Description
Chinese Entrepreneurship Institutions, Ecosystems And Growth Limits
Advances in Economics and Business 1(2): 72-88, 2013http://www.hrpub.org
DOI: 10.13189/aeb.2013.010204
Chinese Entrepreneurship: Institutions, Ecosystems and
Growth Limits
Wei Zhao
*
, Frank La Pira
Ecole Supérieure de Commerce Saint-Etienne,Address: 51-53, cours Fauriel BP 29, 42009 Saint-Etienne, France
*Corresponding Author: [email protected]
Copyright © 2013 Horizon Research Publishing All rights reserved.
Abstract This article gives an entrepreneurial
perspective on the competitiveness of China’s industries in
the economic globalization, especially since the 2008
financial crisis. It explains above all how China gained the
traditional competitiveness (from comparative advantage to
competitive advantage) through rapid technological learning
of its entrepreneurial firms. Behind these firms, it was the
Chinese State as an ensemble of economic actors who had
strong incentives to grow the whole industrial production
aggressively. During the global financial crisis and recession,
China took the lead in the turnaround. Now, it is expected to
take the lead in the next cycle of economic growth. However,
the external foundation underpinning China's fast growth is
in serious disarray. The shifting globalized economy is
challenging the Chinese entrepreneurs and its growth model.
The paper gives some clues on what China should do to be
competitive in the future. The empirical part of the research
is based on Chinese macroeconomic data and in-depth firm
level interviews in China during a long period of time.
1
1
The macroeconomic data were collected from the Chinese official
statistical yearbooks of various years, including China Statistical Yearbook
(2002-2012), China Industry Economy Statistical Yearbook (2005-2012),
China Trade and External Economic Statistical Yearbook (2005-2011),
China Science & Technology Statistical Yearbook (2000-2012), Statistics
Yearbook on Science & Technology Activities of Industrial Enterprises
(2007-2012). All these yearbooks are compiled by China’s National Bureau
of Statistics (with Ministry of Science & Technology or National
Development & Reform Commission for specialized statistics) and
published by the Beijing-based China Statistics Press. The main fieldwork
in China was carried out between March of 2007 and April of 2009 through
the research program “Innovation Potential of Chinese Industries”, financed
by the Hong Kong –based French Research Center on China (CEFC) and in
cooperation with the Research Institute of Guangdong Development (Sun
Yat-sen University in China). Empirical information is based on visits and
investigations of a number of government bodies and firms mainly in
Guangdong Province, which is often called the “world factory” due to its
lion share of 25.1% (2011) in China’s foreign trade value. At each visit,
in-depth interviews of 1-2 hours were undertaken first with local economic
and technological officials (mainly from Economy & Trade Commission or
Science & Technology Department at city or township level) and relevant
policy documents were collected. Government officials from the following
administrations were interviewed: Guangdong Textile and Apparel Industry
Association, Zhaoqing City Government (Guangdong), Jiangmen City
Government (Guangdong), Shuikou Municipal Government (Guangdong),
Xiqiao Municipal Government (Guangdong), Humen Municipal
Government (Guangdong), Dachong Municipal Government (Guangdong),
and Wuhan High-Tech District Administration Committee (Hubei). Most of
our firm visits were recommended, arranged and accompanied by local
governments, with their preferences of selecting the large sized, relatively
well performed and technologically sophisticated local firms and
entrepreneurial activities. At each firm visit, in-depth interviews lasting 1-2
hours with senior managers or company owners were also undertaken,
Keywords Entrepreneurship, China, Economic Policy,
Global Value Chain, Innovation, Business Ecosystem,
Technological learning
1. Introduction
Competitiveness is a comparative concept of the ability
and performance of a firm, sub-sector or country to sell and
supply goods and/or services in a given market (Berger, S.,
2006). It captures the awareness of both the limitations and
challenges posed by global competition, at a time when
effective government action is forced by budgetary
constraints and the private sector faces significant barriers to
competing in domestic and international markets. Paul
Krugman (1994) once notes that countries don't compete,
firms compete. He argues if national competitiveness has
any substantive meaning, it must reside in the factors about a
nation that facilitate productivity. But in practice, the
concept is still a mixture of situations at both national level
and firm level.
Economic globalization triggers questions on what
China’s competitiveness is and how it will compete. As
China has emerged as a major economic force, there is a
clear distinction between the ‘optimistic’ and ‘pessimistic’
camps. Some believe that China is emulating Japan, Korea
and the Asian ‘tiger’ economies and creating internationally
competitive, innovative, high-tech firms like Sony or Hitachi,
thus transforming itself into a modern industrialized country.
Some others say that Chinese economy already reaches its
followed by factory or site visit. Firms studied include: Fenghua High-Tech
Corporation (Zhaoqing), Huaiji Auto Accessories Company (Huaiji),
Zhaoqing Auto Parts & Accessories Company (Huaiji), Dachangjiang
Motorcycle Group (Jiangmen), Shuopu Motorcycle Technology Company
(Jiangmen), Hedy Group (Guangzhou), Delica Plumbing Equipment
Company (Shuikou), Shuikou Technological Innovation Center (Shuikou),
Yishion Group (Humen), Humen Textile Innovation Center (Humen),
Fumin Fashion City Company (Humen), Xiaiqo Textile Innovation Center
(Xiqiao), Dachong Furniture Technology Center (Dachong), Zhengda
Pharmaceutical Company (Wuhan), Balance Pharmaceutical Company
(Wuhan), Mike Bio-Pharmaceutical Company (Xiamen), North-East
Pharmaceutical Company (Changchun), Geely Group (Ningbo), Delphi
Shanghai Ltd. (Shanghai), Desano Bio-Pharmaceutical Company
(Shanghai), and Shanghai-Volkswagen Company (Shanghai).
Advances in Economics and Business 1(2): 72-88, 2013 73
limit and will soon collapse. For example, after two years of
nearly 12% GDP growth in 2006-07, Chinese growth slowed
to 9% in 2008. In late 2008, with the world financial crisis,
there was economic slowdown in China, closures of factories
and 20 million workers unemployed. But from 2009 to 2010,
China's GDP growth rate slightly jumped from 9.2% to
10.4%. However, pessimistic voice rises again when China’s
GDP growth rate fell from 9.2 % in 2011 to 7.8% in 2012.
