Chinese takeovers lurk

chinese overname 4-5-2020

These are hard days for most of us. Many people are at home instead of at the university, and while we might be able to study, there are also people who are not able to work because of the Coronavirus. This is hard for us, both socially as well as financially. Many firms have been weakened due to the Coronavirus. An article from RTLZ, published on the 16th of April, shows that in the Netherlands one out of five companies is financially speaking in a danger zone. Before the crisis, this was the case for about half as many companies. Right now, there might be even more firms in trouble. The number of unemployed people has also increased immensely. For entrepreneurs, it might be attractive to sell their firm instead of attempting to survive through the crisis.

In these times of chaos there is a country that may be able to profit somehow from it. China seems able to take over firms that have been weakened by the crisis. They are mainly interested in firms in the naval sector, like ship building facilities. The Dutch government has prevented a takeover in this sector last week, but the question remains: will the same happen in the case of another firm? And an alternative question: what can be done in order to prevent that firms do not need to be taken over?

This connects to the ESVisie article of last week, which was about governmental aid to firms like the KLM. The amount of aid the government decides to give to firms in the Netherlands can have big effects on the futures of firms and whether they will exist in the future. It is easy to say that businesses should just get as much money as they need, and for businessowners this also sounds like a popular plan. The problem with this is that all of this money that would be pumped into the economy would lead some other effects. There is a certain balance between the interest rate and the inflation level in a country, and it is not clear whether these levels are in balance again from the last financial crisis.

Playing devil’s advocate: what if we did let a number of firms go bankrupt? This would lead to more unemployment and it will certainly have an effect on the economy. Apart from that, there may be positive sides to this. The evolutionary theory of economics claims that the strongest firms will survive, and firms that are not able to adapt will get extinct. If we were to keep on saving firms that are going “extinct”, then we would be funding their losing strategy. The firms would still remain in the market, but they would not have had to change their strategy to become more effective. The next time there is a financial crisis, they would need to be bailed out again. On the other hand, not helping Dutch firms might open the door for Chinese firms to take over these firms. Where lies the balance between protectionism and the free market?

For the Netherlands the focus seems to remain on helping domestic firms and people remain on their feet. This seems logical, as that is the task that many would want a government to fulfil. Furthermore, it might be political suicide for a party not to try decreasing the unemployment level. The question remains however, if we ever might find ourselves in a situation where the best option for the government may be to just do nothing. Some enterprises will fail, so that the most competitive will stay alive.

This would make the economy more effective. Personally, I am content with the actions the government are taking in this area right now. After all, there is nothing wrong with a little variety from which to choose.

By: Merijn van der Leeuw