craft enter-

prises that simply could not compete in international markets.

Colbert decided to fix the problem by building industries such

as glass and textile manufacturing. His plan was to restrict com-

petitive imports and promote exports of exceptionally fine products.

In this way he could generate a trade surplus that would bring a net

inflow of foreign gold and silver into France.

Ruthless, determined, able, and in full control of the finances of

France, he poached craftsmen and entrepreneurs from various coun-

tries by offering highly attractive incentives to set up shop in France.

Many of the resulting businesses were granted “Royal Privilege,”

which meant that they received state funding, paid no taxes, and

were guaranteed government orders for their products.

Colbert expected that such new businesses would become inde-

pendent of state support as their products became commercially suc-

cessful. But this was a slow process. He was known to complain of

continuing demands by entrepreneurs for new funds to cover operat-

ing losses. If you were a favored entrepreneur in Colbert’s France, you

did very well. Why not hold onto your perks as long as you could?

The new companies built large factories with over 1,000 work-

ers – something new in France at the time. Their workers lived in

dormitories and were paid minimal wages. The working day was

between fourteen and sixteen hours, and the only days off were reli-

gious holidays. Colbert complained to the Roman Catholic author-

ities that there were simply too many of those.

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Histor ica l a ntecedents 17

Labor was cheap because France was blessed, if that is the

word, with a large population and significant unemployment in its

rural economy. Colbert had enough foresight to ensure a continued

supply of cheap labor by encouraging early marriages – women were

expected to marry before the age of twenty.

Having pirated technical expertise from other countries,

Colbert worried about losing what our era calls “intellectual prop-

erty” by the same means. He took draconian steps to prevent it. Once

in France, skilled craftsmen could not leave the country. Severe pun-

ishments awaited those caught fleeing – from a sentence of rowing

in one of the King’s galleys to the death penalty.

For Colbert’s program to succeed, French products had to win

international customers. To ensure that the new industries produced

the highest quality goods, Colbert established a corps of state-funded

industrial inspectors who were tasked with checking the quality of

products. Delinquent producers were penalized and publicly pun-

ished for repeated lapses in quality.

At the same time he made sure that the industries he was build-

ing were protected from outside competition until they were ready

to compete in the international market. For example, the importing

of Venetian glass was forbidden in 1672. And woe to the entrepreneur

who attempted to evade his trade and quality controls. His techno-

crats were said to have had over 15,000 small entrepreneurs executed

for the crime of importing or manufacturing cotton cloth in viola-

tion of French law.

Colbert did not limit his attention to manufacturing. He was

also anxious to compete with the Dutch in international trade,

which they dominated. To that end Colbert promoted the construc-

tion of a merchant navy, and gave preference to its ships for French

trade. To discourage competitive transport, high fees were placed on

foreign vessels visiting French ports.

By most measures Jean-Baptiste Colbert was a thoroughly

nasty man, widely hated within and outside France. But he launched

the country on the path of large-scale industrialization. Under his

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Gover nment: Boss, fina ncia l pa rtner, r egulator18

compulsion French industry became renowned for its quality, par-

ticularly in such luxury products as silk fabrics, tapestries, and fine

glass. In these areas French products came to surpass any goods pre-

viously available on the

international market.

Many famous company names in France date from this era,

including the tapestry maker Gobelin and the glass maker Saint-

Gobain. In 1688 a Venetian ambassador wrote that “such is the qual-

ity of the French products that they are the best in the world and

attract orders from all countries.” Colbert’s policies were successful

in at least sustaining the finances of France in spite of the country’s

being in an almost continuous state of warfare.

Colbert’s basic approach held sway in France for some time after

his death. In the eighteenth century French industry benefited from

government attempts to attract English technicians and entrepre-

neurs. France sent agents on undercover missions to England to recruit

people and collect commercial secrets, particularly those dealing with

production machinery and metallurgical processes. For example, the

first English steam engines were secretly imported into France.

In 1779 the ice between France and England thawed consider-

ably as the two countries signed agreements allowing the French to

import steam engines openly. Bilateral agreements covering other

products were also negotiated, but true free trade was far in the

future. Entrepreneurs who followed the rules had done well under

tight government control, but free trade was something better to

look forward to.4

In fact, it was in 1846 that England led the way to a national

free-trade policy by removing the restrictive Corn Laws and easing

its control of the export of advanced technology. By the 1860s prac-

tically all restrictions on imports were gone. At that time England

4 This presentation draws on the wealth of historical information found in J.-C.
Asselain, Histoire économique de la France du XVIII siècle à nos jours (Paris:
Éditions du Seuil, 1985), pp. 77–105; A. Malet and J. Isaac, XVII and XVIII Siècle
(Paris: Librairie Hachette, 1923), pp. 190–194; and Murat, Colbert, pp. 249–261.

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Moder n merca ntilism 19

had such a huge industrial lead on other countries that it could afford

to be generous and open its market. It did not anticipate that imports

would ever threaten domestic industry. Other countries trying to

catch up continued to play by more restrictive trading rules – and

are doing so still.

Modern mercantilism

You might ask why we are spending so much time on mercantil-

ism and its history in a book on the modern global entrepreneur.

The simple answer is that today’s entrepreneurs operate in a world

where governments increasingly control economies, a defining fea-

ture of mercantilism over the centuries and one that will not dis-

appear quickly.

This reality shapes the economic decisions made by business

people and entrepreneurs as they seek markets and business partners

in countries with diverse economic agendas. To fully understand its

implications, it is necessary to see it in a historical perspective.

For the same reason we must also take some time to discuss

China, by far the most prominent of modern countries with controlled

economies. China has the second largest – and fastest growing – econ-

omy in the world. What happens there, in consumer or industrial mar-

kets, has a huge impact on the direction of all global business.

Industrializing Asia

We are witnessing an economic revolution in Asia, affecting billions

of people. Countries in that region are striving to industrialize as

quickly as possible. Given the pressure to make rapid progress and

the top-down structure of many of their economies, it is not surpris-

ing that Asian countries would adopt mercantilist methods.

Indeed, we are living in the golden age of broadly defined mer-

cantilism. It is currently being practiced in a highly developed form,

on a scale unprecedented in history, by China. The world’s most

populous country has embarked on a path to industrialization that

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Gover nment: Boss, fina ncia l pa rtner, r egulator20

in some ways mirrors the journey of France under Colbert, using

some of the same strategies. Its astonishing success has prompted

other countries to learn from its example and shape their trade pol-

icies accordingly.

Long relegated to the ranks of a “third-world” country with a

primarily agrarian economy, China has vaulted into a position of eco-

nomic leadership in just forty years. The ruling Communist Party

still controls the land, much of the economy, the military, foreign

policy, and whatever else is of major importance to the country. But

the highly pragmatic Party has abandoned some communist prac-

tices and embraced a number of capitalist methods without relin-

quishing political control.

Perhaps the biggest difference between China and the devel-

oped West is that the state owns all of the country’s banks, either in

part or in whole. It also controls their activities, and can therefore

channel capital to meet its industrial objectives.5 China’s reluctance

to allow banks to operate outside of government control is as much a

matter of history as it is of ideology. The country suffered through a

long period of weakness and foreign intervention, and its government

is determined to keep it free of foreign economic domination.6

Within China the most obvious sign of the success of these pol-

icies is plain to see. Visitors are frequently amazed at the quality and

quantity of public facilities that have been built in the past couple of

decades. Indeed, the development of a modern infrastructure is a key

element of comprehensive state plans for industrial development.

Of course the government of China had some powerful advan-

tages in its rapid construction of the infrastructure to support a

modern economy. In addition to absolute control of the country’s

5 For an excellent review of the Party’s role, see D. Shambaugh, China’s
Communist Party: Atrophy and adaptation (San Francisco, CA: University
of California Press, 2010). Also, R. McGregor, The Party: The secret world of
China’s Communist rulers (New York: HarperCollins, 2010).

6 H. Jones, Chinamerica: Why the future of America is China (New York:
McGraw-Hill, 2010) contains a good overview of Chinese economic practices and
policies.

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Moder n merca ntilism 21

finances, the government owns all the land. Hence it can develop

roads, airports, railways, and public structures without the legal

restrictions found in countries where land is in private hands. It can

also set arbitrarily low lease rates for land to stimulate the build-

ing of factories and other facilities wherever and by whomever it

chooses.

China’s emergence as an economic power is not accidental. It

is based on long-term development plans drawn up by government

authorities in order to

preserve Chinese control over key domestic industries and the economy;•
promote exports and create a trade surplus;•
acquire modern technology; and•
build a domestic industrial base capable of innovation.•

Developing nations are watching China’s amazing progress very

closely. As more countries adopt various aspects of its approach,

entrepreneurs in the global marketplace will have to make adjust-

ments to economic systems in which mercantilism is flying high

and the government is in the pilot’s seat. It is worth looking more

closely at what they face in China, and may encounter in the other

countries that it influences.

Mixed ownership, tight control

China’s economic policy permits a mix of ownership models: pri-

vately owned businesses, joint ventures with foreign investors and

corporations, and businesses that are fully government owned and

funded. Regardless of ownership, foreign trade by all of these busi-

nesses is controlled by the government. Needless to say in a country

where the currency is tightly regulated, access to foreign exchange

is also strictly controlled.

Some businesses in non-strategic consumer industries,

such as textiles, services, and retail, may be fully owned by for-

eign investors, but restrictions exist on investment and cap-

ital repatriation. Large companies in industries deemed critical,

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Gover nment: Boss, fina ncia l pa rtner, r egulator22

including telecommunications services and banking, are either fully

government-owned or have majority government ownership. Even

when these vital companies are publicly traded, the government

maintains significant ownership and ultimate control.

Fifty-four state-owned enterprises, including China Mobile,

Petro China, Sinopec, and China Electronics Corporation (CEC), are

considered “backbone” companies. To get an idea of the scale and

scope of these enterprises, consider the fact that CEC, which was

established only in 1989, today has 70,000 employees.

While control remains with the parent company, CEC owns

fourteen subsidiaries that are publicly listed and have some degree of

public ownership. These businesses cover software, computers and

computer components, and consumer electronics products. Some of

these companies rank among the world leaders in their product cat-

egories. They include joint ventures with foreign companies such

as HP, IBM, and Philips who contribute their technology. With rev-

enues in excess of $10 billion annually, CEC is a big technology con-

glomerate with the resources to address new business areas.

As would be expected in such an economy, exporting for the

purpose of acquiring foreign exchange is a key objective of state plan-

ners. In this they have been markedly successful. Much to the chag-

rin of its trading partners, China runs a large trade surplus. A major

reason for this success is the number of foreign companies that have

moved their production to China. The products from these trans-

planted factories are exported under their original brand names.

Like Colbert’s France, China’s government offers significant

incentives to attract foreign manufacturing: a modern infrastruc-

ture, a disciplined low-cost labor force, and significant financial

inducements for companies that locate factories in areas of the coun-

try designated for development. It is enough to convince many com-

panies that previously manufactured in Europe, Japan, or the US to

move their equipment into Chinese plants.

China benefits from its new status as the world’s factory in

three ways.

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Moder n merca ntilism 23

Transplanted manufacturing plants churn out products for which there •
is already worldwide demand, building exports at minimum risk.