This article takes neither an optimistic nor a pessimistic
perspective on Chinese economy. It tries to present a realistic
picture of China by evaluating its firms’ behavior and the
overall economic functioning. It proceeds in four stages.
Section 2 will summarize how Chinese firms and
entrepreneurs have gained competitiveness by now. Through
identifying their main paths of technological learning, it is
concluded that Chinese firms and entrepreneurs have
potential innovation capacity but are facing fundamental
constraints. Section 3 analyzes the institutional foundations
of entrepreneurship and enterprise creation in China. The
root of these institutional arrangements is firms’
socio-economic categorization based on ownership or
property rights. It is important to understand these
“administrative heritages” of firms, because they shape both
the current configuration of assets and capabilities, and the
cognitive orientations of entrepreneurs toward future growth,
including international growth. Section 4 extends the
analysis from the creation of entrepreneurs’ ecosystems to
the functioning of whole Chinese economy. Chinese
economic growth is due to its unique socialist Keynesian
model of macro financial circulation. Section 5 describes
how China is now promoting the competitiveness of its firms.
But all the strategies are facing severe challenges from the
globalized economy. Section 6 will conclude the paradox of
China’s macroeconomic performance and firm
competitiveness.
2. Entrepreneurship through Learning:
the Chinese Way
Traditional competitiveness of nations and firms refers to
comparative advantage based on resource endowments, as
well as competitive advantage based on cost-leading or
differentiation strategies of firms, sometimes based on
industrial clustering environment created by States. More
advanced competitiveness refers to higher level advantage of
firms based on innovation, especially when firms learn to
master the global value chain. The strategy of innovation
management consists of designing, developing and
implementing a recurring basis, with new products and
services to be valued in different markets according to firm’s
own technologies and core competencies. Recently, firms
and governments of advanced economies count on
developing competences in new fields of corporate social
responsibilities, sustainable development, and corporate
governance performance. More and more, competitiveness is
the combination of advantages created by firms and
governments in generating new rules of game, and is far
beyond the traditional competition in market place.
How well has China competed until now? China has been
able to export a number of sophisticated high-end products
based on its cheap labor and it has gained the
competitiveness in the traditional sense. From 1993 to 2004,
the rate of productivity growth of enterprises has exceeded
15%, with an average growth rate of TFP (total factor
productivity) of 4.7% in the period 2001-07. Productivity
growth fell dramatically to an average of 2.8%, however,
during the global financial crisis of 2008-2010, and
improved only marginally afterwards. The profit rate of
firms has increased by 6.7% in 2000 to 23% in 2006. The
Chinese industrial sector, the largest part of the economy,
reported average return on equity (ROE) of 13.8 percent in
the period 2001 to 2011. The good performance of Chinese
companies has shown a trend that they were entering the
door of innovation. By 2006, it seemed that the Chinese
industry has developed some capacity to innovate in terms of
R&D investments and creation of industrial technology
centers by multinationals in China (OECD, 2007). From
1995 to 2005, China had 19% growth in R&D budget on
reaching U.S. $ 30 billion per year. In 2006, in terms of R &
D expenditure and number of personnel in R&D, China was
the second country in the world. Since 2007, China’s R&D
expense ratio to GDP steadily increased from 1.49%, to
1.54% (2008), to 1.70% (2009), to 1.76% (2010), to 1.84%
(2011), to 1.97% (2012). The increasing activities in
technology development are certainly more visible in
Shanghai or Beijing. Some Chinese companies have shown
the "Success Stories". The group Huawei spent 9% of its
turnover, or 5.9 billion Yuan in R&D, and even established
an R&D center in Silicon Valley. The Lenovo Group has
also reached an R&D expenditure of 2.8 billion Yuan. More
and more companies in China incorporate higher added
value functions and lower the cost of each function,
including R & D. Some authors have concluded directly that
Chinese companies have developed a new model for
breakthrough innovation, the so-called cost innovation
(Williamson & Zeng, 2007).
Schumpeter (1934) emphasizes the fundamental function
of entrepreneur is innovation. The typical Schumpeterian
entrepreneur is different from simple administrative officer
or owner-capitalist of means of production. Entrepreneur is
the first person introducing a new thing to an economic
system. Entrepreneur is a true adventurer who does not
hesitate to think for innovation and must overcome the
resistance opposed to anything new that might challenge the
conformism. According to Schumpeter, entrepreneurial
activities of innovation are the very engine of economic
growth. But Chinese firms’ gaining of advanced
competitiveness is in fact a process of rapid catching-up. The
concept of "catching up" implies that the more an economy is
far from the maximum level of development, more
technological progress is rapid, because the costs of
adaptation and diffusion of technology are known to be
lower than the costs of innovation and invention that
74 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
advances the technological frontier (Benoît, F. ed., 2004).
While entrepreneurship in China is present, the
Schumpeterian innovation of creative destruction is absent.
Chinese entrepreneurship has not been dependent on
indigenous inventive capacity, but on the ability to “borrow”
technology from the world’s “technological shelf”, i.e., on
the basis of learning (Amsden, A., 1989). These foreign
designs, products or processes are not path breaking, but are
novel in the Chinese context. Learning in entrepreneurship
involves borrowing, adapting and improving upon foreign
designs. At cognitive level, learning of productive
knowledge and innovation based on articulation of new
knowledge are of the same logic. High level learning can
lead to formulate competitive advantage based on innovation.
This means that all learning activities have an internal
tendency and potential to become innovation. For catching
up economy, the more learning is approaching innovation,
the more important the role of system support provided by
the State.
Since the beginning of 1980s, China has been carrying out
a massive movement of foreign technology acquisition
throughout its industrial firms. Over time of the past 25 years,
Chinese entrepreneurs developed two patterns of
technological learning. Simply put it, one is based on
traditional arrangement of technology transfer, which is the
model adopted by most State firms, represented by
automobile firms under the form of joint ventures and large
State-owned electronic firms in the 1980s and 1990s. This
pattern of technology transfer emphasizes the thorough
assimilation of technological and the underlying scientific
knowledge. The key process is “reverse engineering”
followed by continuous quality improvement, product
development from imitation to innovation, and economic
transition from import substitution to export orientation.
