Entrepreneurship in China

The Emergence of the Private Sector

Andrew Atherton, Alex Newman

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781317231059
• Topic: Commerce
• Subtopic: Commerce Général

The Chinese economy has grown faster for a longer period than any other economy in the world. It is now the second, and will soon become the largest, global economy. This is an astonishing transformation of a country that in the late 1970s was one of the poorest in Asia. Central to this economic miracle has been the emergence of a private sector of entrepreneurs who have started and grown businesses of all sizes and types. This book explores these wealth creators and builders of China's new economy, and offers guidance on the best ways to work with China's entrepreneurs and their growing businesses.

Entrepreneurship in China looks at the dynamic and changing nature of entrepreneurship, and the need for entrepreneurs to refine, adapt and evolve their approaches within an uncertain, fast-changing and volatile environment. This book examines the distinctive and particular context of China for entrepreneurs, and offers insights into how entrepreneurship has emerged as the driver of China's economy. This book will benefit business people, policy makers and researchers seeking to understand Chinese entrepreneurship and offers guidance to practitioners interested in working with private Chinese businesses.

1

China’s entrepreneurial transformation

Introduction

China’s recent emergence is the economic success story of the late 20th and early 21st centuries. Personal incomes soared and poverty fell as China grew at a faster rate than any other emerging economy between the late 1970s and mid-2000s. Over that period, China transformed itself from one of the poorest countries in Asia to one of the largest economies in the world. Its economic health and fortunes affect other economies – both developed and developing – and its own growth prospects are becoming a bellweather for global economic health.

There are many accounts of this emergence and celebrations of its success. The benefits of strong leadership, managed liberalisation and opening up of the economy, and the ability to attract huge amounts of foreign direct investment are all regularly cited. What is less reported is the emergence of private entrepreneurs as the primary driver of economic activity and growth in China itself. In 1978, at the beginning of China’s current period of economic growth through reform, the economy was state-owned and controlled. There were, in practice, no private enterprises operating at that time. Nowadays, the private sector accounts for more than three-quarters of the economy, and is continuing to expand. Over the next two decades, it will generate almost all of China’s economic activity, ensuring the country’s transformation from planned to market economy.

This book is about the private sector that has emerged to dominate China’s economy, and the entrepreneurs who have set up and run private businesses.

Entrepreneurship in the age of reform in China

Open the pages of a newspaper or surf your preferred business and news sites online and you will read about a Chinese company seeking to acquire a business in the United States (US), Europe or Japan. Walk through the streets of any city in China and you will see and experience bustling markets and a boom in retail and services. Travel through the Pearl River Delta; go to Shanghai’s massive economic development zone of Pudong or any one of China’s other growth ‘hotspots’, and you will come across privately owned firms owned and run by Chinese entrepreneurs alongside the factories of leading multinational corporations and global giants.

In Beijing, take a taxi to the Summer Palace, one of China’s major tourist attractions, and you will pass by the high-technology zone of Zhongguancun, and its ‘electronics street’, in the University district of Haidian to the north-west of the city. China’s own Silicon Valley, as it has been called, is home to businesses that trade nationally and internationally in software development and engineering, online media, electronics and other high-technology goods and services.

Go into the countryside and you will find thriving businesses that have been established in former paddy fields. These are now privately owned township and village enterprises (TVEs) that sprang up in the countryside in the 1980s, creating wealth and employment across rural China. Visit the ‘rust belt’ in the north-east of the country and see the emergence of a new economy, using state-of-the-art machinery, on the sites of formerly state-owned industrial enterprises that have closed down. These are the ‘phoenix’ firms that emerged after massive and highly inefficient state-owned enterprises (SOEs) shed tens of millions of employees in the second half of the 1990s.

Along the coast – from Dalian in the north to Ningbo and south of Shanghai, on to Xiamen and Fuzhou in Fujian province, and down the Guangdong coastline from Shantou to the Pearl River towards Macau – private entrepreneurs thrive in clusters, supplying foreign firms and increasingly the domestic Chinese market.