These plants provide employment for many millions of Chinese workers.•
Last but not least, they bring the latest technology into China, helping •
it acquire the skills and knowledge to compete on its own in the

international market.

By some estimates as much as 70 percent of the exported products

from China are from such transplanted manufacturing plants.

To take one prominent example, most Apple® products are

assembled in China, using imported and locally manufactured com-

ponents. In some cases the factories where they are produced are joint

ventures with local companies; in other cases the manufacturing is

done by contractors such as Foxconn. Either way, it is estimated that

over 100,000 workers are employed in manufacturing Apple prod-

ucts alone. These wildly popular products are sold worldwide under

the Apple brand, helping boost China’s burgeoning trade surplus.

Foxconn, a huge company ($80 billion of annual revenues in

2009) of Taiwanese origin, exemplifies the importance of transplants

to the development of China’s economy and its workforce. Foxconn

is a contract manufacturer of electronic products not only for Apple,

but for HP and other major international brands.

The company has built virtual dormitory cities for its Chinese

workers. One such location, in Shenzhen, houses over 300,000 work-

ers in a sprawling compound. Since factories draw their low-wage

workers from rural areas, owners have to provide the workers with

access to affordable housing near the plants.

Building domestic industries

Infrastructure, employment, exports: all are prerequisites for a mod-

ern industrial economy. But other bricks are needed to build a stable

industrial base. While transplants contribute to growth, they are no

substitute for home-grown industry.

China’s leaders, anxious to make sure that foreigners do not

control key industries, made the development of domestic industry

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Gover nment: Boss, fina ncia l pa rtner, r egulator24

a state policy, as one analyst has noted. “In the late 1990s increas-

ing dependence on foreign companies led Beijing to build strong

national industries in the protected shell of the domestic market.

But then excess capacity and reliance on foreign consumer markets

impelled Beijing to strive to make its national champions truly glo-

bal and to back them with an assertive trade policy.”7

Its success in turning these companies into effective global

competitors was and is helped by the use of foreign-developed tech-

nology from foreign firms seeking access to the potentially large

Chinese market. Since many are restricted from doing business on

their own in industries deemed critical to the state, foreign com-

panies have to participate in joint ventures within China, which

involves a sharing of their expertise.

It works like this. As noted above, China may allow minor-

ity foreign ownership in a China-based company. There is a better

chance of this happening if the local company can acquire state-

of-the-art technology as part of the deal. In this scenario foreigners

benefit economically from the domestic market, but without hav-

ing total control of the venture or of their intellectual property.

For example, GE has made minority investments in local com-

panies that produce wind turbines for power generation – an indus-

try that Chinese authorities deem critical as they seek to build world

leadership in this new technology. GE is expected to contribute its

own technology to the joint venture.8

Chinese authorities have also targeted electric automobiles

as a crucial product for the country’s industrial future. Here, too,

they are looking to foreign firms for technology that could give

them a leadership position. “China’s government is considering

plans that could force foreign auto makers to hand over cutting-edge

electronic-vehicle technology to Chinese companies in exchange for

7 J. Holsiag, “China’s flexing of its muscles is a sign of weakness,” Financial
Times, September 28, 2010, p. 13.

8 See P. Glader, “GE in China wind-power venture,” The Wall Street Journal,
September 28, 2010, p. B3.

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Moder n merca ntilism 25

access to the nation’s huge market, international auto executives

say.”9

But the imported technology does not generate products

strictly for domestic consumption. For example, Japanese and

European companies that pioneered high-speed train technology

and shared it with Chinese companies are now facing competition

from the Chinese products in international markets.10

Overseas companies find access to China’s immense and

increasingly affluent market a powerful argument for sharing their

expertise, but the country needs to develop its own technology if it

is to build a competitive industrial sector. To that end, government

planners are working to generate domestic innovation by funding

research institutes and universities.

In addition, the authorities are pushing local companies to

invest in research and development. This investment rose from 0.5

percent in 2004 to 1.8 percent in 2009. When a new industrial activ-

ity needs to be developed to meet a market need, state funds are

available and every effort is made to build plants for mass produc-

tion. This ensures that new technologies are not neglected.11 China

now ranks among the top four largest generators of patents after the

US, Japan, and Germany.12

The effort is paying off. Some newly created corporations in

technology sectors have already become world leaders. For example,

Huawei Technologies, established in 1988, is now one of the lead-

ing manufacturers of advanced telecommunications and networking

equipment, with over $30 billion in annual sales in 2011. Huawei

successfully competes globally against established vendors such as

Alcatel-Lucent and Ericsson.

9 N. Shirouzu, “China spooks auto makers,” The Wall Street Journal, September
17, 2010, p. A1.

10 N. Shirouzu, “Train makers rail against China’s high-speed designs”, The Wall
Street Journal, November 18, 2010, p. A1.

11 J. Dean, A. Browne, and S. Oster, “China’s state capitalism sparks a global back-
lash,” The Wall Street Journal, November 16, 2010, p. A1.

12 IEEE Spectrum, July 2011, p. 68.

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Gover nment: Boss, fina ncia l pa rtner, r egulator26

Follow the leader

You can debate whether a top-down, controlled economy can con-

tinue to prosper into the indefinite future. It is easy enough to point

to basic weaknesses including a neglect of environmental condi-

tions and overbuilding of certain industries. We can point to plenty

of examples in other countries where bureaucratic incompetence

sooner or later impedes progress.

However, the emergence of China has changed global trade

patterns. It is hard to think of an industry that is not affected by

competitors from China or by the promise of sales of its products to

China. Hence the importance of China to entrepreneurs with ambi-

tions to become global players.

China’s success also encourages other industrializing coun-

tries such as Malaysia, India, Brazil, Thailand, and Vietnam to step

up their own national initiatives to woo manufacturing sites from

the developed countries with subsidies and other incentives.

Vietnam’s case is especially interesting. It too is a country con-

trolled by a monolithic Communist Party but open to foreign capital

and technology importation. Foreigners are investing in the country,

setting up factories that once upon a time would have gone to China.

Two-thirds of the economy is now in private hands (but with state

supervision); the remaining third consists of state-owned corpora-

tions in industries deemed vital by the authorities. In general terms

Vietnam is closely emulating the Chinese model.

However, the government is dealing with the same problem that

has bedeviled other mercantilist countries, starting with Colbert’s

France: state-owned companies can easily become unprofitable, for-

cing taxpayers to cover their losses. This has been the case with the

Vietnam Shipbuilding Industries Group, which ran up multi-billion

dollar debts while its operating losses ballooned.13

13 J. Hookway and P. Barta, “A troubled state flagship makes waves in Vietnam,”
The Wall Street Journal, September 22, 2010, p. C1.

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Moder n merca ntilism 27

In spite of this risk, the model of combined state and private

ownership is spreading. For example, Brazil is funding the construc-

tion of dams to generate power through such companies. A dam built

to generate 11,200 megawatts, begun in 2010, is 49 percent owned by

the government-controlled Eletrobras. Its total cost will be BRL 20

billion. The rest of the funds came from non-direct state sources and

private investors. The demand for power is stimulating the interest

of investors, with the government coming in when such generating

capacity or transmission needs are not met by private capital.14

Heavy-handed government doctoring of the economy, admin-

istered with an (un)healthy dose of good old-fashioned mercantilism,

can act as a quick tonic for an underdeveloped industrial sector. It

is not only developing countries that are tempted to self-medicate

in this way. In developed countries where jobs are disappearing, dis-

gruntled citizens are alarmed, and political pressure is building to “do

something,” politicians are equally susceptible to the lure of more

government intervention. We return to this subject in Chapter 10.

Among the public, a commitment to free trade is usually the

first victim of the malaise. The call for tariffs to deter low-cost

imports has become ever louder in countries that, like the US, have

suffered a loss of industry. A recent survey shows a marked deterior-

ation in US public opinion regarding free trade agreements, accord-

ing to The Wall Street Journal. In 1999, only about 30 percent of the

people polled believed that free-trade agreements hurt the US econ-

omy, while in 2010 over 50 percent thought such agreements hurt

the country. Even more significant is that only about 15 percent of

the people believed that such agreements were helpful.15

Given this level of disapproval on the part of the public, we

should not wonder if politicians engage in ever louder saber-rattling

over tariffs and trade deficits in the coming years.

14 P. Winterstein, “Brazil power will still see state pressure under Roussseff,” Dow
Jones Newswires, September 2010.

15 S. Murray and D. Belkin, “Americans sour on trade: Majority say free trade pacts
have hurt the US” The Wall Street Journal, October 4, 2010, p. A1.

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Gover nment: Boss, fina ncia l pa rtner, r egulator28

Implications for entrepreneurship

The changing world economic order has enormous implications for

entrepreneurs everywhere. The greater the degree of government

control and willingness to finance and protect industries, the harder

the task is for independent entrepreneurs reliant on private funding.

Such policies affect access to markets and capital. And, most trouble-

some, government-protected competitors can behave irrationally, as

they are not subject to normal market forces.

We live in a world where the fastest-growing economy is the

one where the government has the most control. This has encour-

aged other governments to become more involved in their economies

in the hope of encouraging competitive new industries and defend-

ing established ones. Ours is also a time when trade barriers are

likely to grow.

How do entrepreneurs feel about building their businesses in

this environment? It depends on where they are, and where the best

market for their products is located. We look first of all at the effects

on a Chinese entrepreneur.

While China’s planners are not dependent on domestic entre-

preneurs to build the country’s economic muscle, there is ample

opportunity for entrepreneurship in industrial sectors that don’t

compete head-on with state enterprises. There is even a growing

venture capital industry there to finance such new businesses. Some

of this activity is financed by foreign capital looking for high returns

in a fast-growing economy.

Indeed there are investment opportunities available. A growing

number of independent entrepreneurs, as opposed to state-appointed

managers, are now creating big businesses. For example, the largest

group of Chinese electronics retail stores, Gome, was started by a

private entrepreneur. He was reputed to be the richest man in China

after the company had a public offering of its securities in the Hong

Kong exchange. We will discuss three other Chinese startups in

Chapter 8.

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Implications for entr epr eneurship 29

As an independent entrepreneur in China, you would welcome

the government’s financial help. In fact, a survey of entrepreneurs

in China suggests that many count on some kind of government

support for their success.16 But you would have to learn to deal with

state planning policies.

For example, 2010 was the last year of a national Five Year Plan

that called for a 20 percent reduction in energy use per unit of GDP

to reduce pollution. As a result, if you are an entrepreneur running

an energy-intensive manufacturing business, you might find that

the power available to your factory has been reduced or even shut

down by the local power utility. Such cutbacks actually occurred in

2010, reducing the production of materials such as polysilicon used

to manufacture solar cells.

Your only alternative would be to buy diesel-powered electrical

generators. Of course, their exhausts will add to air pollution – dir-

ectly negating the intent of the Five Year Plan. But that is not your

problem.

Now, let us imagine that you are an entrepreneur in the US.

You are likely to wish for freedom from all government interference.

Here is a classic statement of this position from two US entrepre-

neurs, published as a letter to the editor in The Wall Street Journal:

“In our experience [as entrepreneurs] the very last group we would

appeal to for help with a new venture would be a federal bureaucrat.

