In recent years, the competition between "involution" and "involution" has become a hot word on the Internet, which has attracted widespread attention, especially in the economic field. Then, how to treat the problem of involution, what is its influence, what are its manifestations, what are its causes and how to solve it? In this regard, we inviteProfessor Liu Zhibiao, Executive Dean of Changjiang Industrial Economic Research Institute of Nanjing University.,Professor Mao Zhenhua, Co-Director of Economic Research Institute of Renmin University of China.Answer.
What is the impact of "involution"
Moderator:On July 30th, 2024, the Political Bureau of the Communist Party of China (CPC) Central Committee Conference pointed out that it is necessary to strengthen industry self-discipline and prevent "involution" vicious competition. The Central Committee of the Communist Party of China attaches great importance to preventing "involution". Then, what impact does "involution" have on the economy?
Liu Zhibiao:At present, the problem of "involution" has aroused widespread concern at home and abroad, which has substantially affected the situation and direction of China’s economic operation and development. There are two completely different views on this. One view is that market competition is "involution" to a certain extent. As some scholars have pointed out, Japanese enterprises are "decisive at home and decisive abroad" and gain international competitiveness through domestic market competition. Another point of view is that China’s "involution" competition leads to more and more sales and lower prices, so it is a reason for the current economic contraction. If the latter is established, the problem will become quite serious, instead of being an ordinary market competition phenomenon.
Mao Zhenhua:At present, the "involution" competition of enterprises in China has caused a certain impact at home and abroad. In China, the "involution" competition leads to the decline of commodity prices, which leads to the decline of corporate profits, which in turn leads to the decline of residents’ wage income and consumption power. In addition, with the further intensification of "involution" competition, the market may gradually take price as the sole criterion to measure products, which may lead to the phenomenon of "cutting corners and counterfeiting" that once existed in the era of backward technology and cruel competition in the past. In foreign countries, the "involution" of China enterprises has caused some negative public opinions.
The main manifestations of "involution"
Moderator:Whether it is "involution" or "involution" competition, what are its manifestations in the economic field?
Liu Zhibiao:The problem of involution can be analyzed from three levels: micro, meso and macro. At the micro level, it involves the choice of enterprise strategy and behavior, such as occupying the market at a low price; At the meso level, we need to pay attention to the relationship between enterprises within the industry, such as the relationship between entry and exit and the degree of competition; At the macro level, it is necessary to grasp the macro situation and trend from the perspective of the balance between total supply and total demand. Here, I focus on the discussion from the perspective of the middle industry.
First, from the perspective of industry balance, when the production capacity or supply capacity of an industry significantly exceeds the expansion speed of its market capacity, it will lead to the shrinking market share of each enterprise. Because the growth of market capacity can’t keep up with the expansion of production capacity, it is easy to trigger a price war. This situation is particularly obvious in China’s new energy automobile industry. The increase of inventory pressure and oversupply have directly led to the outbreak of price war, which has become an important factor for the automobile industry to reflect on low profit rate or even loss.
The second is to understand from the income of input factors. The "involution" mainly shows that the marginal income of factor input decreases until the marginal income drops to zero or becomes negative. At this time, enterprises continue to invest because vicious competition poses a threat to survival, and whoever does not continue to invest will die first. In the past, in order to attract large projects, local governments competed to provide preferential conditions, such as "three exemptions and two reductions" and "five exemptions and five reductions", which eventually led to meager local income, and most of the income flowed to investors. Excessive discretionary investment behavior not only makes the benefits flow to the capital owners too much, but also breeds a large number of groups rushing to get the benefits of the project, which in turn leads to overcapacity.
The third is to analyze from the perspective of innovation. In the absence of innovation, technological development mainly depends on imitation and introduction, and the competition among enterprises often manifests itself as homogeneous competition, which eventually evolves into a vicious price war. Due to the lack of differentiation and pricing ability of homogeneous competitive products, enterprises can’t control market share through product characteristics, so they can’t raise prices, so they can only compete by lowering prices.
Fourth, from the perspective of industrial entry, when the entry threshold of an industry is too low, or although there are certain entry thresholds, competitors can easily break through these thresholds with the support of government forces, which will lead to a rapid influx of too many enterprises in the limited market capacity. Because these enterprises can’t achieve economies of scale, they can only compete by lowering prices in the end, thus triggering a vicious price war.
Fifth, from the perspective of industrial chain, China has a strong production capacity in the field of end products, forming many industry giants. However, these giants often transfer the fierce competition pressure between them to upstream suppliers through various methods and channels, which shows the growth of robbing suppliers. For example, the downstream chain owner enterprise delays payment to the upstream supplier, often for half a year or even more, or forces the supplier to reduce the price by 15%-20% quickly in the short term, otherwise it refuses to purchase its products. This practice is actually to enhance their competitiveness by squeezing upstream enterprises. In addition, all kinds of centralized purchasing behaviors for final products, such as centralized purchasing in the communication equipment market and centralized purchasing in the pharmaceutical market, often lead to the price being pushed down to a surprising level, which is very serious.