Japan, and South Korea to some degree, are successful
examples of this model. The South Korean experience shows
the switch from basic productive capability to a more
complex technological capability is linked, but not
exclusively, to the introduction of R&D, to some
organisational sophistication process, and to the integration
of technology and markets in the strategy of the firm (Kim,
2000). Chinese government supported fully this pattern of
technology transfer, interfered in the transfer process within
firms directly or indirectly, and even forced the transfer
behaviour sometimes. Correspondingly, Chinese
government elaborated series of industrial and technological
policies in service of this model, built up institutional
infrastructures to promote the imitation to innovation
process, reinforced Chinese basic research and industry
linkages in purpose of drawing indigenous technological
capabilities from technology transfer. The current national
innovation system modulated by government is for this way
of technological learning at firm level.
But there was another way of learning in China, practiced
mostly in the non-state firms (many of them are in
electronics industry) emerging after Chinese economic
reform and open-door policy. Chinese entrepreneurs learnt
their technologies from serving their clients and competing
in the market. This model of learning that the most dynamic
Chinese entrepreneurs are experiencing can trace their
origins to East Asian catching-up model (see for example the
work of Hobday, 1997). In fact, learning in the emerging
Chinese enterprises has not created a new paradigm for the
learning literature. On the contrary, the learning experience
of the Chinese enterprises is an ordinary process, a follower
of the Southeast Asian model. Even firms advancing more
rapidly toward an innovation frontier are in this pragmatic,
down-to-earth catching-up model, upgrading cumulatively
productive and control knowledge.
2
These firms introduce
new models as long as their foreign clients provide them new
blueprints. Firms that seem to enter in a transitional stage in
upgrading from a basic productive learning to more
sophisticated technology learning maintain the same
diversified types of contacts with their clients, aggregating
more sources of knowledge and trying to keep a multiplicity
of external sources. These firms follow a mixed pattern of
interactive learning, maintaining a variety of sources of
technology, keeping a large portfolio of clients and products,
accepting to be both OEM providers for some products and
an autonomous brand for others, depending on the market.
During the last 25 years, the progressively fierce
competition in Chinese market made the non-state emerging
firms flourish over the State-owned enterprises. Thus the
practical learning pattern prevailed over the formal transfer
pattern in industry. But these emerging firms obtained little
support or backup from the arrangements of Chinese
innovation systems due to their institutional status. Even
some local governments begun to construct supporting
arrangements for these firms by promoting local industrial
clusters, such as in Guangdong Province (Zhao, Wei,
Arvanitis, R. and La Pira, F., 2011), the State innovation
policy is still biased to serve the state firms. There is a deep
institutional and organizational gap between the dominant
practice of technology development in mainstream firms
with strong catch-up characteristics and the legitimate
system of innovation set up by government with target of
indigenous innovation. Except the few Chinese super star
companies which are innovative and accidentally fell into the
government expectations, because they practiced interactive
learning at the same time benefiting from innovation system
due to their special status (such as Lenovo, Haier, Huawei,
which begun to have international expansion), most of
Chinese emerging firms are continuing to reinforce their
capability of production and investment, instead of
2
This observation is mainly based on detailed case studies of 19
automobile and electronic firms in China, carried out during 1998
and 2006. Most of the joint-venture companies in Chinese
automobile industry during the period were included and most of
the studied electronic firms were found in Guangdong Province,
China’s then most important province of electronic products
manufacturing and exporting. Full case evidence and analysis can
be found in Zhao, Wei (2000 and 2013), and Arvanitis, Rigas, Wei
Zhao, Haixiong Qiu and Jian-niu Xu (2006).
Advances in Economics and Business 1(2): 72-88, 2013 75
upgrading to innovation, even some of them are beginning to
expand these production capabilities abroad. Chinese
enterprises are still concentrated on production capabilities
and difficult to enter find themselves in other higher
value-added functions, such as product design, logistics and
transportation, material integration, marketing, design, and
selling, etc. Even some Chinese enterprises begun to invest
in R & D, their new higher value-added functions are found
mostly in domestic value chains in China. Many case studies
prove that Chinese enterprises have little capability of
innovation in the global value chains.
China’s technological learning at the firm level brings
nothing new to the existing models of catch-up firms in
South Korea and other newly industrialized economies
(Hobday, M., 1995; Kim, L., 1997; Amsden, A., 2001).
Though these paths of technological learning led South
Korean firms from imitation to innovation, for Chinese firms
they only bring them potential capability of innovation. The
growth regime of Chinese catch-up has been based on a
combination of particular economic and social factors by
now, such as growing need for consumption in domestic and
foreign market, large scale investment in infrastructure for
20 years, a pool of cheap labor market without limit, in the
absence of social protection and safety at work, an increased
supply of skilled labor (during the last 10 years university
graduates has increased significantly), and free from
intellectual property protection, etc. But to turn this potential
into real innovation, Chinese firms also encounter three main
constraints: the institution for entrepreneurship (the
mechanism problem of origination of new firms), its position
in global value chain (the linkage problem with technology
suppliers and good buyers), and sustaining market demand
for more sophisticated products (the linkage problem with
customers and consumption). The following sections check
these three aspects in more detail.
3. Institutional origins of the Chinese
Entrepreneurship
It is often neglected that Schumpeterian entrepreneurship
involves more actors than just one single entrepreneur, so the
context of entrepreneurship must be taken into account. This
context includes other groups and individuals whose
cooperation is needed for a successful business performance.
Since 30 years, thousands of new enterprises were created in
China. During 1998 and 2007, the number of above-scale
industrial firms in China increased from 165 thousand to 302
thousand, with an increase by 5.8 times of manufacturing
sales. There is no shortage of capitalist entrepreneurs and
bureaucrats in China who also have a strong ambition to
create a powerful ‘national team’ of firms which will be
genuine global competitors. However, to understand why
China has plenty of entrepreneurial activities while is still
lack of innovation, it is necessary to look into the histories of
entrepreneurship, and find the reasons within the Chinese
institutional contexts. It is the institutional condition of
creating new firms in China impedes the entrepreneurship to
embody innovation from the beginning. In fact, the
entrepreneurship in China has a background of dual
economic emergence of the private sector and the renascent
state sector, and co-evolution between new market players
and former planning players. For over 20 years China has
developed a very special socialist market economy,
characterized by the dominance of government control, but
with emergence of a private sector composed by Chinese
local firms, Chinese overseas firms, and foreign firms. In
parallel to the emerging private sector, China has also
sustained and even reinforced its state sector, transforming
itself from the old planned style to a new Keynesian system.