We thus feel the best way to revive the US economy and revitalize

the past ability to innovate would be to cut government spending,

regulation, and taxation.”17

While such total independence is praiseworthy in principle,

it simply isn’t practical in the real world. Entrepreneurs aiming to

build major enterprises have no choice but to have a global strat-

egy and they cannot do it just on the merits of their products. This

16 R. Steeter, “Asian entrepreneurs are bullish on the future,” The Wall Street
Journal, August 6, 2010, p. A13.

17 Letter to the editor by R. Gamblin and K. Borgh, The Wall Street Journal,
September 18, 2010, p. A14.

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Gover nment: Boss, fina ncia l pa rtner, r egulator30

means they may have to accept from the US government such “help”

as tax rebates, licenses, access to loans, or financial assistance with

exports if they are to succeed.

For example, if you want to sell your products in a country

where government restrictions limit imports, you will certainly

welcome US government help in opening such markets. You will

also be happy to accept its help in protecting your intellectual prop-

erty. And you will also welcome new business opportunities created

by government mandates.

Here is an interesting example of how a US government man-

date helped launch a new business. Telnet was arguably the first

commercial packet switching network service provider. In the mid-

1970s, it started offering dial-up modem access to central packet

switches that provided email and, later, file transfer services.

Telnet subscribers accessed these services through local wire-

line telephone networks, which created a problem. In some states the

telephone rates are flat or fixed, while in other states they are priced

on usage. There were long holding times for data sessions, amount-

ing to tens of minutes or even hours, and customers who paid by

usage complained about their charges. Telnet lobbied for relief with

the Federal Communications Commission (FCC).

Eventually the FCC created what it called Special Access,

which mandates that third-party service providers can pay the local

telephone carrier to provide space in the telephone end office for their

equipment (modems, multiplexers, routers, and management equip-

ment). In return they got local phone numbers at that end office and

a flat rate for these services. AOL was arguably the most successful

of all Internet service providers in exploiting special access, mailing

tens of millions of CDs to potential customers, and signing up mil-

lions of subscribers.

Special access is now offered in over fifty countries around the

globe, with other countries adopting what was arguably a great suc-

cess in the US in stimulating novel data communication services.

Today it is being used increasingly for voice communications via

packet switching, a development unforeseen in the 1970s.

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Implications for entr epr eneurship 31

All of the companies that benefit from this cost structure

owe a debt of gratitude to a government agency for creating it. It is

an excellent example of how, instead of crying about government

“interference,” smart entrepreneurs learn to take advantage of such

actions. They adapt in ways that allow them to profit from all oppor-

tunities, including government assistance, which support innova-

tive business models and help pay for new technologies. That is what

they have done throughout history. (We will return to these issues

later in the book.)

Working with the system

Just because countries have restrictive industrial policies does not

mean that there is no market in those countries for innovative prod-

ucts from abroad.

For example, advanced semiconductor devices essential for the

manufacture of electronic products are freely imported into China

and other countries that lack internal competitive resources. This

policy enables new companies from other countries to build their

sales at attractive prices. We will discuss one such entrepreneur-

ial company, RMI (Chapter 5), which became a leading exporter to

China of advanced chips for its communications industry. We will

also discuss Aicent (Chapter 9), a Silicon Valley-based company,

which sells telecommunications services in China.

It is always satisfying to declaim about freedom from govern-

ment intrusion, but it should not be forgotten that, even in the US,

government programs have generated opportunities that spurred

the creation of major new industries. US government policies have

enabled huge investment opportunities in telecommunications, the

Internet, and alternative energy production, to name only the most

important recent examples.18

18 For a fuller discussion of this topic see H. Kressel and T.V. Lento, Investing in
dynamic markets: Venture capital in the digital age (Cambridge: Cambridge
University Press, 2010), especially chs. 1, 4, and 6.

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Gover nment: Boss, fina ncia l pa rtner, r egulator32

In telecommunications, for example, the deregulation of

the US industry in 1996 and the opening to newcomers of what

was once a monopoly field enabled the formation of entrepreneur-

ial companies that eventually grew to be worth many billions of

dollars. Similar deregulatory steps in other countries also led to

the growth of extremely valuable businesses in services and in

advanced hardware and software products. Following deregulation,

the US government played a key role in allocating wireless spec-

trum to companies and regulating its use. This in turn impacted

the development of technology to use this spectrum in wireless

communications.

The growth of the Internet is, if anything, a more striking

instance of beneficial government support. Originally developed

with government funding, its implementation, coupled with

nearly universal access to broadband communications by con-

sumers, enabled an almost infinite number of new businesses

offering products and services on the Web. The opportunities

ranged from commerce (Amazon.com, for example), to auction

sites (eBay), software on demand (Salesforce.com), and social net-

works (Facebook.com).

Our third example of a government initiative in the US (and

many other countries) that holds promise for entrepreneurs is the

fostering of energy generation that uses non-fossil fuels. Hundreds of

new companies have been formed to develop and manufacture solar

energy sources, wind-driven generators, and biomass sources. They

depend on subsidies created by government policies to insure the

commercial viability of these alternative energy sources. Without

government “meddling” many of these new businesses would not

exist. Whether these investment opportunities are good ones depends

on many factors, and we return to this subject in Chapter 10.

Of course government involvement in the economy has a

downside as well as an upside. The bounty of opportunities opened

through government initiative is accompanied by legal challenges

with the potential to kill new businesses.

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Summing up 33

Nowhere is this more apparent than in the case of the Internet,

where enormous business potential exists side by side with obstacles

for entrepreneurs to overcome.

To name one such challenge, the issue of Internet privacy pits

new businesses against government regulations. One of the com-

mercial services enabled by the Internet, now being widely exploited

by new entrepreneurial companies, is the ability to track the online

behavior of individual consumers for the purpose of improving the

ability to sell them products.

Its use is being challenged as an intrusion of privacy: “Since

July 2010 at least six suits have been filed in the US District Court

for the Central District of California against websites and compa-

nies that create advertising technology accusing them of installing

online tracking tools that are so surreptitious that they essentially

hack into users’ machines without their knowledge.”19

Summing up

The world order is being fundamentally changed and entrepreneur-

ship must adjust accordingly.

Here is a comment by one observer regarding our new

situation.

Two-thirds of the world’s people live in countries that are

growing fast. Unfortunately, the one-third of the world’s

population living in [relative] stagnation includes the US, Japan,

and Western Europe, which contribute disproportionately to

world GDP – for the time being. The source of the growth is the

great migration from rural poverty to urban prosperity, perhaps

the greatest engine of economic expansion in history. But

this sort of growth implies great disruptions in the economic

life of many countries; it arises from a shift in the world

19 J. Valentines-DeVries and E. Steel, “Cookies cause bitter backlash: Spate of
lawsuits shows user discomfort with latest innovations to online tracking tech-
nology,” The Wall Street Journal, September 20, 2010, p. B1.

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Gover nment: Boss, fina ncia l pa rtner, r egulator34

economic structure, not incremental expansion of the existing

structure.20

Under such conditions, entrepreneurs need to learn to suc-

ceed in international markets, where each government has its own

set of rules. And, rules there will be, as countries intensely com-

pete to defend their industries and nurture new ones on the basis of

innovation.

National industrial policies have historically been condemned

by many people as infringing on their liberties within countries

founded on the principles of “free enterprise,” such as the US. Yet

today political pressure in these same countries is intensifying to

build import barriers, promote exports, and find new ways for gov-

ernments to promote the creation of new, innovative industries to

replace the mature ones that have migrated to countries with lower

labor and capital costs.

This is precisely the situation in which, more than ever, we

need entrepreneurs to stimulate economic growth. Calling for more

entrepreneurship in an era of big government may seem counter-

intuitive, but it is actually the most desirable way to generate eco-

nomic growth in the developed countries of the world.

In short, we need both private entrepreneurial and public ini-

tiatives to advance economic goals. In the next chapter we discuss

the role of entrepreneurship in achieving that objective.

20 D. P. Goldman, The Macro Strategist, from dgoldman@macrostrategy.com –
September 19, 2011.

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The Meaning and Role of

Entrepreneurship

Education for School Students in

the Global Economy

Christina Wai Mui YU
The Hong Kong Institute of Education, China

Abstract

This paper aims to clarify the meaning and role of entrepreneurship educa-
tion (EE) from a competence-based perspective in order to prepare school
students to work and live better in the global economy. After a critical review
on entrepreneurship and EE, it was found that there is a shift from a narrow
business-oriented process to a generic competence-driven process in defin-
ing entrepreneurship. The ultimate roles and goals of EE for school students
cover both the possession of (1) entrepreneurship for self-employment and
economic growth, and (2) enterprising skills for individual life growth. More
importantly, on top of the traditional entrepreneurial competencies and capa-
bilities, both ethical and social competencies are suggested in EE in order to
balance individual and public interest.

Key Words: Entrepreneurship Education, Enterprise Education, Entrepreneur-
ial Competencies/Capacities, School Students, Global Economy

Introduction

Entrepreneurship Education (EE) has drawn an increasing interest and made
remarkable progress to become a field of academic study over the past four
decades (Garaven & O’Cineide, 1994; Gibb, 1993 & 2011; Hytti & O’Gorman,
2004; Jamieson, 1984; Mwasalwiba, 2010; Pittaway & Cope, 200

7

; Vesper &
Gartner, 1997). EE stakeholders believe that learners are able to cope with chal-
lenging jobs or start new business ventures (self-employment) after receiving
EE (Gibb, 1993; Hytti & O’Gorman, 2004; Jack & Anderson, 1999). Policy-
makers can then release their burdens on meeting the needs in job market
and economic development (Kirby, 2004; Matley, 2005; McKeown, Millman,

7

8 International Journal of Vocational Education and Training Vol. 22 No. 2

Sursani, Smith & Martin, 2006; McMullan & Long, 1987; Rae, 2010). Moreover,
academicians are more motivated to invent programs and activities for the
building of an enterprising society (Mwasalwiba, 2010). Therefore, EE is one
of the possible key drivers of sustained social development and economic re-
covery, which draws an increasing interest from multi-stakeholders in public,
private, academia and non-profit sectors (Volkmann et al., 2009).
The current movement of EE is becoming ‘a mainstream education com-
ponent’ across disciplines at university and school levels in many countries
(Cherwitz & Sullivan, 2002; Gibb, 2011; Mclarty, Highley & Alderson, 2010;
Volkmann et al., 2009). For example, many entrepreneurship incubation cen-
tres are being set up at universities (European Commission, 2008) and EE is a
key consensus area for development in Asia-Pacific countries (United Nations
Educational, Science and Cultural Organisation, Asia-Pacific Programme of
Educational Innovation for Development, 2013). EE appeals to all students no
matter what career paths they will have (European Commission, 2008; Gibb,
2002, 2007 & 2011; Mclarty, Highley & Alderson, 2010).
However, EE is facing many challenges including a confusion of the defi-
nition, and a lack of evidence and empirical study on its impacts on trans-
forming the graduates to be entrepreneurs, despite EE has impacted graduates’
intentionality. Moreover, at policy making level, there is no concrete policy
on how to spread EE to mainstream education, even though EE is said to be
needed by all students. Gibb (2011) also highlighted some other challenges EE
has had such as the intra-disciplinary challenge, assessment, and strategic and
operational capacity building. Yu (2013) shared strategies for capacity build-
ing to advance EE at individual, institutional and societal levels. Amongst the
existing challenges in EE, clarifying the meaning and role of EE for imple-
mentation is most crucial since different understandings of EE would lead to
different objectives, contents, target audiences, teaching methods, assessment
indicators and resource implications (Mwasalwiba, 2010). For example, EE is
mainly understood as a promising way to lower unemployment rate in Main-
land China when it faces more than one million of college graduates each year.
Differently, some western countries may view EE as an individual empower-
ment to meet the ever-changing needs of employment and life. In such a way,
the purpose of EE can range from covering either a narrow focus on business
venturing (Volkmann et al., 2009) or a wide range of enterprising ‘soft’ skills
(Davies, 2002).
Therefore, in this paper, a literature review on the meaning of entrepre-
neurship and EE as well as a discussion on the significant role of EE to today’s
school students will be critically shown in the first three sessions. Afterwards,
a detailed review and discussion on the entrepreneurial competencies and ca-
pabilities for school students, including those traditional and neglected ones

The Role of Entrepreneurship Education for Students in the Global Economy 9

will be presented. Finally, the acquisition of entrepreneurial competencies and
capacities will be proposed.