Mao Zhenhua:The main form of "involution" competition among enterprises in China is involution price, while price reduction mainly depends on cost reduction, which comes from salary reduction, layoffs and R&D reduction. Especially for industries with relatively low industrial and technical thresholds and products that are easy to copy, latecomers have more room for cost reduction. Starting from VC (venture capital, also translated as venture capital), the first-time enterprises finally formed an industrial structure after several rounds of investment, and invested a lot of costs in this process. However, the second-time enterprises do not need such a large-scale basic investment, and can directly use ready-made technologies and equipment, so their cost is lower and it is easier to achieve "involution".
The deep-seated reasons of "involution"
Moderator:When analyzing problems, we should look at the essence through phenomena. Then, what are the deep-seated or essential reasons for the "involution" in the economic field?
Liu Zhibiao:The phenomenon of "involution" can be analyzed from the classical three-dimensional structure of technology, market and system.
First, from the strategic concept of China enterprises. For a long time, some enterprises in China have relied on the concept of competition, which is a non-cooperative competition game rather than a win-win cooperation game. This concept is based on the thinking of zero-sum competition, that is, pushing competitors into trouble by means of price reduction, thus occupying a dominant position in the market. This kind of competitive thought not only exists in the domestic market, but also prevails in the international market, but it is often not welcomed by the enterprises and governments in the host country.
Second, from the perspective of industrial organization structure. China’s industrial organization mechanism has long been imperfect. Specifically, despite decades of competition, China’s enterprises have not yet formed the common oligopoly market structure in modern market economy. Oligopoly market structure is the micro-foundation of market economy in developed countries, in which several oligopolistic enterprises dominate the market and at the same time drive a large number of small and medium-sized enterprises to develop in the upstream and downstream of the industrial chain. This structure promotes the competition and cooperation between the main enterprises in the industrial chain and the upstream suppliers, and forms the governance mechanism, which forms the foundation of modern market economy. In the course of industrialization of about 200 years, western countries have experienced eight large-scale waves of mergers and acquisitions, which have shaped the current market structure. In contrast, China has not experienced a similar wave of mergers and acquisitions. Therefore, the imperfection of China’s industrial organization structure and the consequent "involution" phenomenon conform to the basic laws and viewpoints revealed by industrial economics to some extent.
Third, from the way the government participates in competition. The way the government participates in the competition leads to or aggravates the defect of industrial organization structure to a certain extent. One of the characteristics of China’s economic system transition is that the central government devolves power to local governments instead of delegating all power to enterprises. After becoming the main body of development, local governments have a variety of means to participate in market competition. Among them, providing various preferential policies is a common way of competition for local governments. In recent years, a new phenomenon is that local governments participate in competition by setting up various funds. Local governments participate in market competition by means of fund investment, which has potential risks because it may aggravate the involution competition in the market.
Fourth, from the perspective of institutional mechanisms. The administrative regional pattern formed since the reform and opening up has hindered the formation of a unified national market. The administrative regional pattern makes the competition mainly between the block economies. In these massive economies, the coordination mechanism is often a mixture of administrative orders and market coordination, while the external coordination mechanism mainly depends on the administrative relationship between regions. This state has hindered the free flow of factors and fair competition to some extent. The recently issued "Guidelines for National Unified Big Market Standards" aims to solve this problem and standardize the behavior of local governments. However, because the economic, administrative and judicial functions of local governments have not been completely straightened out, the guide can play a certain role, but it cannot completely solve the problem. To solve this problem fundamentally, we need to further adhere to the market-oriented reform, clarify the basic functions of the government and the market, and then establish the division of responsibilities and the relationship between the central and local governments.
Mao Zhenhua:From the perspective of price, I think that the formation of "involution" competition of enterprises comes from the problem of supply and demand. Long-term oversupply will lead to overcapacity and promote enterprise involution. From the demand side, the demand has shrunk in recent years, especially the lack of domestic demand and the weakening of terminal consumption. From the supply side, a long-term supply side force will form a large amount of production capacity, leading to oversupply.
The convergence of industrial policies of local governments will further aggravate overcapacity, which is an important reason for the "involution" competition of enterprises. In order to attract investment, local governments have launched various industrial funds, and the convergent industrial policies have further intensified the homogenization competition. Local governments promote the development of an industry at the same time, which will soon turn an industry from a "window" into a "risk exposure". We should reflect on the advantages and disadvantages of the government’s personal investment and industrial layout, whether it is shifting from advantages exceeding disadvantages to disadvantages exceeding advantages, whether it will lead to overcapacity and further promote the "involution" competition of enterprises.
Ways to get rid of the problem of "involution"
Moderator:How to overcome the negative effects of involution? How to prevent "involution" fundamentally?
