Alibaba, The State

Alibaba is sort of doing fine after the IPO. But what does it do? It replaces the state.

Roughly, if a firm picks a supplier, it wants supplies to be fine and to arrive in time. The supplier, in turn, want to make sure that the client pays as agreed.

Now, there are two ways to provide it for sure. Option A is the threat of legal actions if things went terribly wrong. Option B is to avoid bad partners at all. The state offers both options. It has licensing and regulators to prevent very bad companies from operating in the market. And the state also has a more traditional function of bashing bad businesses for violating the law.

Obviously, Alibaba is not the British East India Company—it cannot apply violence freely. But it does offer an alternative to government regulations, especially in countries where governments are not trusted. The website routinely offers inspections and secure payments. It encourages buyers to leave feedbacks. As a matter of punishment, it can ban businesses from the marketplace.

Alibaba reduces the risk, which would otherwise require more resources to meet. Though private inspections, insurance, and feedbacks have been there for centuries, IT technologies made them extremely centralized and embedded in a single company. The state also implies a monopoly—and online marketplaces have it! Amazon, eBay, and Alibaba have no strong competitors in their respective markets.

Does this replacement for weak governance affect economic development? Possibly. Alibaba is an international trade hub. Normally, small and medium enterprises are reluctant to deal with international partners due to uncertainty. For example, the World Bank points at political risks:

Source
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Those investors who actually work in emerging markets estimate the risk as being three times lower than that by investors who don’t consider investing in emerging markets at all. Uninformed investors overstate risks and stay away from what can be a perfectly normal market.

Many of the B2B transactions mediated by Alibaba might not have happened at all without the relevant information. For one reason, the baseline risk is high as governments in emerging markets are reluctant to prosecute local crooks. For another, western mass media cover these markets biasedly. Someone who read the Financial Times throughout 2014 might have an impression that China is nothing more but corruption, political trials, empty infrastructure, ghost cities, and permanently slowing down economic growth. Even if these materials are not necessarily biased against one country (the media look for a drama everywhere, right?), the readers can’t simply go out in the streets and check how things really are, as for domestic coverage. Therefore, businesses need a middleman who is more motivated than the state and more systematic than the media in helping shoppers in emerging markets.

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