Management and Organizations in Transitional China

Yanlong Zhang, Lisa Keister

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317606024
• Edition: 1
• Topic: Business
• Subtopic: Organisational Behaviour
• Index: Business

China's 30-year market transition and its integration into the world economy provide a unique opportunity for exploring the nature of large-scale economic and political transformation and the mechanisms underlying organizational behavior during such a transition. Management and Organizations in Transitional China explores how managers and firms cope with transition-related challenges by adapting to, manipulating, or even creating the complex institutional environment. This book examines the way transitional institutions shape individual decisions and organizational strategies, the mechanisms that promote the diffusion of innovative management practices and economic policies, and the formation and evolution of interfirm networks.

Based on a comprehensive review of the studies on market transition, this book investigates how firms manage their relationship with important stakeholders in the environment. It highlights the importance of network-based strategies for institutionally less-advantaged actors (like private firms, foreign entrants, and entrepreneurs) to establish legitimacy, gain institutional support, and mobilize financial resources. Moreover, this book studies the mechanisms that facilitate the adoption of innovative management practices and economic policies in the transitional context, comparing the mainstream diffusion theories and evaluating the relative potency of the diffusion drivers. Furthermore, Management and Organizations in Transitional China provides empirical analyses using longitudinal data of alliance formation, network evolution, and the effect of both alliance formation and network evolution on firm decision-making and performance.

Combining theory, data analysis, and rich contextual description to provide a comprehensive understanding of the organizational transition process, this book will appeal to scholars and practitioners in general management, organizational studies, international business, entrepreneurship, and related disciplines.

1 Introduction

The Chinese Context

Introduction

It has now been four decades since China launched its reform and opening up policy in 1978, which is guided by the principle of “crossing the river by feeling the stones.” This large-scale and profound social change has attracted scholarly attention from multiple disciplines. Not only has China become a natural laboratory for testing the theories on economic development, policy making, and business strategies, but it has also become a place where an increasing number of new phenomena emerge every day that beg new models or theoretical frameworks to explain their emergence, successes, and failures. In order to achieve economic growth, which is regarded as crucial to the political survival of the regime, the state has been willing to incorporate wisdom from various models of the state and build new capacities. Some of the adjustments have made observers believe that the Chinese state will eventually evolve into a system that is similar to western capitalism. However, the reform process is not as linear as transitional theorists have portrayed. Although reformers at different times made great efforts to promote economic development and improve the nation’s strength, the content of the waves of reforms has been continuously reformulated: from the four modernizations, to the building of a socialist market economy, to the construction of a xiaokang society, and then to the realization of Chinese dreams. There have been successes and failures, but what is most remarkable is simply how far China has moved toward a market economy and how the reform process has maintained its relevance despite the changing challenges the economy has faced (Naughton, 2007). From a state-building perspective, these changes in the overarching political and economic goals, as well as the practical policy choices, are responses to the challenges that arose during the marketization and globalization processes. These responses were neither well planned nor unified under one ideology, and were often reactive to the challenges the regime faced at each moment (Gao, 2009).

The capitalist system, at the empirical level, is less coherent than it is assumed to be. It is often a loose conglomeration of institutions, ideas, and policy prescriptions from which policy makers pick and choose based on the prevailing political, economic, social, historical, and institutional conditions in a nation. As a result, the specific policy structure is far from uniform, and varies greatly across countries. Other developing countries embraced western styled capitalism by adopting pro-market economic policies as prescribed in the Washington Consensus and implementing political democratization. Unlike these other countries, China adopts similar neoliberal economic policies, but appears to have remained in its traditional Leninist form (Gao, 2009; Krug & Hendrischke, 2008; Nee, 1992; Zheng, 2004). The coexistence of a vibrant market economy with a powerful authoritarian state contradicts the prevailing model in two ways. First, economic liberalization does not go hand in hand with political democratization. Whereas the country’s economy is increasingly open to the global market, its political system has not changed much in the past three decades. Second, although the market’s power has substantially increased during the reform era, the state has not relinquished its control over the economy; instead, state intervention is still active and influential and can be easily identified in many economic sectors (Blanchard & Shleifer, 2001; Fligstein & Zhang, 2011; Hall & Soskice, 2001; Yeung, 2003). Such paradoxical coexistence does not lead to serious conflicts between the political and economic doctrines. Compared with the local states in other developing or transitional economies, the Chinese local states play the role of a “helping hand” and promote the market development in the local economy (Jin, Qian, & Weingast, 2005). In many cases, the authoritarian state actively uses its political power and institutional resources to implement pro-market policies. At the same time, the authoritarian state has been very cautious in expanding the neoliberal ideas to new fields; it tries to ensure that market institutions are nothing more than policy tools for the state (Gao, 2009).