Private enterprises are permitted to compete and operate in a
free market environment, but the State grasps most of the
benefits and redistribute to state-owned sectors.
3.1. Renascent Entrepreneurship within State Sector
Many wrongly believe that after the Soviet-style planned
economy, reform since 30 years is leading China towards a
capitalist market economy, in which private individuals and
corporations own the means of production and, motivated by
the desire for profit, compete in free markets under
conditions of limited restraint by government. Many forget
that China’s fundamental economic institutions are ruled by
socialist principles, deeply rooted in its political system.
State sectors include SOE which is the core part. SOE are
diversified firms under government control established by
and around administrative bureaus during the 1980s. With
the gradual opening of China in 1978, China’s political
authorities fostered connections between Chinese SOE
subsequently leading to the creation of these business groups.
The motivation for promoting such a development was
influenced by the success of the Japanese Kereitsu or the
Korean Chabeol. In 1995, the official numbers given was 20,
000 business groups in the country when it was also reported
that they accounted for approximately one quarter of the total
state-owned assets. In 1997, the State Council selected
industries while incorporating small and underperforming
state companies at the same time. Along with making China
the “world factory” in the 1990s, resources, especially
financial resources, were drawn back to the State sectors.
Today, the share of SOE in business is estimated between
20% and 50%; some of them are large enough such as
Sinopec, State Grid, and China National Petroleum. Some of
them are in the process of internationalization. At first there
were only reductions in the planned sector and business
changes, and there was no emergence. But gradually the
State sector has learned to react to the pressure from private
sector. China was eventually able to develop a new State
sector that renews their activities by adopting new
technologies and management systems, with funding from
the profits channeled through the Sate-controlled financial
institutions (banks, stock market, insurance companies,
investment funds, or direct payments to local governments,
particularly through their tax offices, etc.). The emerged
76 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
State owned firms dominate the most important
infrastructure sectors, such as telecommunications,
petroleum, chemicals, even in automobiles and some
electronics. It should be noted that the state sector also
includes other organizations supporting the SOE: public
health institutions, education, science and technology,
finance, labor, etc. A recent example is Commercial Aircraft
Corporation of China (CACC), a state-owned enterprise
from China created in May 2008 by merging the commercial
aircraft operations of two other existing state-owned
enterprises, AVIC 1 and AVIC 2. The Chinese government
has publicly stated its goal to make China a competitor in the
global jumbo jet market by 2020. CACC’s predecessor,
AVIC 1, has already announced that it will be launching the
maiden flight of ARJ21, a 70-100 seat passenger aircraft
sometime during the year of 2009.
The firms created or renewed in the course of this State
sector reemergence are mostly orthodox firms in the eyes of
government and their growth is due mainly to subsidization
from government. In China, there is a bias in favor of large
State-owned enterprises in the design of policy instruments
for innovation. This bias appears to influence the choice of
policy instruments. For instance, programs for private-public
partnerships for innovation, which have emerged in OECD
countries as instruments to foster long-term industry-science
linkages, have found their place in China to promote SOE
and universities cooperation. In fact, Chinese policy mixes
are characterized by the strong legacy of the planned
economy, as the programs – literally “plans” in Chinese – are
the main instruments for addressing policy priorities. The
operation of national innovation system is very centralized,
and the relation between State and SOEs are much closed.
Chinese central government has purposefully followed the
catch-up trajectory of Japan and South Korea, constructing
national system specifically in service of state-owned
enterprises. These firms continue to obtain State’s support
and take use easily resources in the national system of
innovation.
Many big Chinese firms grew up in following this pattern,
which reminds us always of the story of South Korea. In the
South Korea case, a high rate of investment was maintained
largely through the channeling of large amounts of
subsidized credit to industrial enterprises controlled by the
Chaebol (large, family-run conglomerates), although state
enterprises played an important leading role in certain
sectors (steel and petrochemicals, for example). Indeed, the
high leveraging of investments was a central structural
feature of the South Korean development model. But
technological catch-up and international competitiveness
require more than high rates of investment. The allocation of
subsidies has rendered the government not merely a banker,
but an entrepreneur, using the subsidy to decide what, when,
and how much to produce. This State-entrepreneurship
involved a combination of import-substitution and
export-promotion. Cheap credit and access to protected
domestic markets were provided to the favored Chaebol
enterprises in exchange for achievement of export targets. If
an enterprise failed to meet state export targets, the subsidies
would be scaled back accordingly. Using these methods, the
South Korean government was able to promote the
development of internationally competitive production in a
succession of new industries- textiles, shipbuilding, steel,
automobiles, and consumer electronics. These industries
successfully assimilated technologies obtained through the
importation, and licensing agreements with foreign (mainly
Japanese) corporations. Foreign direct investment also
played an important, though subsidiary, role, mostly in the
form of joint ventures. Such ventures were particularly
important in electronics. More broadly, Korea’s heavy
industrial program was spearheaded by the large Korean
Chaebols, all of which had close ties with the Japanese
conglomerates (or large firms) through joint ventures upon
whom they were largely reliant for technology transfers. The
South Korean government’s strong and sophisticated
external negotiating stance, and its efforts to arrange the
importation of management and engineering consultants
(again mainly from Japan), were crucial factors in the
country’s acquisition of the foreign technologies, expertise,
and capital needed for industrialization” (Amsden, A., 1989).
This pattern of entrepreneurship is less similar to that of
Japanese firms. Comparing to South Korea, Japanese
State-firm structure adopted flat organizational form, with
less degree of hierarchy between the higher level of
government and lower level of firms. Japanese firms
emphasized on experience accumulation and continuous
progress in quality. Japanese firms had a unique intrinsic
learning pattern which integrated closely design, production,
marketing and R&D to invent new production methods, such
as JIT and Lean Production. Chinese big State firms intended
to take the route of Japanese firms, but in a much less
successful degree. Their efforts in international technology
transfer are exactly in the same way as Korean firms, but also
in a much less successful degree. Nevertheless, they get
much stronger support from Chinese government than their
South Korean and Japanese counterparts.