Entrepreneurship

Scheumpeter (1934) suggested a classical function which constitutes entrepre-
neurship concept as ‘innovation’ – carrying out changes through creation of
new products, new production methods, new markets and new forms of or-
ganization. Wealth is then created when such innovation exists. Furthermore,
Drucker (2006) claimed that true entrepreneurs seek to minimize risk and ex-
ploit change to achieve purposeful innovation. Entrepreneurship is therefore a
process which involves the creation of an innovative economic organization for
the purpose of gain or growth under condition of risk and uncertainty (Doll-
inger, 2001). Entrepreneurship refers to business-oriented activities that closely
relates to the intersections of creativity, innovation, management, opportunity
seeking, risk taking and striking for growth (Vanderwerf & Brush, 1989).
However, Shefsky refers to entrepreneur as someone who is able to identify
opportunity, take up the opportunity in time and manage the opportunity to
function as a success (Singer, 1995). It symbolises that an entrepreneur is not
necessarily referring to someone who is associated with business, but could
also be referring to those who possess enterprising attributes to set up and run
a specific task because their psychological characteristics are basically identi-
cal (Caird & Johnson, 1988; Gibb, 1987). Hence, the Commission of the Euro-
pean Communities (CEC 2005, p. 4) defined entrepreneurship as:

… an individual’s ability to turn ideas into action. It includes creativity, in-
novation and risk taking, as well as the ability to plan and manage projects
in order to achieve objectives. This supports everyone in day-to-day life at
home and in society, makes employees more aware of the context of their
work and better able to seize opportunities, and provides a foundation for
entrepreneurs establishing a social or commercial activity.

According to the definition of entrepreneurship given by CEC (2005), entre-
preneurship no longer refers to business-oriented activities solely but also to
individual’s ability of actualizing his/her own idea through the same cross-
ings of creativity, innovation, risk taking, management, opportunity seeking and
striking for sustainable development in different aspects of life. As can be seen,
there is a shift from a narrow business-oriented process for economic growth
to a generic competence-driven process for individual growth in defining en-
trepreneurship. Such a shift not only draws a significant impact on under-
standing the nature and use of entrepreneurship, but also on EE.

10 International Journal of Vocational Education and Training Vol. 22 No. 2

Entrepreneurship Education (EE)

The terms ‘entrepreneurship education’ and ‘enterprise education’ are used
interchangeably to describe EE in a wide range of programs, courses and or
initiatives found at varied educational levels. Gibb (1993) has stated that the
two terms are conceptually identical but contextually different. Garavan and
O’Cinneide (1994) have further distinguished the two, explaining that entre-
preneurship education aims to create an attitude of self-reliance, while enter-
prise education seeks to create opportunity-seeking individuals. In fact, no
matter what exactly the terms is used, EE covers the aspects of both entre-
preneurship and enterprising behaviour (Seikkula-Leino, Ruskovaara, Ika-
valko, Mattila, & Rytkola, 2010). Moreover, EE not only applies to business
ventures but also more broadly to life (Bridge, Hegarty, & Porter, 2010; Gibb,
2011). Many authors have suggested that entrepreneurship education which is
more economic focused, fits advanced students in university, while enterprise
education which is more generic in nature, suits younger students in basic
schooling (e.g., Jones & Iredale, 2010; Leffler, 2009; Pepin, 2012). Schools and
universities should prepare young people to work in a dynamic, rapidly chang-
ing entrepreneurial and global environment. Therefore, providing an analyti-
cal perspective on the meaning and role of EE for school students in the global
economy context is needed.

Role of EE to School Students

Education systems have traditionally focused on providing basic skills and
ensuring individuals can secure future jobs. Meanwhile globalization has
changed the nature of work, including (1) the relocation of offices, factories
and staff to countries where operation costs are cheaper, (2) the rapid tech-
nological development towards labour-saving production and business pro-
cesses, (3) the lower cost of travel to encourage job mobility and (4) an advent
of “virtual” companies outsourced to freelancers or offshore workers (Fien,
Maclean & Park, 2009; Velde, 2009). Amidst highly uncertain economic and
labour market conditions, employers are likely to be cautious and hesitant
about expanding their enterprises and hiring new employees, particularly in-
experienced school students. Even when school students have a more stable
and secured job, they may only be able to barely sustain their living and even
live in poor households. The rise of in-work poverty comes to be the most
dramatic outcomes in industrialized countries over the past 30 years due to
globalization and technological advancements (Hellier & Chusseau, 2013).
Under such circumstances, traditional education seems no longer able to help
employment and poverty in today’s global economy. Contrastingly, EE is in-

The Role of Entrepreneurship Education for Students in the Global Economy 11

tended to develop a culture of enterprise among a younger generation within
the society that emphasizes on the value of competitiveness, innovation and
creativity (Robertson & Collins, 2003). EE can play a significant role in em-
powering school students to possess entrepreneurial competencies and capa-
bilities to meet challenges in employment and or self-employment. Of course,
life planning education and career counselling should go alongside with EE
through a concerted effort of stakeholders in the community too.
Moreover, investment in human capital not only enables individuals to
increase their future earnings and enhance their experience in the labour
market, but also enables individuals to become better citizens on top of being
better workers (Lister, 2003). Schools should strive to make students become
knowledgeable about contemporary issues, be able to work independently and
collaborate with others, and possess personal dispositions that value cultural
diversity (Learning & Teaching Scotland, 2002). They are critical for school
students to become active citizens regardless of the economic background they
have had and the career path they are to take (Deuchar, 2008). For example,
those individuals who are in poverty could be empowered by EE to regain
their economic and social dignity; while those individuals who are rich could
be educated by EE to see how they can enjoy their life uniquely through self-
employment. If every individual respects and cares about others as well as the
global issues, a more enjoyable life is achievable for everyone. Erkkila (2000),
on her comparative study between United States, United Kingdom and Fin-
land, suggested that the belief of having both societal and individual improve-
ments always supports the provision of EE.
There are two main features of EE to school students: (1) developing those
personal attributes and transferable generic skills that form the basis of an
entrepreneurial mind-set and behaviour; (b) raising learners’ awareness of
self-employment and entrepreneurship as possible career options (European
Commission, 2009). These understandings incorporate both the know-how
and know-why knowledge and skills as well as an emphasis on the learning
process of entrepreneurship. However, the achievement of EE depends very
much on what entrepreneurial competencies and capabilities are identified for
the learning process.

Entrepreneurial Competencies and Capabilities
for School Students

Entrepreneurs need both entrepreneurial and managerial competencies to
support the different stages and contexts of business growth (Capaldo, Ian-
doli & Ponsiglione, 2004; Hayton & McEvoy, 2006). Entrepreneurial compe-
tence, therefore, encompasses not only behavioural competence (knowledge

12 International Journal of Vocational Education and Training Vol. 22 No. 2

of how to behave) but also cognitive competence (work-related knowledge
and understanding) and functional competence (job-related skills, know-
how) (Delamare Le Deist & Winterton, 2005; Lans, Hulsink, Baert & Mulder,
2008). Moreover, competence-related motivational attitudes like self-efficacy
and self-confidence should be regarded as important conditions for entrepre-
neurial competence (Lans et al., 2008). Indeed, many authors have agreed on
such an integrated view of competence in entrepreneurship (e.g. Hayton &
Kelley, 2006; Markman, 2007).
Lum (2009) further noted that the possession of skills and competencies
can lead learners to underestimate the capacities required in the real world,
necessitating that broader and more concrete learning content should be pro-
vided to them. Hence, developing individuals’ capacity of knowing how to seek
for opportunities (Baron & Ensley, 2006), that is ‘be enterprising’ (enterprise
capacity), may be more important particularly in view of the need to meet the
ever-changing demands through lifelong learning in today’s knowledge-based
society. The European Commission (2006) named such enterprise capabili-
ties as ‘new basic skills’ for school students in order to improve international
competitiveness. Mclarty, Highley and Alderson (2010, p. 33) echoed and de-
fined enterprise capability in this way: ‘Enterprise capability [includes] innova-
tion, creativity, risk-management and risk-taking, a can-do attitude and the
drive to make things happen’. This concept of enterprise capability provides a
clear guidance for the nurturing of active citizens to enable them to develop
a mind-set of ‘you can if you want to’ (Mclarty, Highley & Alderson, 2010).
Perhaps EE can indeed give school students courage to strive for excellence in
their pursuit of dreams with a highly optimistic attitude. However, it may also
possibly encourage young people to do whatever they want without a concern
of others. ‘Be considerate before you act’ and “you can if you want” should go
hand-in-hand in developing an enterprising mind-set for school students.
Pepin (2012) pointed out that there are some negative effects of entrepre-
neurship on school students such as individualism, marginality or difficulty
dealing with authority, which have been inadequately addressed in education.
Also, Caird (1990) indicated that the strong motivation of entrepreneurs is
governed by a high need for achievement, power and autonomy, and a low
need for affiliation. It is reasonable to expect that entrepreneurs who have
confidence in their ability to control the events would be more motivated to
actively seek new business opportunities (Lee & Tsang, 2001). Hence, in re-
ality, it is quite true that most entrepreneurs work in isolation, which may
easily lead them unwilling to listen to others and act opportunistically and
ruthlessly in their will to succeed. An emphasis of opportunity seeking may
possibly lead someone to become an opportunist without a proper concern of
others. Hence, it is necessary to seek for a balance between the individual and

The Role of Entrepreneurship Education for Students in the Global Economy 13

societal interests in the provision of EE in order to protect and nurture school
students in a healthy and positive development. Therefore, ethical and social
competencies and capabilities are called upon in EE.