The same story of dynamic growth applies to consumers. Next to the French supermarket Carrefour in Fangzhuang in south-central Beijing are local stores selling everything imaginable to well-heeled local residents in their upmarket Hong Kong-style luxury apartment developments – and this is a moderately prosperous rather than exclusive neighbourhood. Go to the villas and millionaire’s houses on the outskirts of Beijing near the airport and you will see Ferraris, Lamborghinis and Rolls Royce cars drive in and out of secure compounds owned by some of the more than 1.5 million Chinese millionaires. A recent fashion has been to build luxury housing in the style of a particular type of Western or other foreign architecture. In high-end developments across China, there are copies of the Arc de Triomphe and Champs Élysées at the heart of gated developments. Similarly, Big Ben, Times Square and other iconic sites lie at the centre of a London or New York development. The promise is of a luxurious and historical Western lifestyle.

After shopping in IKEA, shoppers are as likely to pop round the corner for Shanghainese Lion’s Head or Beijing Duck as they are to top up on Coke and hot dogs within the superstore itself. Many will go to KFC or Starbucks instead of eating at local restaurants or drinking in a teahouse. Xintiandi in central Shanghai is a reconstructed village of 19th-century stone gate houses (shikumen), where the well-heeled shop, eat and drink in Chinese and Western outlets interchangeably. An interest in China’s past is beginning to shape retail and leisure experiences across the country. In Chengdu, in central western China, Jinli Old (or Ancient) Street next to Wuhou Temple and the Wide and Narrow Alleys are modern reconstructions depicting China’s past, and are among the city’s most popular shopping and eating venues.

Rising consumption also extends into markets other than food and shopping. China is now the world’s biggest market for cars. It has the largest number of mobile phone, particularly smartphone, users globally.¹ Online shopping and services are rapidly expanding and China will become the largest e-market in the world if the current pace of growth continues. International tourism is booming.² China, in other words, is already the largest market for consumer goods.

This consumer boom extends away from the large cities to most parts of China. In Sichuan Province’s Leshan, home of one of the largest Buddha statues in the world, the whole of the west bank throngs with xiba beancurd restaurants, next to mobile phone stands and electronics stores selling the latest Xiaomi, Meizu, Oppo and Zopo smartphones. In remote Ningxia Province in north-western China, in cities near the Gobi Desert, residents crowd around a TV on the street to watch the latest soap opera or talent show after a day of shopping for SeptWolves designer menswear and Bosideng suits that you can also buy from any of the 100 former Greenwoods clothes stores in the United Kingdom, now owned by a Chinese company.³

Away from the cities, where farmers had built white-tiled multi-storey homes with blue-tinted windows as they first became wealthier in the 1980s and 1990s, new villas are now popping up next to their old single-storey brick buildings – three generations of farmer’s housing sitting side by side. Spending money made on cash crops or new business ventures began on the farm or in nearby villages and towns, agricultural entrepreneurs are buying up the usual ‘mod cons’, starting with a mobile phone, television and motorbike and then moving on to white goods and four-wheeled vehicles. Repatriated earnings have come from sons and daughters working on the coast or in the Pearl River.

The scale and range of entrepreneurial activity across China – from metropolis to remote rural village – is huge and expanding. These landscapes of enterprise are a far cry from China in 1978, when the current period of reform began. At that time, the economy was dominated by huge state-owned enterprises (SOEs). Officially, the private sector did not exist, although in the countryside informal businesses grew produce and reared livestock, and communes were running their own commercial ventures. The state-owned collective sector ‘filled in’ around the state sector by offering a limited range of products for households.