3.2. Grass Roots Entrepreneurship
But originally there was one kind of entrepreneurship in
China: the private sector, or non-State sector, since private
sector did not exist before, it has itself emerged as an island
in the sea, which is sometimes described as bamboo
capitalism (Economist, 2011). This pattern of
entrepreneurship includes firms under different forms:
red-hat enterprise, FDI from HK, TW and Macau, the
late-comers business, etc. The private firms originated from
the better exploitation of the residual resources in State
sector. These resources were circulated outside the State
sector system. The strength of these companies is very
uncertain. They need to live and survive to create a clean
living space, a specific knowledge, a learning exercise for
both organizational and technological aspects, which can
make them stronger. All other phenomena are logical
consequences that flow from this first and only
Advances in Economics and Business 1(2): 72-88, 2013 77
entrepreneurship in China. These new enterprises took the
share of manufacturing in the global value chains, in
exploiting the abundant and low-cost labor resources in
China. Most of them exported to foreign markets and earned
foreign exchange. Most of them were also in nature local
FDI. In fact, the FDI occupied more than 40% of Chinese
GDP, and FDI firms occupied 55.48% of national import and
export, 87% of Chinese high-tech exports, and 90% of
Chinese high-end automobile export. From the late 1990s,
there begun to have more and more real Chinese private
firms participating in global value chains. This
export-oriented non-State sector constituted the main growth
engine of Chinese economy during the last 25 years.
These Chinese entrepreneurs do not depend on support
from China’s national innovation system constructed by
government. The entrepreneurs may be called “grassroots”,
because in their creation and growth process they get little
attention and support from government. They are almost
outside the sight of government. Their emergence is due to
the combination of Chinese comparative advantageous
domestic endowments, such as cheap labour, huge internal
market space, abundant natural resources (Lin, J. Y., 2012),
and the globalization of value chain and the recent
formulation of international innovation system. The learning
pattern of this entrepreneurship consists of a double process:
one is taking part of the global value chain of industrial
production; the other is taking use of Chinese comparative
advantages in industrial production. The double process is
nothing mysterious than just a normal industrialization
process.
The disruption between 1980s and the before is the
worldwide separation of functions of a value chain of
production. Industrial production includes a series of
functions from design of product to selling to client,
sometimes until service after sales. Some steps imply
production or transformation of manufactured goods; other
steps consist of providing services or information. Nowadays,
these functions are subcontracted one after another by the big
brands to low-cost producers. Along this process, ownership
linkages are replaced by the contractual relations between
independent firms. These firms may be located in different
places in the planet but are linked around a value chain
(Berger, S., 2006). From 1990s, most of functions of
production and components have been moved to China. The
movement is not at firm level, but at industrial level,
meaning all industries move their production and
components sections to China. The globalization of value
chain didn’t industrialize some specific firms in China, but
the whole country and its whole industries. This
delocalisation of industries to China gave a golden
opportunity to whichever Chinese firms, but specifically
small and medium sized non-State firms, to absorb and
develop production capacity. Learning started from
production and component functions, but later some firms
extended to distribution, product design, even marketing and
after-sales service. It is a typical routine of Southeast Asian
firms from OEM to ODM to OBM.
On the other side, grassroots Chinese entrepreneurship
also benefited from the boom of huge domestic market. By
leveraging technologies that they get from foreign clients to
the domestic market, these Chinese firms begun to master all
the functions in the value chain, from product development,
through production, to marketing. They set up big vertical
integrated organization to coordinate their activities, just as
big firms for mass production in US in the 19
th
century. The
fast growth begins with cost advantages that large scale and
broad scope provide in relatively technologically advanced
and capital-intensive industries in China. It continues with
heavy investments in manufacturing, marketing, and
distribution. Also geographic expansion and moves into
related product markets both lead to economies of scale, and
economies of scope in Chinese market. These firms, when
big enough, will also try to take use of the former reserve of
scientific and technological competence, leaked out by
former science and technology system in China, to
industrialize the design and technology to mass production.
But this linkage is always difficult to be inserted into formal
plan of the State.
Thus most firms in this pattern of entrepreneurship, even
those active in R&D now, have both limited capabilities and
a low propensity to innovate. The private sectors include
only business firms, with little support from other sectors.
Key factors include an emphasis on quantity rather than
quality, which is a legacy of their entrepreneurship routine,
the availability of cheap but insufficiently skilled labour, the
lack of managerial know-how, a mode of governance that
does not encourage managers to take the risk of innovating,
the persistence of a government support system that tends to
crowd out rather that encourage emerging private business
investment in risky projects, and a financial system that is
not supportive to them. In fact, many of the grassroots firms’
innovation depends upon the various forms of public support
granted by the different levels of government to tenants of
science and technology parks. But the recent period has seen
the clusters of small firms in some regions, notably Zhejiang,
Jiangsu and Guangdong provinces.
3.3. Boundary and Brokerage Entrepreneurship
The institutional aspect of Chinese firms has been widely
explored by Chinese scholars (Yasheng Huang, Xielin Liu,
Justin Yifu Lin, etc.). This dual emergence of private
enterprises (national IDE) and the renewed State sector
creates a bias of access to certain strategic resources
(technological, human, financial and even organizational)
for entrepreneurship. The type of ownership (property rights)
of an entrepreneurial course will determine its possibilities to
get the support from outside the firm (education institutions,
university research, public technology centers, banks loans,
information sharing, etc.). Grass root entrepreneurs
encounter major obstacles to the development of innovation
(funding, control of strategic products, inability to recruit top
level personnel, impossibility to get support in technical
activity when it is not part of public companies or public or
78 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
quasi-public bodies), even from the very start-up phase.
Most grass root entrepreneurs have to find cooperation with
state sectors, and enter into partnership with the State, in
order to gain the needed resources. The solution is often to
mix the private entrepreneurship with that in State sector and
find a new institutional arrangement (red-hat of firm,
subcontracting from SOE, fake joint-venture with SOE,
subordinating to a non-profit public organization, etc.).