Liu Zhibiao:First, to solve the problem fundamentally, we must strengthen the construction of enterprise autonomy and decision-making independence, and implement hard budget constraints including economic responsibility and bankruptcy. Without the hard budget constraint mechanism, enterprises will not use resources effectively, nor will they make responsible management and strategic decisions. Such enterprises cannot compete effectively in the market.
The second is to carry out the system reform in which local governments participate in competition. In this system, it is necessary to stimulate the enthusiasm of local governments and prevent the occurrence of unfair competition, which constitutes a pair of contradictory relations and is a highly complex worldwide problem. It may be necessary to solve it slowly from the aspects of power restriction and separation of functions according to the requirements of rule of law.
The third is to reconstruct the industrial organization structure of China. National policies should be devoted to promoting the formation of monopolistic competition market structure, and promote the merger, acquisition, bankruptcy and reorganization of enterprises through market competition mechanism.
Fourth, the national macro-level policy efforts. Here, I will focus on some suggestions for the transformation of industrial policy:
First, we should support the transfer of industrial policies to the front end, rather than the back-end capacity replication. In the past, industrial policies often supported the replication and expansion of production capacity. This is correct in the era of shortage economy. But now it not only intensifies market competition and overcapacity, but also promotes the phenomenon of "involution". Industrial policy should now pay more attention to front-end research and development and innovation. Although the intensification of front-end competition may lead to repeated investment of certain resources, which seems to be a waste, it is actually a necessary cost and price for technological progress. Once an enterprise obtains results through research and development and applies for a patent, other enterprises will naturally quit. Therefore, industrial policies should shift from supporting capacity expansion to supporting scientific and technological innovation, especially front-end innovation activities.
Second, the subsidy mode of industrial policy needs directional adjustment. Previous policies tended to subsidize producers, which easily led to overcapacity, rent-seeking and corruption. We should turn to subsidizing consumers, users and customers to expand market demand. In this way, the problem of "involution" can be effectively alleviated.
Third, the implementation method of industrial policy needs to be transformed. In the past, the main practice was to select losers and winners, and selectively support those enterprises that were considered competitive without competition in advance, ignoring the development needs of other enterprises. In addition to being unfair, this practice will also contribute to overcapacity. Industrial policy should support the creation of a favorable and fair competition environment for innovation, rather than simply supporting specific enterprises.
Fourth, the main body of industrial policy implementation should move up. It should be combined with the reform of local government functions to transform the local leading industrial policy into the central leading industrial policy. This is the basic premise of building a unified big market in China. If the industrial policy function continues to be dominated by local governments, it will be difficult to form a unified big market in China. Because the market will be divided into block structures by local government’s industrial competition means. The implementation of the central leading industrial policy does not mean returning to the planned economy, but reducing the number of industrial policies, so that the central government can concentrate resources to support several key industries instead of intervening in all industries. In most developed countries, it is usually the function of the central government to formulate industrial policies, and local governments rarely get involved. The special situation in China is that most industrial policies are dominated by local governments, which participate in market competition not for the purpose of realizing public interests, which leads to market segmentation. Therefore, some industries that are vital to the country, especially industrial policies that are suitable for developing new quality productive forces, should be uniformly implemented at the central level, which is conducive to achieving the consistency of rules, policies and coordination of actions.
Mao Zhenhua:How to solve the negative effects brought by the "involution" competition of China enterprises will affect the operation of international trade and the economic trend of China. The problem of "involution" competition among enterprises in China is very complicated, and it is ultimately necessary to solve the problem in economic development. Under the background that western capitalist countries have introduced policies to support enterprises’ export, China is no exception. Before new international trade advantages are formed, we should maintain our existing advantages and not simply and rudely raise product prices to eliminate "involution", which is neither reasonable nor feasible.
At the same time, the government should introduce policies to protect the competitive pattern of China’s export industry under the current price advantage. However, under the premise of maintaining the existing advantages, we should actively deal with new problems. In the process of governance, we should give play to the role of market mechanism, form consistent expectations from recognizing policies to behaviors, and actively deal with the negative effects brought by "involution" competition. First, we should pay attention to the chaos of low-price competition among enterprises, and introduce relevant policies to promote fair competition and restrict enterprises from unfair competition in a way below cost. The second is to properly handle the relationship between "promising government" and "effective market" to prevent improper government intervention from aggravating overcapacity. Third, chain owners should actively take measures to comprehensively sort out the problems existing in product pricing, wages and benefits, labor assessment, etc., seriously think about it, take the initiative to take improvement measures, respond to social concerns, and make contributions to changing the "involution" competition. Finally, scientific and technological innovation should lead the development of new quality productive forces and accelerate the formation of new competitive advantages. Of course, this process is inseparable from the support of the academic community. The "involution" competition among enterprises in China has posed a very important question not only to China, but also to global economists, that is, how to reshape the world trade theory in theory. With the improvement of China’s economic development level, the basic theory of world trade and competition may change. The practice of simply relying on cost theory to build a theoretical framework needs to be adjusted in the current situation, and it is suggested to strengthen theoretical research in this field in the future. (Moderator: Li Pan)
