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financial times

China frightens the West. Rarely, however, do Westerners look at how the world looks to China. Yes, it has made enormous economic strides. But it still sees a world economy dominated by developed economies.

Among the few Westerners able to look at the world from the Chinese point of view is Peter Nolan, professor of Chinese development at Cambridge university. In a thought-provoking book published last year, he addressed one of the big fears about China – that it is buying the world. His answer is no: we are inside China but China is not inside us.

To understand what Prof. Nolan means by this, one must understand his view of what has happened during three decades of technology-driven global economic integration. The world economy has been transformed, he argues, by the emergence, through mergers, acquisition and foreign direct investment, of a limited number of dominant businesses, almost entirely rooted in advanced countries.

At the heart of the new global economy are what Prof. Nolan calls "systems integrator" companies – businesses with dominant brands and superior technologies, which are at the apex of value chains that serve the global middle classes. These global businesses, in turn, exert enormous pressure on their supply chains, creating ever-rising consolidation there, as well.

Using data from 2006-09, Prof. Nolan concludes that the number of globally dominant businesses in the manufacture of large commercial aircraft and carbonated drinks was two; of mobile telecommunications infrastructure and smart phones, just three; of beer, elevators, heavy-duty trucks and personal computers, four; of digital cameras, six; and of motor vehicles and pharmaceuticals, 10. In these cases, dominant businesses supplied between half and all of the world market. Similar degrees of concentration have emerged, after consolidation, in many industries.

Much the same concentration can be seen among component suppliers. Look at aircraft. The world has three dominant suppliers of engines, two of brakes, three of tyres, two of seats, one supplier of lavatory systems and one of wiring. In the motor industries, as well as information technology, beverages and many others, the world has just a few dominant suppliers of the essential components.

We can now see the organization of global production and distribution under the aegis of the integrator company. Such a business "typically possesses some combination of a number of key attributes, among them the capability to raise finance for large new projects and the resources necessary to fund a high level of research and development spending to sustain technological leadership, to develop a global brand, to invest in state-of-the-art information technology and to attract the best human resources."

Moreover, "one hundred giant firms, all from the high-income countries, account for over three-fifths of the total R&D expenditure among the world's top 1,400 companies. They are the foundation of the world's technical progress in the era of capitalist globalisation."

These companies have invested hugely across borders, not least in China. In the process, they are losing national characteristics and loyalties. This creates growing tension, as governments find "their" companies ever harder to tax or regulate. Nevertheless, the companies still retain national characteristics and remain rooted in national cultures.

How does China fit into this new world? It is a huge development success. But it has built that success on its willingness and ability to offer its workers and markets to the world's producers. So in 2007-09, foreign-invested companies were responsible for 28 per cent of China's industrial value-added; 66 per cent of its output from high-technology industries; 55 per cent of its exports; and 90 per cent of its exports of new and high-technology products. Thus, the country is a crucial contributor to systems managed by foreigners. If the citizens and governments of advanced countries look askance at these global companies, how much more so must the Chinese?

China is not buying the world. Between 1990 and 2012, the global stock of outward FDI soared from $2.1-trillion (U.S.) to $23.6-trillion. High-income countries still accounted for 79 per cent of this in the latter year. In 2012, the outward stock of U.S. investment was $5.2-trillion, while that of the U.K. was $1.8-trillion, against $509-billion from China. China's net stock (the difference between its inward and outward stocks) was hugely negative, at minus $324-billion. In 2009, 68 per cent of its outward investment was supposedly in Hong Kong.

As Prof. Nolan notes: "Chinese firms have been conspicuously absent from major international mergers and acquisitions." In view of its lack of natural resources, China is investing abroad in this sector. But, even here, the scale of its foreign investments are dwarfed by those of dominant foreign companies.

What does this analysis suggest? The most important implication is that China has barely developed any globally significant companies. Moreover, such is the lead of the advanced countries' incumbents that it is going to find it extremely hard to do so. From the Chinese perspective, therefore, the striking feature of their economy remains its dependence on the knowhow of others. This explains China's desperate efforts to obtain that knowledge. A further implication is that China is very far indeed from "buying up the world." The paranoia about its impact is unwarranted.

A deeper question is whether, in a world of ever more global companies, it makes sense to worry that companies are not "yours." I suspect the answer is: yes. China is right to worry about this. Companies still have national attachments that shape how they behave and, in particular, their role in developing a particular country's competences. But, for a nation as vast as China, this may matter less than for most others. In the end, almost all global companies are likely to find themselves enveloped by China: it will be too central to their activities for them to escape its demands.

If that happens, it will be because of a natural process of integration. For the future of the world economy and indeed the world, the further development of such deep global entanglements is desirable. We should keep calm and just carry on.