All these ways can be called institutional entrepreneurship
in China. Most firms in this pattern have a hybrid
institutional form of ownership from the beginning. They are
often semi-public and semi-private firms, or the collective
firms with vague ownership classification, or the mixture of
State-assets and private investments. The State-owned
aspects of firms permit them to have very specific insertion
within the national innovation system and create a
firm-specific context different from that of industrialization
pattern. But their private or non-state aspects make firms
adopt industrialization-type learning pattern. The uniqueness
of this pattern is that entrepreneurs should have institutional
access to resources provided by national policy and
innovation system, benefit the equivalent regulation
environment as the SOEs; at the same time, their firms’
operation adopts totally the model of grassroots firms (mass
production, cheap labour force exploitation, assimilating
technologies from foreign clients, competing by price
advantage and quantity, etc.). Moreover, entrepreneurship of
this pattern skilfully combines the strong points from both
State and market, brokering between State-controlled
resources and market power. For example, a firm of this
pattern can well integrate its R&D projects into national
planning and get governmental subsidies, even direct
investment in development; at the same time, it may use its
huge production capacity to push its foreign clients to give
more technologies, or to acquire foreign surplus production
capacity and move it back to China. Entrepreneurs take
advantage of the former immobilized technological reserves
in planned innovation system and new technological
knowledge of foreign clients and partners (Lu, Q., 1997).
They in fact create an economic and technological
convention between different systems, and their success
depends on the brokerage capability of entrepreneurs.
Some of Chinese firms that have already acquired global
visibility and market presence, even in high-technology
sectors, such as Huawei, Haier, TCL and Lenovo, are typical
cases of this pattern of entrepreneurship. Most
R&D-intensive Chinese firms usually emerged from the
public research sector. This is the case for three leading
Chinese producers of personal computers: the predecessor of
Lenovo, Legend, was nurtured in the Institute of Computing
Technology of the Chinese Academy of Sciences; Founder
Electronics was a spin-off from Beijing University; and
Tsinghua Tongfang originated from Tsinghua University.
Some of these large successful firms are now investing
abroad in R&D. The small and less famous firms of
brokerage pattern, such as Jinling Corporation, Fenghua
Hi-Tech Company, Huaiji car parts firms and Dachangjiang
Motorcycle Group, adopted in fact very similar routine of
giant successful Chinese firms. The disappearance of one
side of system may destroy the firm, such as the case of
Fenghua High-Tech Corporation. But it should not be
forgotten that the joint-ventures in China, especially the
joint-ventures between SOEs and MNCs are also following
this process of entrepreneurship, even under a more
structured organization and with less brokerage effects.
These joint-ventures may follow more the pattern of State
sector entrepreneurship if Chinese government imposes
more control and the foreign investors have less confidence
(the cases of JVs in automobile industry), or may follow the
pattern of grassroots entrepreneurship, if the Chinese partner
is a private entrepreneur and the foreign partner is well
recognized, and its market power is protected by Chinese
government (the case of Wahaha-Danone dispute). In any
case, finding the appropriate institutional arrangement is the
key element if the joint-venture wants to have successful
growth in the domestic or export markets. But normally
Sino-foreign joint-ventures are less successful cases of
institutional entrepreneurship comparing to typical Chinese
super star firms.
Since 30 years, the double emergence of State
entrepreneurship (State-own firm reform, attracting foreign
direct investment, export-led strategy) and private
entrepreneurship (informal privatization of state-assets,
township and village enterprises, and private firms)
continuously created a variety of business firms in China,
though the life-cycle of each specific firm was often short.
Curiously, such intensive entrepreneurial activities didn’t
lead the whole economy to evolve from imitation to
innovation, just as Japanese and Korean economies did. The
reason is that most of entrepreneurs’ resources and creation
are contributed to Chinese unique institutional contexts to
make the so-called institutional innovation. For
entrepreneurs, firm is a cognitive focusing device or
dominant logic device for collective action. The institutional
identity of the firm serves to give a social and legal basis for
the coordination, production and collaboration of resources.
Institutional arrangement of ownership rights is needed to
establish to control resources, and a generalized labor
contract to coordinate resources. But in China, this
institutional arrangement of ownership will subsequently
determine more or less the firm’s internal relationships and
activities (organizational form, quality management, human
development efforts, and compensation systems) and
specific external linkages with suppliers, customers, and
knowledge institutions. Thus it becomes the close focus and
dominant logic of entrepreneurs in China. The innovation
requires collaboration with outside and other organization,
and focus on market, not institution itself. Nevertheless this
Schumpeterian innovation lies outside the focal scope of
Chinese entrepreneurship.
4. Macroeconomic circular of Chinese
Entrepreneurship
Advances in Economics and Business 1(2): 72-88, 2013 79
Firm’s production activities establish the linkage between
investment and consumption. As a firm is created, it will
enter into various interactions with other institutions and
organizations (public authorities, universities, labor market,
foreign buyers, laboratories, technical research centers,
suppliers, financial institutions, users, consumers, clients,
consultancies, investors, competitors, partners, etc.). It will
also get involved into a chain of activities (undertaken by the
firm or joint activities it carries out with other actors, e.g.,
searching government support to export to foreign markets,
which is in fact a joint activity of firm and government,
sometimes with banks). These activities, for theoretical
purpose, can be roughly clustered in three categories:
financing, producing and consuming. Financing activity
often implies investment, such as R&D, new product
development, the decision to purchase and finance
equipment, removal of plants, etc. Producing activity
includes purchase, supply and logistics, equipment
maintenance and operation, manufacture of components,
quality control, and delivery of product, etc. They are mainly
internal activities of a firm, but often contain its suppliers,
connected companies, cooperative, sub-contractors, and
specialized suppliers, often located in the same area.
Consuming activity includes marketing, selling, services,
distribution and logistics, market research, product design,
product usage, in relations with users, clients, consumer, and
market data, etc. Firm is embedded in all these activities. We
may define all these business activities and interactions
among actors beyond the frontier of a firm as a business
ecosystem. An entrepreneur’s ecosystem is, throughout time,
a number of economic activities carried out in relation with a
series of actors around a project of industrial production of
an existing firm or an entrepreneur. As a concrete
environment, ecosystem can generate opportunities that can
be then exploited by the entrepreneurs.