The Need of Ethical and Social Competence in EE

Ethical competence refers to the possession of certain personal and profes-
sional values that can underpin the moral reasoning, decision making and ac-
tion taking on specific events (CEC, 2005). Yu and Man (2009) found that
the desirability for entrepreneurship lies in an attitudinal change in entre-
preneurial characteristics, where more in-depth conceptual understanding
of entrepreneurship is recommended. To strengthen individual participants’
conceptual understanding of entrepreneurship and attitudinal change, the
advancement of individual character building can be viewed as a condition
for enabling individuals to engage in the ‘process of learning and adapting to
change’ properly. As such, displaying an understanding of the importance of
cultivating strong ethical character development through the business-run-
ning (learning) process of entrepreneurship is crucial.
In defining key competence for all students, Kennedy (2005) pointed out
that key competence should include the full range of skills and competencies
relevant to one’s life span instead of employment solely. Education should en-
able young people to become local and global citizens. Self-interest particu-
larly takes priority in an individuals’ life in today’s increasingly fragmented
world, however it does not mean that we can ignore needs of others and do
whatever we want from local and/or global citizenship points of view (Ken-
nedy, 2005). In response to the breakdown of social principles, values and po-
litical engagement among young people, there has been a renewed interest
in promoting ethics and moral education in citizenship (Deuchar, 2006). Ac-
cording to Kennedy (2005, p. 44), “Young citizens must first be taught to value
values”, it is not to indoctrinate but to allow young local and global citizens to
distinguish between right and wrong, to recognize it in the behaviour of others
and to take appropriate action, although it may not be easy to find a common
value in the 21st century. In order to protect young people from over-dressed
individualism, we need to educate them in striking a good balance between
personal and common interest in decision makings throughout their life. EE
possibly provides a platform to help young people to value values as a cen-
tral part of the life experience. Deuchar (2006 & 2007) explored the views of
teachers and students on enterprise and citizenship education in ten primary
schools and seven secondary schools in Scotland and found that teachers and
students were increasingly focused more on “enterprise” as being framed upon
a model of social renewal and civic responsibility within a global and moral

14 International Journal of Vocational Education and Training Vol. 22 No. 2

framework. The teachers recognised the need for rights as well as responsibili-
ties, ambition as well as tolerance and wealth creation as well as charity in car-
rying out EE (Deuchar, 2007).
Furthermore, in order to address the societal needs in business running
instead of profit-making solely, social responsibility should be highly empha-
sised in EE for school students since democratic citizenship is not only about
benefits but also responsibilities. The purpose of running a business is to ben-
efit not only the individual but also society. It is important to lead school stu-
dents to engage in a wider learning context of social interaction and help them
to become more aware of other’s concerns and to better understand the world
around them. This enables school students to address and respond to the pub-
lic concerns more. Enabling young people to work on social entrepreneurship
is a possible way to strike a balance between individual and collective needs.
Social entrepreneurship in here is defined as a business set up to benefit society
(someone who is enterprising to benefit society) (Young, 1983). For example,
in Quebec, Canada, school entrepreneurial activities must stem from and cater
for the needs of the local community (Pelletier, 2007). School students should
be provided with relevant concepts and knowledge on social responsibility,
and be guided to create some sort of action taken to demonstrate their con-
cern for social responsibility. For instance, school students may also consider
producing some products and donating a certain percent of their total profit
(if any was made) to a chosen minority or social enterprise. Deuchar (2008, p.
30) pointed out that one of the key performance indicators of enterprise and
citizenship education is when school students are able to view enterprise in a
social sense and enterprising individuals as someone not limited in business
or academic success but “anyone who could be enterprising in their response to
community issues if they believed in the need for justice, truth and honesty”. In
fact, social interaction with various parties plays a significant role in the learn-
ing process of EE (Yu & Man, 2009). Thus, promoting social interaction and
collaboration with various stakeholders to sustain individual and collective
development in EE is highly desirable.

Acquisition of Entrepreneurial Competencies
and Capabilities

Sandberg (1994) argued that competence is constituted by a worker’s under-
standing of work by drawing on his interpretative findings. Gerber and Velde
(1996) further highlighted the relational aspect in understanding competence.
Both context and work relationships play a role in the embedding of compe-
tence. These arguments shift the concept of competence from a narrow to a
broader view that draws on three significant implications: first, learner is the

The Role of Entrepreneurship Education for Students in the Global Economy 15

departure point for the acquisition of competence instead of the competencies
themselves; second, competence is better described as a combination of core
components that are interdependent; third, competence needs to be developed
through the enrichment of practical experience that benefits learners’ holistic
development. Also, the acquisition of competence is subject to the context, the
situation and the experience of the individual who works. Entrepreneurship
depends upon generic forms of understanding, which require theory be put
into real practice in shifting its focus from venture creation to the seeking of
opportunities and innovation (Lans et al., 2008). In such a way, EE is no longer
able to teach knowledge and skills without a consideration of their transfer-
ability across contexts and situations.
Hence, any entrepreneurship program should be led by ‘creativity, infor-
mality, curiosity, emotion and its application to personal and real-world prob-
lems and opportunities’ (Penaluna & Penaluna, 2008) that takes place outside
of a formal classroom setting. Moreover, entrepreneurship programs need to
incorporate active learning elements such as business simulation, workshops,
counselling and mentoring, study visits, business set-ups, games and competi-
tions (Hytti & O’Gorman, 2004). Lewis and Massey (2003) and Jones (2010)
have also argued that student-centred learning should form the basis of any
entrepreneurship program, with students acting as agents who are able to learn
and apply their knowledge onto other contexts. EE also depends on hands-on
practice and social interaction with others, such as entrepreneurs, throughout
the learning process (Man & Yu, 2007; Yu & Man, 2009). An ecosystem for
possible collaboration amongst business, education and community sectors
needs to be built up for enhancing the effectiveness of EE too.
More importantly, in-depth reflection throughout the process of entre-
preneurship learning should be emphasized (Pepin, 2012) because reflection
is a pre-condition in becoming aware of the lack of competence (Korthager
1999, p. 192). Furthermore, the development of the necessary and appropriate
type of entrepreneurial competencies and capacities requires a long-term and
comprehensive transformation of education systems and practices at all levels.
Relevant changes in policy, curriculum development, teaching and learning,
assessment, teacher education, career counselling, work-based projects and
internships are considered necessary.

Conclusion and Recommendations

The definition of entrepreneurship shifts from a narrow business-oriented
process for economic growth to a generic competence-driven process for indi-
vidual growth, which draws a significant impact on EE for school students – a
learning process for a possession of entrepreneurship for employment as an

16 International Journal of Vocational Education and Training Vol. 22 No. 2

option and enterprising skills for life. Young people are facing huge challenges
in the global economy, EE instils an entrepreneurial spirit to young people and
plays a key role in empowering them to survive better in the future regardless
of the career and life path to be taken. Hence, entrepreneurial competencies
and capabilities are suggested to be embedded in the education system as ‘es-
sential and/or core’ elements. In order to create a more harmonious global
community for the future, ethical and social competence also need to be em-
phasized in EE. Cultivating school students to value values, build ethical char-
acter, balance self and public interest, take up social responsibility, interact
and collaborate with different people through authentic learning process are
strongly recommended. Finally, more thorough studies on policy making and
implementation of EE at all school levels are needed.

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GOVERNMENTS AS MARKET PLAYERS:

STATE INNOVATION IN THE GLOBAL

ECONOMY

Giselle Datz

Financial innovation emanating from the public sector is not a new phenomenon.The literature and practice of financial regulation is filled with instances in which
the public sector understood and tried to contain financial excesses and attempted to
maximize opportunities for economic growth via private investment. Hardly studied,
however, have been cases of financial innovation that are not primarily related to
regulation of private or public financial flows. This paper focuses on how govern-
ments in emerging markets are acting increasingly as financial market players,
enacting strategies that are not simply those of a risk-averse welfare maximizer (in a
formal modeling description), but that of a high(er) yield seeking investor.

The public realm in which states operate is symbiotic. It encompasses two dual-
ities: one between public and private activity and authority, and the other between
demand and supply for financial innovation. In continuing with its transformative
process, the state in emerging markets is undergoing a process of further hybridiza-
tion, applying private methodologies to serve public goals (however politically
insulated) and engaging as both a supplier and consumer of financial innovation in
more aggressive ways. This hybridization shapes a new relationship between states
and financial risk. However, the extent to which sovereigns can act as private players
is limited by the understanding that they are inescapably tied to strategic public
“interests that will take precedence over profit maximization.”‘

The ability to grasp the broadened investment room to move emerging market
governments, as well as the new constraints they face, ultimately requires an under-
standing of the state as a heterogeneous category. In other words, the heterogeneity
that exists within financial markets in terms of strategies used and instruments
available, can be found within the state with its diverse time horizons, functions and
strategies.2 Therefore, understanding the role of states demands unpacking various
layers of public and private mechanisms that manipulates them, which together
determine their clout in the global economy.

Journal of International Affairs, Fall/Winter 2008, Vol. 62, No. 1. F A L L / W INTER 2008 | 35
© The Trustees of Columbia University in the City of New York

Giselle Datz

T H E PUBLIC AS A SYMBIOTIC ENTITY

The public realm encompasses a symbiotic relationship in financial innovation
that is not simply concerned with regulating private activity, sponsoring privatiza-
tions or leaving room for private authority to emerge. Instead, it is actually assuming
“private-like behavior” through risk management activities regarding liability (debt)
management and asset (reserves) diversiflcation.3 This is translated in the work of
relatively new and autonomous debt-management offices and of sovereign wealth
funds (SWFs). Within these can be detected a pervasive private strategy in actions
ranging from the hiring of uniquely qualified financial professionals at market-
competitive rates to the expansion of return-related operations.”

A second symbiosis is also at play. Governments that have always behaved as
suppliers of financial assets—most notably sovereign bonds—by catering to the
needs of institutional investors, are now playing a different role by providing
demand for financial innovation and financial assets. Increasingly, states in emerg-
ing markets are becoming net exporters of capital rather than importers. Emerging
market governments, especially in the Persian Gulf and Asia-Pacific regions, are less
content to leave large volumes of excess foreign reserves to be invested in risk-free
assets with low return. More and more, there is a flight to risk through more auda-
cious investments made by sovereign wealth funds—relatively autonomous and,
thus far, secretive institutions.

Indeed, since the late 1990s, the globalization literature has been keen on
parceling out the role of the state. Studies that claimed that the state was withering
away gave way to more focused analyses of states as negotiators trying to intersect
national law with foreign actors, especially through competitive deregulation or
reregulation linked to the preferences or imperatives of foreign capital.5 A key para-
doxical relationship between states and global capital was identified. Although the
scope of states’ autonomy to control monetary and fiscal policies was constrained by
economic globalization, in order to realize the material gain from this process, as
James Mittelman suggested, the state increasingly facilitated its development acting
as its agent. 6 This facilitation operated not only at the level of political infrastruc-
ture, but particularly at the level of legal infrastructure. For Leo Panitch, states
authored a regime that defined and guaranteed the global and domestic rights of
capital through international treaties with constitutional effect.” Hence, the role of
states was not only one of internalizing, but especially of mediating adherence to
international capitalist competition.