In light of these complexities, some scholars have argued that instead of asking how rapidly and in what respects China is moving toward western styled capitalism, a more important issue that needs to be clarified first is whether China is moving toward capitalism or away from it, and if the latter, then is China on a collision course with western capitalism? Unlike early scholarly work which generally viewed China as an additional example of emerging economies that would follow the past development trajectory of advanced economies (Guthrie, 1998; Nee, 1989, 1992; Peng, 2003), later scholars contended that China’s current trajectory is not in the direction of capitalism; rather the current trajectory is toward central management (Lin, 2011). It is suggested that China has coopted western capitalism and emulated many of its overt features; now it poses an unprecedented and profound challenge to western capitalism that scholars, policy consultants, and policy makers have only begun to grasp (Meyer, 2011).

Presenting a comprehensive review on the future of Chinese capitalism is not the goal of this book; however, we do believe that such discussions allow us to better understand the myriad of organizational and management phenomena in the Chinese context. Borrowing insights from theories that are originally developed at individual or national levels, we can achieve a more comprehensive understanding of management issues across institutional domains representing various levels of marketization, state control, and the penetration of foreign social and economic influences, and we can directly examine the effect of social, political, and economical forces on different economic outcomes (Nee & Opper, 2009). In fact, many scholars have taken this initiative and extended this framework to the study of organizations.

Transition or Transformation?

Early theories that aim to shed light on the nature and mechanics of China’s social and economic transformations and their impact on economic actors have paid considerable attention to the interaction between political power and market forces, and tried to explain the rationale behind economic actors by embedding them into the institutional contexts defined by the relative potency of state versus market. The new institutional sociology approach developed by Nee is among the early scholarly attempts to understand the mechanism and direction of this social economic transformation (Brinton & Nee, 1998; Nee, 2005). Applying this theory to interpret the socioeconomic changes that occurred in former socialist transitional economies, theorists foresee that economic liberalization may result in transformative change in the direction of more relative autonomy between the political and economic sphere, which is quite similar to the situation in established market economies. Theorists predict that the value of political capital will decline as a consequence of progressive marketization; meanwhile, power will shift from redistributors to producers and the emergence of a market economy in departure from state socialism (Nee, 1989, 1992; Nee & Opper, 2009).

Instead of simply assuming the existence of institutions, the new institutionalism approach aims to articulate the mechanisms that govern how institutions operate, i.e., the way institutions facilitate or constrain social actions. This theory calls for the integration of both formal and informal institutional conditions into the analysis of the rationale underlying individual or firm-level decisions. Formal institutions here are defined as laws and well-codified rules that are often formulated and enforced by the state, whereas informal institutions refers to norms that tend to be monitored and enforced through the approval and disapproval of various social contacts, such as friends, relatives, acquaintances, and even strangers (Nee, 2005). This approach deals directly with behavior where uncertainty and transaction costs are high, which happen to be common institutional features of transitional economies. Moreover, it facilitates explicit analysis of interactions between large-scale social change and micro behavior (Keister, 2009; Keister & Zhang, 2009).

The early development of this approach was mainly focused on the organizational dynamics that lead to China’s rapid economic growth, especially in the rural sectors. Nee (1992) argued that similar to transitional economies in Eastern Europe and the former Soviet states, the transitional context is characterized by a variable degree of state intervention and heterogeneous levels of market development. During the early transition period, these societies tend to have weak markets, poorly specified property rights, and institutional uncertainty. These conditions not only lead to changes in the resource allocation mechanism (i.e., the changing balance between the market allocation and bureaucratic allocation, which changes the relative importance of the state bureaucratic allocation), but also give rise to new organizational forms that can more effectively cope with the uncertainties in the environment. It was argued that the introduction of market mechanisms gradually promotes the shift of power from redistributors to direct producers. As a result, the traditional state-owned enterprises, with a closer relationship to the bureaucratic redistributors, lost power to firms with hybrid and private ownership forms (Nee, 1992, 2005). In addition, due to the higher economic efficiency in an increasingly competitive market, hybrid and privately owned firms may construct various informal institutional arrangements that function as alternative governing mechanisms (Borys & Jemison, 1989). Such arrangements, ranging from informal lending networks to private capital to new start-ups to distribution networks, may present significant challenges to the remaining state control, and may constitute an important reform momentum from below (Keister, 2009; Nee, 1992).

This market power thesis also suggests that the spread of markets and the changing structure of property rights increasingly favor private firms; business successes will be less dependent on the particularistic relationships with the redistributors (Nee, 1992; Nee & Opper, 2009). For instance, through in-depth interviews with more than 155 Chinese officials and industrial firm managers in 1995, Guthrie (1998) concluded that powerful economic actors began to pay more and more attention to formal rules, laws, and regulations, which are important elements of an emerging rational-legal market. This finding supports the idea that an institutional system is being constructed by the Chinese state. The respondents from the large industrial organizations increasingly saw social connections as unnecessary and dangerous because the new regulations prohibited the use of social relations to bypass official procedures. However, the complexity of the transitional context and the non-linear development of marketization made some theorists revise their initial predictions. They argue that the original market power thesis cannot be interpreted as a complete devaluation of political connections. Such connections are found to be functional in many types of economies, including the mature markets (Boisot & Child, 1988, 1996). A more refined argument is that political capital matters for firms that seek legitimacy in the transitional as well as advanced economies. However, the value of such resource is greater in institutional domains where government agencies can still exert significant influence over economic activities (Nee & Opper, 2009).