Before the economic reform period that began in 1978, there was no real consumer economy, and almost all production was by quota according to a five-year plan. Clunky products such as Flying Pigeon bicycles – that would never defy gravity given the amount of metal used – were the mode of travel, rather than cars and trucks. City dwellers dressed in green and dark blue Mao suits and – in the bitter northern winters – long, quilted padded coats of the same two colours that dropped to well below the knee. In those more egalitarian times, government officials signalled their hierarchical position by the number and type of pens inserted in their jacket breast pocket. Food supplies were basic and rationed, with very small amounts of meat and the majority of food being vegetables and grains. Coupons (Liangpiao, literally grain tickets or notes) were the source of these staples, and also an informal currency used by households to trade for other goods.

In today’s urban China, eating out is the norm, if not a national pastime. Diners eat in a vast range of outlets, from street restaurants with child-sized plastic seats huddled around a gas-fired mobile stove on a grimy pavement to invitation-only designer venues that would not be out of place in London or New York. In 1978, people ate standard fare in canteens within their own ‘work units’. In large SOEs and government departments, these canteens were huge, with hundreds of dining chairs lined up in neat rows. In northern China, a common sight in November was delivery of a mountain of Chinese cabbage (baicai) covered by cardboard and quilts to keep it semi-frozen outside the industrial kitchens of the work units, as the only ‘fresh’ vegetable for diners until the thaws of early spring.

In Mao’s China, foreign investment was extremely limited. The economy was insulated from world trade and investment, and was characterised by low levels of productivity, chronic under-employment of staff and poor returns on capital investment. Where equipment was purchased, it was typically second hand and years, if not decades, out of date. Rail transport used coal-powered steam rather than diesel or electric power. By the late 1970s, Mao’s successor, Hua Guofeng, had been replaced by Deng Xiaoping, who wanted China to open up and develop economically. Deng proposed economic reform and liberalisation, albeit in careful words forged by the political rhetoric of the recent Maoist era. Deng was supported by a loose coalition of eight veterans of the Chinese Communist Party with a wide range of political views; most were nervous about, sceptical of, or openly resistant to excessive or too-rapid economic reform. At that time, the future pattern of development was far from clear and the inevitability of reform a fragile and distant possibility. The story of transition to a marketised economy has been one of ongoing debate and disagreement between proponents of reform, supported by a growing group of liberal intellectuals, westernised think tanks and government technocrats on the one hand, and ‘hardline’ conservatives on the other seeking to uphold – and latterly re-invent – the Maoist approach. This was particularly the case in the 1980s and early 1990s, when reform and retrenchment alternated depending on which part of the Communist Party had the upper hand.

Economic liberalisation, in other words, was not an inevitable outcome when Deng Xiaoping came to power in late 1978; its history over much of the reform period has been one of resistance and setback as well as progress and opening up. In the early years, reforms were much argued over, often tentative and incremental, relying on local initiatives and experiments that could be monitored centrally. There were, and have been, changes in policy since 1978, and at times a real prospect that a reformist path would not be maintained, most notably after June 1989, until late 2001. The anti-bourgeois liberalisation campaign of early 1987, followed by student demonstrations and marches on Tiananmen Square over New Year – in protest at the demotion of Hu Yaobang for pushing reform too hard and fast – reflected the ongoing conflict between reformers and conservatives that played out through the 1980s and early 1990s.

Overall, however, the trajectory has been one of ‘opening up’ through legislative and market liberalisation and reform. This has created the highest levels of economic growth of any country over a 30-year period since the industrial era began. Further, as China has become used to and increasingly reliant on sustained levels of world-beating Gross Domestic Product (GDP) growth, the logic of the market has become more strongly entrenched in social norms and personal values. For all the concerns about economic liberalisation, the hard facts of economic growth and rising prosperity won the battle at the increasingly pragmatic heart of the Chinese state. As the economy boomed, there was a general realisation that revolutionary ideology had destroyed lives, families, communities and the economic wellbeing of the country. As state officials benefitted from this growth, attempts to reinvigorate China’s Maoist past became more and more infeasible.