Eric Helleiner’s analysis of the Bretton Woods system provided a historical
understanding of how states were indeed proactive in the development of financial
globalization, initially restricted by the pervasiveness of the embedded liberalism
compromise, e.g. economic liberalization accompanied by domestic welfare policies.8

36 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Players

Incrementally, however, the tenants of neoliberalisn:\ as both a political project and

a set of ambitious economic reforms, promoted the abolition—even if not univer-

sally—of capital controls in favor of freer international financial flows.^

Governments recognize the importance of international coordination in monetary

policy. Furthermore, central bank independence remains an important tool for signaling

credibility to markets. However, transforming key administrative functions within states

and financial innovations lay beyond both pillars.lo States endured internal changes as

a consequence of their renewed engagement with global capital. Saslda Sassen suggests

that the “internal structuration of states” is in fact an element of analyses of the state

and globalization that has been neglected.” In her view, state participation in imple-

menting its global economic agenda entailed the ascendance of what became strategic

agencies within the government apparatus that were most directly connected to this

agenda, namely central banl«, treasuries and regulatory agencies. 12

This discussion leads to an analysis of what Sassen calls the “restructuring of the

private-public divide,” where “forms of authority once exclusive to the public

domain are now shifting to or being constituted in the private sphere of markets

with the corresponding normative recording.”‘3 More specifically, Sassen refers to

cases of expansion of the private sphere, particularly through privatization and

marketization processes launched in the 1980s. In other words, she sees economic

actors seeking to privatize public regulatory functions in a way that increases their

authority over matters once exclusive to the public domain, such as commercial arbi-

tration, property rights and the regulation of trade and capital markets.

This analysis of the privatization of forms of authority, however insightful, still

does not fully account for a parallel process marking a different trend. Privatization

often means that public functions and authority cease to be exercised solely by a

public entity and become a private venture undertaken by private agents who

usually follow efficiency-maximization criteria and remain far from any mandate to

provide public goods. In this sense, what is privatized is no longer publicly managed.

Nevertheless, these processes do not fit this kind of transformation: Sovereign debt

and asset management are not functions that have become privatized. The private

in this discussion has to do with how, not who. These functions are still a responsi-

bility of the state, yet are conducted almost as private-investment operations insofar

as they: (a) count on highly specialized professionals with private experience or

outsource some services to the private sector in serving a public purpose; (b) involve,

in the case of asset management by SWFs, a mix of “opaque operations and invest-

ments” such as acquisition equity (making sovereign states shareholders in private

businesses abroad); and (c) utilize models of risk management through hedging akin

to that of private financial players. Together such functions entail competitive strate-

gies among different sovereign debt and asset managers for the most lucrative deals,

FALLAVINTER 2008 I 37

Giselle Datz

taldng the understanding of a “competitive state” to yet another level of specializa-
tion and interaction. 14 In all of these areas, we see a rearticulation ofthe relationship
between states and financial risk. At stake is a more welcoming engagement with the
motto, “no risk, no reward.”

Sassen aptly suggests that understanding the global economy may entail the
blurring, rather than the neat segmentation, of “longstanding dualities in state schol-

arship, notably those concerning the distinctive
QlStinCtlOn spheres of influence of respectively the national and

l i c ^^ global, of state and non-state actors, and of the
orirl -rkfixT-o+o i o private and the public.”‘^ In this sense, my argument
«mu. p r i v a t e IS ., o , , . . .
j ^ , merges with Sassen s notion that globalization is
QcLerinineQ Oy producing within states a form of authority that is a

tlie kinds of hybrid, “neither fully private nor fully public, neither

constraints that ^”‘̂ ^ national nor fully global.”‘^ I argue that the
. , t” . 1 distinction between public and private is then not

states as rinancial
determined by passive versus active investment and

y p e t and
players risk management, but by the ldnds of constraints that

subject to. states as financial market players are subjected to.
More than a hybrid, the state is a heterogeneous cate-

gory that entails a symbiotic relationship between private and public strategies,
obstacles and methodologies.

For Geoffrey Underhill, a neat separation of state and market is not realistic as
there is a latent interdependence between the two, one which is evidently not new,
but rather endogenous to governance and the process of economic competition.!”
Such interdependence is not welcoming of a market and government conceptual
dichotomy (seeing markets as exchange and governance as coercion), but rather
more conducive to the idea of a “state-market condominium.” Under this condo-
minium, public regulation and supervision of market forces is more than the result
of an antagonistic relationship between the public and the private. Instead, “it is
systematic evidence of the ways in which market interests and state policy processes
are integrated.”is In this view, the transformation of markets goes hand-in-hand with
the transformation of the state. Yet more than a reciprocal relationship, a symbiotic
interaction between public and private in the heart of the state is apparent. The case
of SWFs that purchase stakes in important Western firms has led to a series of reac-
tions by official sectors in developed countries. The complexity of the situation is
well illustrated by U.S. Securities and Exchange Commission Chairman Christopher
Cox, to whom the increasing involvement of governments as both owners of compa-
nies and investors in securities can be seen to challenge the classical (liberal)
understanding of states as proposed by Adam Smith and Milton Friedman, who

38 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Flayers

emphasize minimal intervention at a fundamental level.’^

Underlining this unfolding policy confusion is the reality of “embedded neolib-

eralism,” which is, as Philip Cerny suggests, a system of production and

private-public interaction—not simply via state, but also via civil society networks—

multifaceted and impressively fungible.20 That is, the current phase of capitalism,

based on a combination of tenants from neoclassical economic theory targeting

global economic integration, has become increasingly “what actors make of it.”

What states have been making of it goes beyond setting up firewalls; it now involves

a closer understanding of risk and how some exposure to it may be worth the ride.

DEBT MANAGEMENT

Sovereign debt management has gone through important changes in both devel-

oped and developing countries. In the European Union (EU), political integration

was a product of an important process of economic harmonization, which entailed,

among other initiatives, balancing budgets along the lines of accountable and trans-

parent debt management. From this emphasis came the initiative to make debt

management a more autonomous function of entities located inside the Ministry of

Finance, yet behaved separately from it in a more specialized fashion. For example,

the Ministry of Finance defines the medium-term strategy for debt management

according to its risk preferences and the macroeconomic constraints of the country,

while the Debt Management Office (DMO) implements that strategy and adminis-

ters the issuance of domestic and foreign-currency debt.2 ‘

At the macroeconomic level, the logic for this separation of tasks is analogous to

investor-signaling arguments made by students of central bank independence.22

Sovereign debt management that is independent of monetary policy would signal to

financial markets and domestic constituencies that governments are indeed commit-

ted to the transparent and accountable management of debt policy. That could lower

the government’s borrowing costs, indicating that the country is much less likely to

engage in risky strategies, such as irresponsible indebtedness, in order to suit

political goals.

At the microeconomic level, an autonomous debt agency functions much like

private fund administrators in the sense that it tries to attract professionals who are

knowledgeable in the intricacies of global financial markets. In an International

Monetary Fund (IMF) report. Marcel Cassard and David Folkerts-Landau explain

that a great advantage of an autonomous DMO is that it “can be given a clearly

defined objective, without being hampered by either the management of structure or

pay scale of the public sector. “23 A flexible pay structure is seen as an important mech-

anism to attract qualified staff. Translated into practice, performance criteria was

developed for debt managers, which made their daily work, accountability structures

FALLAVINTER 2008 I 39

Giselle Datz

set aside, a risk management operation of liabilities. If they were in charge of manag-
ing assets, their work would not differentiate much from that of private mutual or
pension fund managers. After all, the logic goes that “debt management could be
significantly improved if it was entrusted to portfolio managers with knowledge and
experience in modern risk management techniques, and if their performance was
measured against a set of criteria defined by the Ministry of Finance.”24

Indeed, the perceived necessity to attract these kinds of professionals was a
reason for Ireland, Sweden and Denmark to develop separate debt management
offices placed outside of the Ministry of Finance and staffed with financial experts
with experience in portfolio risk management. It was then assumed that funding
operations would be carried out more aptly because those in charge “followed private
sector, market-oriented principles and that, since they did not have to comply with
bureaucratic procedures, they would create an environment appropriate for quick
decision making. “25 Philip Anderson stresses the fact that recruitment and retention
of staff with appropriate skills is often a challenge in the public sector.26 Yet, creative
solutions are increasingly being discovered, such as providing staff with training
opportunities, contracting skilled and experienced staff on fixed-term assignments
and allowing for placements of private sector personnel in the debt management
unit or for the use of long-term advisors with specialist skills.27 Furthermore, bench-
marks for debt management are set in accordance with the risk tolerance of each
government, which is, in turn, a function of the size of the public debt, its currency
composition and maturity.28 Sovereign debt managers, like private pension and
hedge or mutual funds managers, are held accountable for their actions if they
perform below benchmark targets set in terms of the foreign currency market.

Increased competitiveness is another goal of DMOs, further linking public poli-
cies to private methodologies. For example, France’s Debt Management
Office—^Agence France Tresor—was created to reduce the cost of debt for the French
taxpayer and “to help investors better identify French debt securities within the range
of sovereign debt products available in European and world markets.”29 Catering to
investors’ demands and preferences is an effective way to gain terrain among competi-
tors. In this effort, sovereign debt management institutions are increasingly issuing
inflation-indexed bonds as well as long-maturity bonds that appeal to investors inter-
ested in cushioning growing inflationary pressures worldwide.^o

W^hat we see then are two important transformations having taken place. Not
only was more autonomy given to DMOs and equivalent agencies, but also a private
rationale for conducting business was inserted in the system via increased competi-
tion among these agencies. The Financial Times reported in 2002 that, although
“European finance ministers are not usually at the forefront of innovation in capital
markets,” the picture is definitely changing. The newspaper went on to report that,

40 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Players

as “competition for funding from investors intensifies in the wake of the euro, newly-
styled and aggressive debt management agencies are getting more creative and more
opportunistic in meeting their governments’ borrowing requirements.” If, in the
past, the supply of European sovereign bonds was relatively predictable, now supply
for bonds is a major mover of financial markets. So much so that “some of the
elements of the corporate bond market are beginning to influence the shape of the
government market. “31

Since 2001, the World Bank and the IMF have been advocating for the estab-
lishment of quasi-independent agencies to manage the public debt of emerging
market countries, emphasize the benefits of lower cost for public credit, create trans-
parency and accountability, especially regarding the development of accurate and
comprehensive debt data, implement of cost effective cash management policies that
“minimize government liquidity and repayment risks”; and provide consistency in
the development of governments’ securities market.32 The crucial difference between
emerging market economies and Organisation for Economic Go-operation and
Development (OECD) economies is not the level of indebtedness, which has been
positively altered by high levels of reserve accumulation in the developing countries,
but how governments’ balance sheets are exposed to external shocks, given their low
level of investment diversification and amount of debt issued in foreign currency.33

The Nigerian Debt Management Office, for example, was established in 2000 in
order to consolidate the management of public debt in a semi-autonomous agency.
Its goals were to reduce debt stock and cost, link debt management to effective fiscal
and monetary policies and to project and promote the “good image of Nigeria as a
disciplined and organized nation, capable of managing its assets and liabilities.”34
The Nigerian DMO has been able to deliver on its mandate to reduce the debt stock
and, perhaps more importantly, lead the way in the much needed development of
Africa’s debt markets. A crucial achievement of Nigeria’s DMO has been the
country’s exit from the Paris and London clubs through effective negotiations and
debt buybacks.35

Autonomous DMOs operating in developing countries are still relatively rare,
even if the notion of increased strategic debt management has been prevalent since
the 1990s. Where no major institutional change was carried out, evident moves have
been made in most countries in terms of methodological assessments and updates in
risk management practices. In countries where the central bank is responsible for
domestic debt, it has been hard to transform this responsibility to a different agency,
as in the cases of Costa Rica, Nicaragua and Sri Lanka. Pakistan has set up a coor-
dination office and Gosta Rica a coordination committee. These are layers of
“complex arrangements” politically and financially when it comes to debt manage-
ment in a context of volatile financial flows.36 In addition, developing countries have

FALLAVINTER 2008 I 41

Giselle Datz

focused on creating domestic public debt markets. For example, in Brazil these debt
markets have been a component of the country’s debt management strategy^?