In addition to the power shift, the new institutional sociology also maintains that when the rewards for producers are increasingly based on their performance rather than their connections to the redistributors, positive incentives are created for entrepreneurial activities and innovators. Therefore, as marketization proceeds and market competition intensifies, it can be expected that firms will invest more in innovations, which is regarded as an effective way to extend firms’ profit margins. Moreover, as the market institution becomes better established, the price signals function as better indicators, which allow entrepreneurs to identify the emerging market needs and invest in productive activities (Nee & Opper, 2009). Such predictions have received much support in the entrepreneurship literature. It is indicated that entrepreneurship existed in nearly all transitional economies before the 1980s, although it was not widespread. During the transition process, many states have relaxed the restrictions imposed on private entrepreneurs (Davis, 1999; Peng, 1997). When it comes to the Chinese case, ideological discrimination against private ownership was abolished, private enterprises have become important pillars of the nation’s economy, private entrepreneurs are allowed to join the communist party, and entrepreneurship and innovation are regarded as important means to boost economic growth during the recent economic slow-down.

This new institutional sociology perspective was echoed by developments in the strategic management literature exploring how organizations make strategic choices during fundamental institutional transitions (Hoskisson, Eden, Lau, & Wright, 2000) and later led to the emergence of an institution-based perspective (Peng, 2003). Scholars argue that previous literature offers less useful knowledge about how organizations resist old rules, incorporate new routines, and develop new capabilities. They believe that institutions can facilitate strategy making by allowing firms to react to and play a more active role in an institutional environment. If firms have adaptive ability and agency, that allows them to move beyond institutional constraints (Hoskisson et al., 2000; Oliver, 1991). It was argued that firms operating in the transitional context often respond to the institutional environment in a way that is quite different from the expectations of the reformers. The transition process is often not smooth; the abolishment of old institutions can create new opportunities for new entrants who can benefit from the market-based institutions but adversely affect the interests of the incumbent groups who may resist the new rules of the game (Peng, 2003).

According to this perspective, market-oriented institutional transitions can be depicted as a process of evolving from one exchange mode to another. A relationship-based transaction mode tends to fit the needs of a less complex economic system, where the number of transactions and variety of economic activities tend to be low. Relationships can also function as important market-supporting institutions in this context because information about the trustworthiness of the transaction parties is readily available and social sanctions tend to remain effective in this context. As the transition proceeds, the scope, complexity, and scale of economic transactions will experience tremendous growth. Therefore, social relations can no longer effectively function as market-supporting institutions due to their high embeddedness, localized nature, and lack of formal sanctioning mechanisms. Third party enforcement mechanisms are thus needed to ensure the successful functioning of the increasingly complex and competitive market system. At this stage, more codified institutions are established to reduce the uncertainties and costs associated with market exchanges. And the end state of the institutional environment during transition will be a rule-based, impersonal exchange system, which is generally regarded as the underpinning mechanism of successful modern economies involved in the complex contracting necessary for modern economic growth (North, 1990; Peng, 2003). The transition process, according to this perspective, will begin with a predominantly relationship-based transaction structure and then may gradually move to a second, rule-based structure.

However, the evolution of China’s economic, social, and political system has presented a more complex picture to scholars who wish to use a single unified theoretical model to characterize the essence of this profound, large-scale social change. During the transition, we see the state gradually unleash market power and allow domestic private and foreign investors to play a bigger role in the economy, and meanwhile gradually integrate China into the global economy. We see the state resembles a development state: it made important changes to the existing institutions to win the competition for floating capital and to design and promote industrial policies to encourage the development of strategic industrial sectors so that the nation can climb up the global value chain (Gao, 2009). These complexities have made proponents of the institutional-based view realize that the two-stage framework is relatively simplistic. They acknowledge that institutions are composed of multiple dimensions that are interconnected, mitigating or reinforcing each other. Consequently, the institutional transitions may achieve progress at different speeds along different dimensions (Zhou & Peng, 2010). In order to better understand the way that firms respond to different levels of institutional transition, it is necessary to explore the contingencies that affect firms’ strategic choices, from relation-based strategies to market-based strategies.

The contingency approach generally focuses on the impacts of three factors. The first factor is the extensiveness and effectiveness of institutions that promote fair competition. These institutions include the developed factor and product market, in which price-setting mechanisms are primarily market driven and are free from bureaucratic control; the factor and product market can effectively coordinate transactions of raw materials and other production factors as well as the sale of the final product (Lee, ...