4.1. Dynamic Ecosystems of Chinese Entrepreneurship
The exploitation opportunities provided by business
ecosystems are the dynamic sources of Chinese
entrepreneurship. In Chinese environment, new firms are
created, often as result of investment. Entrepreneur and the
new firm’s linkages with other actors are almost
predetermined by the institutional foundation of the firm
ownership from its day of birth. For example, a private
entrepreneur knows more or less how it will get labor, what
forms of its network of suppliers will be, what its relations
with banks will be, with whom it is able to cooperate with
other firms in the industry, etc., before the firm is created
legally. These institutionally determined linkage possibilities
will specify more or less the ways the entrepreneur
undertakes different activities. Thus entrepreneurs and firms
in China are extended to different types of business
ecosystems, once they get involved in activities regarding
investment of production and consumption of products.
Chinese firms are not only different in internal capability, but
also in terms of their linkages as producers with financing
and consumption opportunities, provided by their specific
ecosystems.
Entrepreneurship within State sector mainly forms an
investment-led ecosystem. The system is like a 'producer'
chains leading to demands of the market (both consumers
and corporate customers). For State-owned firms, the weight
of business is located upstream and all activities, from
manufacturing to marketing, are then guided by the
possibilities of gaining investment. These firms are often
legacies of former planning system in China, but under new
form. Chinese governments often play the role of
corporations, bankers and universities, and are the most
powerful and biggest investors in the economy. The
investment in State-owned firms is for investment itself,
because new investment attracts more investment. In 2008,
the State-owned enterprises (excluding the financial
institutions) owned net assets of up to 17 trillion Yuan, and
were almost all good-quality assets. The producing activities
are normally in the upstream and monopoly sectors, such as
infrastructures (telecommunications, transportation, etc.) or
raw materials (petroleum, chemistry, etc.), equipped with
advanced machinery and well-organized, well-paid
employees. Huge fixed assets attract more investors (foreign
and Chinese). When State makes investment in these firms, it
includes also many programs of technology development,
specifies formal links with universities and partnerships with
banks. At firm level inside, the size is very important, and
investor relations are fundamental. At government level,
there is often strong involvement to implement industrial
policy. In this kind of business ecosystem, entrepreneurs
don’t worry too much about the market, since customers or
markets are already there. The consumption of their outputs
is relatively stable and strong, often with the intervention of
state or government (e.g., in pharmaceutical sectors, the
State buys). Their market is domestic. The main customers
of the State-owned firms are in fact other types of firms
(private, foreign, and mixed ownership firms, etc.) as well as
employees from other sectors (increasing population of
migrating peasant workers, for example). The strategic
positioning of these firms brings them revenues from other
firms comfortably. Implementation of national strategies for
employment, social stability, attracting foreign investment
gives a lot of opportunities of growth for State-owned forms.
A typical case, the State-owned Fenghua High-Tech
Corporation, was ever the most innovative Chinese
high-technology producer in semi-conductor. The firm had
strong production capacity with low cost, and gained an
important foreign client. After losing its foreign client, it
turned to State for more investment to survive. Under the
direction of the State, many banks gave loans, and the firm
also had privilege to be listed on stock market.
As for most private entrepreneurs and their small and
medium-sized firms, they often find themselves in a
client-led ecosystem. The basis of this ecosystem is the
interaction between producer and customer, often abroad.
The dynamics does not rely on the firms themselves but on
the relationship between the foreign client and the local firm.
80 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
Typical firms are often the suppliers specialized in OEM
mode, with their foreign clients who are themselves
producers in foreign markets. Their relationship is that of
outsourcing production for a foreign client, or assembly
products according to foreign specifications, sometimes
under the arrangement of compensatory trade (the same type
as the Maquiladoras in Mexico). Foreign client is also
supplier of technology to Chinese firm which is user of that
technology. Foreign companies as clients are forcing
Chinese manufacturers to improve product quality and
processes to meet their increasing demands, so they
dominate the relationship. At the same time, foreign
companies provide technical assistance to Chinese firms,
who do not know the market of Western consumers, but only
their clients (Western firms). Consequently, few firms are
able to monitor changes of habit and needs of users, and to
take these changes into account in the design and operation
of their products. Some products exported from China are
placed in very demanding foreign markets, but these
products are sold by multinationals. This has greatly reduced
the chances of learning from markets. In fact, to the Chinese
producer, the foreign client has become the barrier to its
market access. But the producing activities are well
developed on specific request of client. It is characterized by
lower prices by a desire to improve and move up in the
market, the use of a pool of unlimited labor supply from
countryside, but a very high turnover rate that is bad to
production quality. To be attractive to foreign firms, local
governments often intervene to regulate the problems of
manpower (security, control of unions, lower wages, job
maintenance, etc.) to make firms flexible and efficient, and
cost of production remain low enough. The investment for
launching such production is very low, and local
governments provide funds, helping also entrepreneurs to
develop contacts with foreign clients. Sometimes, local
governments act as intermediaries to make liaison with
universities, technology centers, etc. Examples of industrial
clusters in Guangdong Province, such as Shuikou, Dachong,
and Nanhai, are all towns in specialized products
manufacturing.
Different from normal private entrepreneurs, institutional
entrepreneurship and the corresponding firms (Chinese
red-hat firms, wholly foreign owned subsidiaries, powerful
private entrepreneurs, etc.) often evolve their business into a
real market-led business ecosystem. Here the opportunity is
mainly Chinese domestic mass market and composed of
non-demanding consumers. The chain of production is
guided by the final consumer. The firms have the ability to
adapt to conditions of sale. Firm’s producing activity, from
product design to delivery, is then guided by the needs of
customers. The biggest difference between the opportunities
provided by this ecosystem and the client-led ecosystem is
that it is not a client, who dominates the relation, but the
producer develops and manages a network of distributors to
sell the product directly to consumers, and firms directly
receive the feedbacks of consumers. Downstream activities
are important to firms: the challenge is to achieve control and
anticipate consumer needs (definition of trademark, etc.).
