Entrepreneurship in China

Keming Yang

• Publisher: Routledge
• Year: 2016
• Topic: Economics
• eBook ISBN:
  9781317142560
• Subtopic: Economic Theory
• Index: Economics

The emergence of China as a major world economy is of great importance to the global political economy and to international business. There has been much research on the macro level of institutional reform but little detailed work on the grassroots level of entrepreneurship in China. This innovative book addresses this gap by investigating how an economic system dominated by central plans, communist ideologies and suppressing bureaucracies could generate such energy from the bottom of society, fuelling the country's economic growth. Keming Yang's theory of entrepreneurship is based on two interrelated concepts: double entrepreneurship and institutional holes. He argues that the two concepts bridge a gap between the neo-classical institutionalism of economic development and entrepreneurship studies that emphasize individual choice. The rigorous theoretical framework is supported by substantial empirical research, offering statistical analyses of survey data as well as detailed case studies. This timely book will appeal to an interdisciplinary readership in sociology, economics, business studies and Chinese and Asian Studies.

Chapter 1

The Puzzle of China, the Puzzle of Entrepreneurship

How the first puzzle leads to the second

At the time of writing (early 2006), that China is on the way to becoming a global power is no longer in dispute. One does not have to analyze complicated economic figures to have a sense of how powerful China’s economy has become. We learn from the media that China has overtaken the UK to become the fourth largest economy in the world,¹ something Mao Zedong wished to achieve during his life time. In America, ‘The China Price’ has become ‘the three scariest words in US industry’.² Millions of jobs have been lost in the US and recreated in China and India. The US trade deficit with China has been growing at an average rate of 20 per cent per year. With the ambition of building up several business flagships that are internationally visible, China has started a ‘Shopping Spree’ of American and European companies, including Rover, IBM PC, and some oil producers. Just two decades ago, ‘Made in China’ was still a synonym of poor quality. Now, it would be difficult for people living in Europe and America to enjoy shopping in supermarkets without clothes, appliances, and many other things made in China. These economic powers will doubtlessly be translated into political, diplomatic, and military ones. True, as China specialists and business analysts have pointed out,³ both India and China are facing huge obstacles to growth, but it is exactly their growth despite the obstacles that is so remarkable and puzzling.

Most people in the West have now taken China’s remarkable economic development as a ‘given’. To them, a question of greater urgency is ‘What shall we do to deal with China’s growth?’, not an academic question like ‘Why has China been growing in such a speedy manner?’. Even academics seem to have shifted their attention from the triggers and causes to the consequences and implications of China’s development. This book, however, sticks to the ‘why’ question.

But, first of all, let’s remind ourselves of what the puzzle exactly is. As far as I know, it was Peter Nolan who initially and most explicitly presented ‘The China Puzzle’, which obviously troubled the minds of other China specialists and social scientists in the late 1980s and the early 1990s:

Why did China perform so well in the first decade and a half of reform, despite the fact that its economic institutions and policies were gravely inadequate in relation to mainstream Western economic theory and policy?⁴

The puzzle became even more perplexing when Nolan moved on to compare and contrast China’s rise with Russia’s fall.⁵ Whilst the pre-reform conditions in the two nations were different, the two former largest Communist regimes did follow the same line of political ideology for more than two decades, the same reasoning of organizing the economy and, most importantly, the same idea of bringing in market mechanisms to reform their economic organizations in the 1980s. But their paths of economic reforms became divergent later on, apparently leading to two remarkably different economic situations. What’s going on?

I would not venture to make a systematic comparison between the two nations’ experiences; this book is about China’s economic development alone. But the comparison with Russia does highlight the intriguing source of China’s economic growth: How could fast economic growth be achieved in a system that is politically authoritarian and economically centralized? Swift economic growth has been going side by side with political reform at a snail’s pace. It is perplexing because there has been a popular logic among studies of China: a democratic political system is a prerequisite for successful economic development, no matter at what time or in which country; therefore, either economic reform will lead to the collapse of the communist regime, or the communist regime will suffocate economic growth in its struggle for maintaining political dominance. Gordon White applied the Chinese phrase qi hu nan xia (being unable to dismount from a tiger) to illustrate the dilemma: China’s economic reform would only lead to ‘a political deadlock, reflecting serious contradictions which lie at the roots of the “market socialist” programme’.⁶ A more sophisticated version of this ‘deadlock’ solution to the China puzzle comes from a book by Andrew Walder and his associates:

This volume’s premise is that such departures set in motion a chain of consequences, usually unintended, and if the departures are extensive enough, they eventually alter political institutions and relationships to the point where Communist party rule can no longer be sustained.⁷

In agreement with such prediction, Merle Goldman and Roderick MacFarquhar listed some evidence for China’s declining party-state as a consequence of dynamic economy, including the growing independence of the National People’s Congress (NPC), the increasing decentralization of power to local authorities, the rigorous emergence of the non-state sectors, untameable corruptions that erode the legitimacy of Communist rule, and so on.⁸ Some researchers from China have followed a similar line of reasoning.⁹

In short, almost all leading China specialists¹⁰ seem to favour the proclamation that economic development will eventually — although no one would offer a time scale — topple down the political regime rather than that the Communist State will be able to sustain its political dominance by sacrificing economic growth.

To ascertain whether the power of the Chinese State has declined would lead one to get involved in debates over conceptualizing and measuring state power. I am not ready to do that. Nor would I like to engage in the debate over whether (let alone when) the current Chinese State will eventually be replaced by a democratic one for the sake of maintaining economic growth. I simply find those questions too difficult to answer. The fact is, after two and half decades of economic reforms, the Chinese State is still in power, and it is still difficult to completely dismiss an argument for a stronger Chinese State given the increasing amount of economic resources under its control and its growing influence in international affairs.

Whilst pointing out some fundamental problems inherent in China’s logic of reform, the leading specialists nevertheless have not taken a head-on approach to solving Nolan’s puzzle. Instead of arguing how economic reforms have led, and will lead, to any particular situation, in this book I would go back to Nolan’s original puzzle and try to answer a few questions about China’s economic growth per se: How could China’s economic growth occur in the first place? If the Communist regime was so suppressing, where did the products, commodities, services, or in general, China’s national wealth, come from? What was the driving force? Would some liberal policies initiated by Deng Xiaoping be sufficient for explaining the establishment of millions of factories, enterprises, and companies? How could profit-hunting individuals and organizations, constantly being labelled in political terms detrimental to their businesses, survive and even thrive on the ‘gravely inadequate’ institutional structure?

To answer these questions, researchers have picked up their favourite, but different, explanatory variables — including liberal ideology and strategy promoted by political leaders such as Deng Xiaoping¹¹ and some provincial leaders such as Zhao Ziyang and Wanli¹² at the early stage of reform, pragmatic and ad hoc policies for solving problems such as unemployment in urban areas,¹³ decentralization of economic power to local authorities,¹⁴ the symbiotic relations between local officials and private business owners,¹⁵ and so on.

I have learnt a great deal from these studies and I am grateful for their insights in building up my own work. What I am trying to do is no more than adding a bit of theory to the whole business of understanding China’s economic development and demonstrating how theoretical mechanisms work with empirical illustrations. Such theorizing will focus on the interactive relationship between institutional rules and entrepreneurship. By doing so I hope we can have a relatively shorter causal chain in our explanation. For example, our chain of explanation will be stretched too long if we start with some grand state policies, because no matter how liberal they are, they remain policies until they are translated into value-producing actions. And even after the translation, there is no guarantee that the actions will be successful. Therefore, it is more manageable to work out the immediate institutional conditions under which productive actions take place.

After years of reading and thinking, I have come to the conclusion that what has not been put at the very centre of current studies and theories, either unwittingly or purposefully, is entrepreneurial opportunities and how these opportunities have been identified, interpreted, and exploited. That entrepreneurship is the eventual driving force of economic development is a well-established insight. It is entrepreneurs who create new jobs by setting up new organizations, increase national wealth by organizing the production of new commodities and by increasing tax revenues.¹⁶ The mechanisms of economic change ‘pivot certainly on entrepreneurial activity’, which is true not only for capitalist societies¹⁷ but for other types of societies as well. Higgins has offered perhaps the best summary of the importance of entrepreneurship:

The key figure in this process of technological advance is the entrepreneur. He is the man who sees the opportunity for introducing the new commodity, technique, raw material, or machine, and brings together the necessary capital, management, labour, and materials to do it … In any society, the rate of technological progress, and so of economic development, depends greatly on the number and ability of entrepreneurs available to it.¹⁸

It may sound too commonplace to argue that entrepreneurship deserves a central status in the study of China’s economic development, but I don’t think I am simply setting up a straw man for the sake of justifying my research when I say that entrepreneurship has not occupied a prominent position in the current studies of China’s economic development. In particular, we are short of ideas that theorize the relationship between entrepreneurship and institutional change in this emerging economy. Some researchers have committed themselves to documenting the experience of various types of entrepreneurs,¹⁹ but they do not seem to be interested in identifying the distinctive qualities of entrepreneurship in China, specifying the structural features of institutional rules, and theorizing the interaction between entrepreneurship and institutional conditions.

This less than encouraging situation is reflected in the weakness of specific theories that explicitly connect entrepreneurship with institutional environment in mainstream sociological and economic literature. Although entrepreneurship has established itself in business schools in most western nations, the major concern is ironically with ‘routine’ practices and strategies in each step of the entrepreneurial process: where to find initial capital, how to network with clients, how to write a business plan, how to organize a team, etc. These issues are of course very important, but they have kept a distance away from some more fundamental ones, such as the social origins of entrepreneurial opportunities, the interpretation and justification of entrepreneurial strategies, the social relations of entrepreneurs among themselves and with others, and cross-national comparisons of entrepreneurial behaviours. While on the one hand it is definitely valuable to take stock of social science studies of entrepreneurship and introduce these insights to students of business schools,²⁰ it is on the other hand equally valuable to derive some theoretical explanations of entrepreneurship across countries at different stages of economic development.

Whether the Chinese State has handled political reforms in a way ideologically acceptable is a matter beyond academic discussion. And even if we do intend to reveal the logical impasse of China’s reforms, it is still too early to make any reliable predictions in the foreseeable future. No matter how authoritarian China’s political system remains and no matter how poorly designed and enforced the institutional infrastructure has been, it is a matter of fact that the institutional environment in China has offered numerous opportunities for entrepreneurial actions, and when entrepreneurs do take actions to exploit these opportunities, new factories are built up and new products are churned out. Consequently, the economy has grown quickly. As Joseph Stiglitz has correctly noted,²¹ China’s economic success supplies an important case of focusing on the creation of new enterprises rather than privatizing old ones for making transition economies successful. Douglas North also noted the unique features of the China experience by acknowledging that ‘the Chinese developed an incentive structure which managed to produce rapid economic development without any of the standard recipes of the West’.²² But North is ambivalent about whether China should continue following its own way of development or come closer to the western path, because he does not go one step further to study how that alternative incentive structure works. This whole process is what this book is all about: where did so many opportunities come from, especially during the early years of reform when the whole nation was still against ‘capitalist’ ways of economic development? Given the less than appropriate environment, how could so many entrepreneurs go about making a huge amount of profit?

No matter how researchers disagree over which aspect of China’s institutional framework is the key to understanding the nation’s economic development, either fiscal reform, property rights, or central-local relations, few would disagree that it is institutional change that has brought forth the nation’s remarkable economic development. Whilst it is doubtless necessary and valuable to study institutional changes themselves, there still exists a black box between what explains and what is explained – if economic development can be understood as the increase of commodities and services, institutional changes cannot directly produce all of these. By focusing on entrepre...

Table of contents

• Cover Page
• Dedication
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• 1 The Puzzle of China, the Puzzle of Entrepreneurship
• 2 Rules and Entrepreneurship
• 3 Institutional Holes and Double Entrepreneurship
• 4 Institutional Change and Entrepreneurial Strategies
• 5 The Entrepreneurial Process in China
• 6 The Entrepreneur, the Bureaucrats, and the Journalists: Huo Hongmin and the Huaqi Group
• 7 The Limits on Playing Institutional Holes: Mou Qizhong and the Nande Group
• 8 Entrepreneurial Authority and Institutional Autonomy: Xu Wenrong and the Hengdian Group
• 9 Double Gambles
• Appendix
• Bibliography
• Index