With varying degrees of depth, more private-like approaches to public debt
management are changing in important ways the channels through which govern-
ments do business with public and private financial players, both as demand for high
yield and supply of new investment tools.

SOVEREIGN WEALTH FUNDS

After decades of severe indebtedness, many developing countries are now able
to accumulate foreign reserves, make early repayments of their debts to the IMF
and buy back foreign-currency debts. This has to do with learning curves from the
1997 Asian crisis, which made it evident that reserve accumulation was an imper-
ative to buffer sudden instability. As Ben Thirkell-White puts it, “the build up of
reserves in the post-crisis Asia suggests that the need for finance is not so desper-
ate that countries are prostrate in the face of market pressure.”38 Indeed, the tide
has turned. Developing countries are consolidating their positions as capital
exporters.39 That is a critical change in the configuration of capital flows. The
salience is no longer that of the private sector, nor is it that of the public sector in
developed countries exporting money to developing countries. Rather, a structural
shift is underway, marking a “dramatic redistribution of international wealth”
according to which large flows of publicly-owned funds are moving from countries
that “historically have not been major players in international finance” to those who
used to play this role. Therefore, governments, not private players, are in control of
“the new international wealth.”40

A large volume of this wealth is held by sovereign wealth funds (SWFs), govern-
ment investment vehicles funded by foreign reserve exchange assets that are
managed separately from the official reserves of the central bank and reserve-related
functions of the finance ministry.^i According to recent estimates, there are fifty-four
SWFs (pension and non-pension funds) in operation today. They are linked to
thirty-seven different countries and hold approximately US$5.3 trillion in assets.42
Sources of funding and hence strategies of investment and time horizons differ
among SWFs. Some are funded through central bank reserves (as in the case of the
giant funds from China and Singapore). Others are funded through export revenues
of state-owned resources (Abu Dhabi, Kuwait), taxation from exports (Russia), fiscal
surpluses (Korea, New Zealand) or privatization receipts (Malaysia, Australia).

According to the IMF, there are five types of SWFs based on policy objectives.
There are stabilization funds set up by countries rich in natural resources to cushion
volatility in commodity prices, savings funds that “transfer non-renewable assets
into a diversified portfolio of international financial assets to provide for future

42 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Players

generations,” funds that operate as reserve investment corporations pursuing poli-
cies with higher returns, development funds that allege priority to socioeconomic
projects and sovereign funds that are, in effect, pension funds.”^

Having existed for over three decades, SWFs are not new; what is new is the
number of funds and their sheer current and predicted sizes. In 2007, sovereign
funds invested US$92 billion in equity transactions, compared to US$3 billion in
2000. Moreover, the trend seems to be accelerating as these funds’ investments
during the first quarter of 2008 alone reached US$58 billion, which exceeds their
combined total for the years 2000 to 2005.44

Such growth is linked to the accumulation of sovereign reserves in emerging
markets through trade surpluses “unequalled as a percentage of the global economy
since the beginning of the 20th century,” which have made official reserves held by
some governments become “astronomically high.” The key here is that SWFs do not
simply represent saving for a rainy day, but strategic investing for the long term.45
They mark a departure from the trend to invest foreign reserves in liquid assets such
as short-term U.S. Treasury bills and government securities issued by other devel-
oped countries to investment in high-return equities. After all, as Nouriel Roubini
puts it, “Why hold U.S. T-bills with a meager 5 percent return, German Bunds with
a 4 percent return, or Japanese government bonds with a 0.5 percent return when
you can acquire foreign firms, invest in real assets, stock markets, or higher-yielding
corporate bonds? “46 Indeed, there is pressure on governments with surpluses to earn
better returns through different and riskier investment avenues.

One of the key financial developments of the turbulent period of late 2007 and
early 2008 was the way in which emerging market governments, through their
SWFs, acted as stabilizers of key commercial and investment banks plagued by ever-
increasing losses from the sub prime crisis. For example, the Chinese Investment
Corporation (CIC) invested US$5 billion in Morgan Stanley, acquiring a 9.9 percent
share in the company. This happened despite CIC’s losses in a previous US$3 billion
deal with Blackstone whose initial public offering price dropped over 50 percent
after the deal was concluded. The Government of Singapore Investment
Corporation (GIC) and an undisclosed investor from the Middle East invested
US$12 billion in the Swiss UBS. Abu Dhabi Investment Authority injected US$7.5
billion into Citigroup late in 2007.

Sovereign wealth funds are not only investors in large Western financial institu-
tions, but also clients. Investment banks have been keen on creating the
infrastructure to attract sovereign investment. For example, HSBC Investments has
hired a new “global head of sovereign and supranational,” and Morgan Stanley
Investment Management has announced the appointment of a “managing director
and head of central banks and sovereign wealth funds.” According to the person who

FALL/WINTER 2008 I 43

Giselle Datz

assumed this latter position, his role is to “help improve the firm’s coverage of these
increasingly important clients.” In his own words: “It’s about engaging with the
clients to understand their needs and then providing tailored investment solutions.”
Another asset manager in charge of dealing with sovereign funds states that “one of
the reasons why sovereign funds are important…is because it’s new business, it’s new
money.”‘”‘ That entails managing funds on behalf of SWFs, many of which outsource
mandates when in-house expertise is lacking, as in the case of Abu Dhabi Investment
Authority whose assets—between 70 and 80 percent—are managed outside the
country. Norway’s Government Pension Fund has about 28 precent of its assets
managed by fewer than fifty third-party bond and equity asset managers. As
expected, competition for the business of SWFs is stiff. Wall Street firms are increas-
ing their focus on sovereign funds by selling services that range from advice on
merger and acquisitions to structured services.48

The liaison between Wall Street and some emerging market governments
should not recall the time Citibank—despite being “too big to fall”—lent money to
Latin American countries only to witness the default of these loans en masse in the
1980s. This is a different kind of relationship. It is a private investment firm
serving the sovereign client, helping it generate higher yield for public monies, and,
expectedly, collecting handsome fees in return. Not only is the public-private
symbiosis within the state a case in point, but the renewed ways in which Wall
Street deals with and in some ways relies on sovereign wealth from emerging
markets adds more depth to what Richard Gnoddle calls the “new ecosystem of
global capital.”49

Sovereign wealth funds retreated from Wall Street as the U.S. financial crisis
worsened in the early fall of 2008. Yet, retreating does not mean that these sover-
eign investors are behaving less like market players. On the contrary, as all investors
are now engaging in a “flight to quality,” or to liquidity, destined to the U.S. bond
market, SWFs are still behaving akin to most market players as well as foreign
central banks. These funds are said to be taking their time to see how the U.S.
government’s bailout plan shapes up and whether it helps to ease the sense of chaos
in the Western banking system. However, risks as well as new opportunities for
profit lie ahead.5O SWFs are poised to take advantage of the latter. In addition, it is
likely that Gulf economies in particular may seek to invest more locally. As long as
oil prices remain high, their fundamentals remain strong, in sharp contrast to those
of most Western economies.^’

INESCAPABLY PUBLIC: HYBRIDITY AND CONSTRAINTS

The literature on globalization—suggesting that emerging markets were severely
constrained by ñnancial market expectations—^was apt in its detection of public

44 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Players

responses to financial preferences and their impact on policy autonomy. More

recently, the ways in which states in developed countries found room to move became

clearer, even at the level of international institutions and the commitments therein.^2

Less attention has been paid to the effort of identifying room for policy maneuvers in

emerging markets, even at times of economic distress.^^ Increasingly it is important

to consider that the types of constraints imposed on emerging market governments

will not merely be imposed by international financial investors, but by new rules at

the public level that limit governments’ actions as market players. Those can be

endogenous and intrinsic to public mandates to foster domestic economies and

consistent with macroeconomic goals. They can also be related to accountability

abroad regarding sovereign investment in private markets and key institutions.

Indeed, public initiatives that use private methodologies for liability manage-

ment or new and rislder channels for asset investments will still be circumscribed by

the notion, or fear, that states are not always profit maximizers, and thus “their

private activity is [always] public in character. “̂ 4 xhis public character entails legal

restrictions and incipient but potentially restrictive “codes of conduct” for govern-

ments as foreign investors. How restrictive those will ultimately be is still history in

the making, yet countries that try to curb the penetration of foreign public invest-

ment in their domestic economies will pay the price of potentially losing a financial

tie to limited pockets of wealth in the currently ailing global economy.

CONCLUSION

In the last two decades, governments have undergone important transforma-

tions in the constant challenge to compete, adapt and innovate in a realm of global

economic and financial integration. Focusing on the element of innovation, particu-

lar autonomy is being given to debt and asset management agencies within the state,

which increasingly operate as private actors. They engage in hedging risks, but they

also seek returns. This is not privatization of state activity or delegation of author-

ity from the public to the private sector. It is something more symbiotic happening

within the public realm, linking governments’ roles as both supply and demand for

financial assets and innovation. There is a reconfiguration of public financial goals,

which is strategic, sophisticated and proactive, rather than purely regulatory.

One important implication has to do with financial complexity and state behav-

ior. States are less and less capable of fully regulating financial transactions due to

the fact that, as Alan Greenspan notes in his recent autobiography, “Markets have

become too huge, complex, and fast moving to be subject to 20th century supervi-

sion and regulation.” He adds that it is no wonder that “this globalized financial

behemoth stretches beyond the full comprehension of even the most sophisticated

of market participants.”55 Nonetheless, this is not a monolithic phenomenon.

FALLAVINTER 2008 I 45

Giselle Datz

Despite this general sense of bewilderment, the state in emerging markets is far from
retreating. Rather, it is evolving, and in some areas of its involvement with financial
players, it is taking the role akin to that of an investor or risk manager—at times
equally secretive and opportunistic despite inescapable constraints that attach
governments’ financial moves to broader public interest goals.

Another implication involves the contours of a new relationship with risk between
the public and private sectors. If risk indeed drives the demand for regulation, and
hence underlies the regulatory (defensive) role of the state, so too does it propel the
active (offensive) role of governments as financial players, using private sector princi-
ples to manage sovereign assets and liabilities. Governments are following
methodologies tailored to corporations, creating benchmarks for risk taking while
keeping an eye on opportunities to generate returns that make them intensively
competitive, definitively adaptable and increasingly innovative. As Julie Froud, Adam
Leaver and ICarel Williams posit, what sustains the remaldng of capitalism today is the
“proliferation of new actors, contradictory agendas and multiple logics” brought about
by financial dynamics.56 The state is hardly a new actor, but its role is constantly recon-
figured according to its intrinsic heterogeneity of tasks, tools and responsibilities. ‘^

NOTES

*I am grateful to Leslie Armijo, Phil Cerny, Anna Gelpern and Iain Hardie for their comments.