The emergence of a large private sector populated by entrepreneurial owner–managers has been one of the most significant changes to the Chinese economy in recent years. The growth of the private sector has been a constant feature over the reform period, although its nature and characteristics have changed significantly. The private sector now accounts for 75 per cent or more of the economy in terms of output, and almost all of China’s exports.⁴ In 1998, the private sector accounted for only around 0.2 per cent of the Chinese economy. There are now more than 15 million private enterprises that have more than seven employees, and over 50 million private household enterprises in China. Private enterprises vastly outnumber the small and dwindling number of SOEs, and now account for almost all economic activity. This is China’s entrepreneurial transformation, from state-owned and state-controlled to an economy dominated by private enterprises.

In part, these changes have been the result of a de facto privatisation that happened at a local level without fuss, by county and municipal government officials seeking to offload unprofitable and failing state-owned and collective enterprises. It is also the product of legislation that dates back to the 1980s encouraging smaller-scale and micro enterprise. It has been influenced by investors, entrepreneurs and managers from Hong Kong, Singapore, Taiwan and the overseas Chinese communities of East and Southeast Asia. Foreign direct investment from North America, Europe and the East Asian ‘tiger’ economies of Japan and South Korea has also fuelled growth across the country, especially in the major cities and along the east coast.

Throughout the reform period, the government has taken an active role in stimulating economic and enterprise development, in particular by encouraging exporting; promoting key industries; and kick starting growth when domestic or global macroeconomic conditions have been poor. This was seen in 2008 following the financial crisis, when the Chinese government intervened to prop up the economy. At its low point at the end of 2008, GDP growth was still close to 7 per cent, while other major economies were experiencing zero or negative growth. A massive stimulus package by the Chinese government helped the economy to post growth rates of over 8 per cent by summer 2009 and 9 per cent by the end of the year – close to the heady levels of more than 10 per cent growth seen in 2006 and 2007.

In response to the global downturn, there was a strong push to encourage more consumption, especially in rural areas, with farmers and the rural population receiving discounts on white goods and firms responding aggressively and rapidly to growing domestic market opportunities. This is in a country where consumption was concentrated in cities until recently, and where projections are that the urban population will rise from around 600 million to over one billion by 2030. Population and income growth in China’s cities, and income growth in the countryside, will increase consumption, creating stronger domestic conditions for future economic growth, as well as some insulation against downturns in global economic conditions.

The entrepreneurial nature of China can be seen in response to the closure of tens of thousands of small businesses in the Pearl River Delta following on from the financial crash of 2008. These businesses were affected by a collapse in orders from their US and European customers. Since then, new businesses have started up and are being encouraged by a government that is pushing still-reluctant banks to invest in the private small business sector. The state recognises that in places like the Pearl River Delta, which is a major earner of export income, private businesses have driven much of the country’s recent economic growth.

At the heart of this transformation of China’s economy are the entrepreneurs themselves. Working in a challenging environment with cutthroat competition, unclear ownership rights and uncertainty over the role of the state, the owners and managers of private ventures often appear to be working against the odds. High rates of closure and failure of new businesses attest to the inherent volatility of markets in China. However, the increasingly dominant role of the private sector in the economy shows that entrepreneurship is China’s driving force for growth and development – despite the many individual stories and experiences of unsuccessful entrepreneurship.

There will be losers as well as winners. Where you live and work will be important, with growing divergence between dynamic local economies, driven by entrepreneurs, and slower growing settlements in more remote areas. An imperfect and partial social welfare system, combined...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• Acknowledgements
• Funding
• 1. China’s entrepreneurial transformation
• 2. China’s entrepreneurs and private enterprises
• 3. The evolution and emergence of entrepreneurship in China
• 4. Models of entrepreneurship in China
• 5. China’s market dynamics: Domestic competition and international expansion
• 6. Financing entrepreneurship in China
• 7. Chinese business culture and entrepreneurship
• 8. Dealing with the government
• 9. Doing business with Chinese entrepreneurs
• 10. The future of entrepreneurship in China
• Index