• Ashby Monk, Scott Moore and Xunyi Xu, “A Review of Chinese Language Literature on Sovereign
Wealth Funds” (Oxford International Review Working Paper SWFOOl, 1 July 2008), 3.

2 Javier Santiso, Ttte Political Economy of Emerging Markets: Actors, Institutions, and Financial Crises
in Latin America (New York: Palgrave, 2003); Iain Hardie, “Trading the Risk: Financialisation, Loyalty
and Emerging Market Government Policy” (paper presented at the annual meeting of the International
Studies Association, San Francisco, 26-29 March 2008).

3 Saskia Sassen, Losing Control (New York: Columbia University Press, 1996).

^ According to the International Monetary Fund-World Bank Debt Management Guidelines, sovereign
debt management can be defined as “the process of establishing and executing a strategy for managing
the government’s debt in order to raise the required amount of funding, achieve its risk and cost objec-
tives and to meet any other sovereign debt management goals the government may have set, such as
developing and maintaining an efficient market for government securities.” “Guidelines for Public Debt
Management,” International Monetary Fund and World Bank (2001).

5 Saskia Sassen, “Embedding the Global in the National: Implications for the Role of the State,” in States
and Sovereignty in the Global Economy, ed. David A. Smith, Dorothy J. Solinger and Steven C. Topik
(London: Routledge, 1999); Philip Cerny, “The Asian Grisis and the Gompetition State” (manuscript.
University of Manchester, 2003); Steven Vogel, Freer Markets, More Rules (Ithaca: Gornell University
Press, 1996); Michael Moran, “Understanding the Regulatory State,” British Journal of Political Science
32, no. 2 (2002), 391-413.

6 James Mittelman, The Globalization Syndrome: Transformation and Legitimacy (Princeton: Princeton
University Press, 2000).

46 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Players

^ Leo Panitch, “Rethinking the Role of the State,” in Globalization: Critical Reflections, ed. James

Mittelman (Boulder: Lynne Rienner, 1997).

^ Eric Helleiner, States and the Reemergence of Global Finance (Ithaca: Cornell University Press, 1994);

John Ruggie, “Globalization and the Embedded Liberalism Compromise: The End of an Era?” (MPIFG

Lecture Series on Economic Globalization and National Democracy, Cologne, 1996).

9 Philip Cerny, “Embedding Neoliberalism: The Evolution of a Hegemonic Paradigm,” ¡oumal of

International Trade and Diplomacy (forthcoming. Spring 2008); David Harvey, A Brief History of

Neoliberalism (New York: Oxford University Press, 2005).

‘0 Sylvia Maxfield, Gatekeepers of Growth: The International Political Economy of Central Banking in

Developing Countries (Princeton: Princeton University Press, 1997); According to W. Scott Frame and

Lawrence White financial innovations are characterized by new products (e.g. adjustable-rate mortgages,

exchange-traded indexed funds); new services (e.g. online securities trading, internet banking); new

production processes (e.g. a new type of electronic exchange for trading securities, internet-only banks).

In their review of the economic and financial literature on financial innovation the authors point out that

empirical studies on financial innovation are surprisingly few. More revealingly, in listing sources and

actors involved in innovation, the authors never mention the role states play in it. W Scott Frame and

Lawrence White, “Empirical Studies of Financial Innovation: Lots of Talk, Little Action?” Journal of

Economic Literature 42 (March 2004), 118.

‘ ‘ Saskia Sassen. Territory, Authority, Rights: From Medieval to Global Assemblages (Princeton:

Princeton University Press, 2006a).

‘2 In Territory, Authority, Rights, Sassen extends this argument to include an expansion of executive

powers in the United States (continued and deepened by the current Bush administration) in a realm of

heightened security concerns, withering civil privacy and increased secrecy.

13 Sassen (2006a), 184.

”^ Philip Cerny, “Paradoxes of the Competition State: The Dynamics of Political Globalization,”

Government and Opposition 32, no. 1 (1997), 251-274.

‘^ Saskia Sassen, “When National Territory is Home to the Global: Old Borders and Novel Borderings,”

in Debates in New Political Economy, ed. Anthony Payne (London: Routledge, 2006b), 109.

16 Sassen (2006b), 109-110.

•^ Geoffrey Underhill, “States, Markets, and Governance for Emerging Market Economies: Private

Interests, the Public Good, and the Legitimacy of the Development Process,” International Affairs 79, no.

4 (2003), 755-781; Geoffrey Underhill, “Markets, Institutions, and Transaction Costs: The Endogeneity

of Governance,” (working paper no. WEF0025, World Economy and Finance Research Programme of the

UK Economic and Social Research Council, 2007).

18 Underhill (2007), 681.

19 Christopher Cox, “The Rise of Sovereign Business,” (speech by the U.S. Securities and Exchange

Commission chairman, Washington, DC, 5 December 2007).

20 Cerny (2008), 10 (page number as in the original manuscript).

21 While central banks are usually in charge of operations regarding foreign reserve management.

Ministries of Finance have the authority over liabilities (debt) management.

22 Central bank independence did not necessarily entail debt management independence because debt

management was still being used in some countries to achieve monetary goals; see the case of Sweden

from World War 11 until the mid-1980s; Elizabeth Currie, Jean-Jacques Dethier and Eriko Togo,

FALLAVINTER 2008 I 47

Giselle Datz

“Institutional Arrangements for Public Debt Management,” (World Bank Policy Research Working Paper
No. 3021,2003).

23 Marcel Cassard and David Folkerts-Landau, “Risk Management of Sovereign Assets and Liabilities,”
(IMF Working Paper No. 97/166, 1997), 14-15.

24 Ibid., 11.

25 Currie, Dethier and Togo (2003), 16.

26 Philip Anderson, “The Changing Role ofthe Public Debt Manager,” (Washington, DC: World Bank, 2005).

27 The expanded roles of public debt managers would justify such fiexibility Those can include: conduct-
ing transaction in derivatives markets (such as swaps and futures), modeling cost and risk of the debt
portfolio, advancing information technology systems and handling all financial instruments, managing
operational risks (Anderson 2005).

28 Cassard and Landau (1997).

29 Agence France Tresor, “The Best ofthe Euro,” (Paris: Agence France Tresor, 2007).

30 In February 2005, France recorded a “groundbreaking” sale of 50-year maturity bonds in response to
a notable demand by institutional investors, including pension and insurance funds, which need longer-
maturity assets to match their liabilities in a context of ageing populations {Financial Times, 23 February
2005). These institutional investors accounted for one quarter of the transaction. Notably, hedge funds
were also interested in the deal. With this operation, France became the first G-7 country to issue such
a long-maturity bond (way beyond the maximum 30-year bonds in existence) in modern times; Inflation-
linked bonds are not strangers of emerging market countries in Latin America and Europe (which made
up 73% of the $46 billion in these bonds). Yet, recently it has been reported that more countries in the
Asia-Pacific region are likely to also issue these so-called linkers in order to signal commitment with price
stability. The absence of a substantial number of linkers issued in the region has to do with the lack of a
large pension fund sector, yet sovereign wealth funds are making for potentially sizable new demand
{International Herald Tribune, 1 August 2008).

3 ‘ Financial Times, 1 March 2002.

32 “Strengthening Debt Management Practices: Lessons from Country Experiences and Issues Going
Forward,” (Washington, DC: International Monetary Fund and World Bank, 2007), 5.

33 Currie, Dethier and Togo (2003).

34 “About DMO,” Debt Management Office of Nigeria, 20 September 2008, http://www.dmo.gov.ng/
aboutdmo/about.php.

35 In 2003, Nigeria took advantage of a downtime in debt markets to repurchase US$601million of its
par bonds and US$288 million of its oil warrants at considerably discounted prices in a public auction
coordinated by Citigroup. This was done in preparation before the Paris Club in 2005, when Nigeria
struck a deal that eliminated US$30 billion of debt, combining forgiveness (US$18 billion was written
off) with two repayments of US$12 billion combined {Financial Times, 1 July 2005).

36 IMF and World Bank (2007).

37 IMF and World Bank (2007); “Building a Debt Managing Department: The Brazilian Experience,”
(Brasilia: Tesouro Nacional, 2006).

38 Ben Thirkell-White, “The International Financial Architecture and the Limits of Neoliberal
Hegemony,” New Political Economy 12, no. 1 (2007), 36.

39 Stephany Griffith-Jones, cited in Financial Times, 9 February 2007.

48 I JOURNAL OF INTERNATIONAL AFFAIRS

Governments as Market Flayers

‘*0 Edwin Truman, “A Blueprint for Sovereign Wealth Fund Best Practices,” (policy brief no. PB08-3,

Peterson Institute for International Economics, 2008), 3.

‘ ‘ ‘ Clay Lowery “Remarks by Acting Under Secretary of International Affairs, Clay Lowery on Sovereign

Wealth Funds and the International Financial System,” (speech. United States Treasury, Washington,

DC, 2007).

42 Truman (2008).

43 Often these are assets still understood as “reserves”; IMF and World Bank (2007), 46.

44 Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy (Cambridge,

MA: Monitor Group, 2008).

45 ING Investment Management, “Rich SWF Seek Long Mutually Fulfilling Relationship(s),” ING

Investment Weekly (May 28, 2007).

46 Nouriel Roubini, “The New Bogeyman of Financial Capitalism,” Project Syndicate, http;//www.project-

syndicate.or^commentary/roubini 1 (2007).

47 Euromoney, December 2007.

48 Financial Times, 27 June

2008.

49 Richard Gnoddle, “New Actors Play a Vital Role in the Global Economy,” Financial Times, 12

November 2007.

50 Roula Khalaf, “Gulf Wealth Funds Poised to Pounce on US Assets,” Financial Times, 27 September

2008.

51 Simeon Kerr, “Local Liquidity Loss Shatters Gulfs Faith,” Financial Times, 26 September 2008.

52 Layna Mosley, Global Capital and National Governments (New York: Cambridge University Press, .

2003); Linda Weiss, “Global Governance, National Strategies: How Industrialized States Make Room to

Move under the WTO,” Review of International Political Economy 12, no. 5 (2005), 723-749.

53 Giselle Datz, “What Life After Default? Time Horizons and the Outcome of the Argentine Sovereign

Debt Restructuring,” Review of International Political Economy (forthcoming).

54 Larry Cata Becker, “The Private Law of Public Law: Public Authorities as Shareholders, Golden Shares,

Sovereign Wealth Funds, and the Public Law Element in Private Choice of Law,” Tulane Law Review 82,

no. 1 (2008).

55 Alan Greenspan, The Age of Turbulence (London: Penguin Books, 2007), 489.

56 Julie Froud, Adam Leaver, and Karel Williams, “New Actors in a Financialized World,” New Political

Economy 12, no. 3 (2007), 339-347.

FALLAVINTER 2008 I 49

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