Many entrepreneurs started their business as traders. Then
they became producers under OEM arrangement for foreign
customers. But gradually, they focus on the Chinese market
(the requirements are lower than those of foreign customers)
to build marketing power. Yishion Group in Humen, one of
the biggest Chinese apparel retailers (known as the Chinese
Zara), was originally a clothing producer, and then it
established and managed a national network of distributors,
and outsourced the production to some local providers. Sales
revenues come from domestic consumers, who are also
workers in SOE and private firms. In Chinese markets,
consumers are not so in demand of high-quality products.
The low disposable income made consumers demand for
conventional products at low prices. The example of foreign
retailers such as Carrefour highlighted this characteristic.
Carrefour has relied on low prices; its price is even lower
than that of Chinese supermarkets. Carrefour is engaged in a
price war with Chinese competitors. With this policy and
despite the strict limitation imposed by the central
government, Carrefour has expanded rapidly and has made
considerable profits. Also, China's savings rates are at up to
half of its gross domestic product and are much higher than
in other countries. Workers save money and have low
consumption propensity. If firms want to keep their
production activities going on, they have to find ways to earn
margin from the weak consumption. Their strategy is to
expand production capacity to benefit from scale economy.
The increasing ability production industry in China is based
on the slow growth of domestic demand and high
expectation of entrepreneurs to reach mass production.
Entrepreneurs in this situation spend considerable resources
to forge links with their environment, with research
institutions, suppliers and customers. Many entrepreneurial
firms originated from other ownership categories can be
evolved in this kind of ecosystem. Jinling Washing Machine
Company, a local State-owned company in Jiangmen,
transformed itself into a scaled producer led by foreign client,
then extended to a market-led ecosystem.
4.2 Creation of Entrepreneurs’ Long-Term Expectations
But how the whole Chinese economy without
Schumpeterian entrepreneurship and innovation achieves to
gain consecutive growth? The answer is found in
understanding the macro monetary circular overflowing its
various ecosystems of entrepreneurial activities. China’s
whole process of economic functioning and monetary
circular can be shown by the Figure 1 as below.
Advances in Economics and Business 1(2): 72-88, 2013 81
Figure 1. The Entrepreneurship-based Circular of Chinese Economy
Above all, China's unique monetary, banking and
financial system is in fact a State-owned sector. Chinese
Government has full control over money circulation process
and uses the whole financial system (including its stock
markets) as a huge financing machine for its economic
expansion. In China, the use of interest rate as monetary
policy tool is only recent. Government has managed the
quantity of money through banks and financial institutions.
The Chinese macro monetary and financial system has
several characteristics. First, China's banks and financial
institutions can effectively absorb the economy's monetary
savings (see flows ¥1 in Figure 1). China's total savings rate
increased from 36% in 1996 to 51% in 2007. Even if the
interest rate is zero, China's savings would be still very high.
This is because the whole financial sector is
government-owned; households are not worried about the
risk of bank failure and expect that the financial sector will
always exist. And they don’t know where to put their money,
except saving in the banks. For a period of time, China's
households even threw their money into the stock market in
believing there is no risk of losing, because the stock market
is a government-run. Household savings in China are about
20 per cent of gross domestic product, increasing during 11
years from 19% to 22%. A high amount of savings comes
from large companies in China. In fact, saving rate of
government and business sectors increased during 11 years
from 17% to 29%, contributing 80% of the growth. These
savings were mainly transformed to industrial investments in
large firms through Chinese financial system. State-owned
and large firms continued to expand their productive
capacity. While small and medium-sized enterprises, which
employ 80 per cent of workers, have minimal access to
financial services because that sector is dominated by four
large banks that primarily serve large companies. In effect,
the skewed financial structure in China means that ordinary
households and small and medium-sized companies have
been subsidizing big corporations and the new rich class
through the banking system with low interest rates. In
addition to savings, the Government absorbs money through
taxes and fees from firms and households (see flows ¥2 in
82 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
Figure 1). Since reform and opening of the economy,
Chinese fiscal revenue is always at high speed of growth. In
addition, the Chinese currency Yuan is not freely convertible.
China's foreign exchange system absorbs most of the foreign
exchange earnings of Chinese exports enterprises, and
foreign currency brought by foreign investors (for direct
investment or financial investment). Before this foreign
currency flows into China's economy, they must be
converted into Chinese currency to enter into the circulation
in domestic market. This money, through the banks and the
SAFE, becomes in fact Government’s foreign exchange
reserve. Besides, Chinese government set up a floating
exchange rate system with reference to a basket of currencies.
Since 2005, under international pressures, it has appreciated
20% of RMB exchange rate against the U.S. dollar. In fact,
Chinese government is the biggest capitalist who produces
and operates the economy’s money, including RMB and
foreign exchange (see flows $3 and ¥3 in Figure 1).
Under the Government’s command, the key function of
Chinese State-owned financial system is "investment
transfusion", meaning channeling and allocating the savings
and financial resources to investment projects in the real
economy (see flows ¥4 in Figure 1). The result of these
continuous waves of investment is the ‘piling up’ of different
types of productive ecosystems in China (Arvanitis, R., P.
Miège, and Zhao, W., 2003). Entrepreneurial firms,
especially new ventures, are receivers of these investments.
But entrepreneurship in China has to go through the
institutional filters which clarify the ownership of new firm.
Ownership category then has big impact on the subsequent
concrete situation of the firm. It determines with which
institutions of knowledge it can establish linkages, as well as
the nature of its interactions with financial institutions and
users, clients, markets, suppliers, competitors, foreigners, etc.
These linkages with others evolve into different ecosystems.
Most banks in China are large banks and have no internal
process adapted to give credits to small private entrepreneurs.
They are used to finance the key projects within planned
frameworks. “Investment transfusion” is biased to
entrepreneurship within State-owned sector. Through the
financial system, China uses private accumulations and
foreign financial resources to feed its State-owned sector
entrepreneurship. Tools of direct financing such as capital
market are also for this purpose. It is not surprising to find
that Chinese local governments and banks fund the sectors of
steel, cement, road building, bridge building, real estates, etc.
These infrastructure sectors accounted for about 30% of total
economic output in 2007 and were dominated by
State-owned firms, who had always the heritage of the
classic “thirsty for investment” of socialist enterprises.
Chinese Government’s investment push approach has
created a high degree of aggregate effective demand at
domestic level. According to Keynes (1936), effective
demand is the anticipated demand by entrepreneurs. They
calculate the output they must make in order to provide the
optimum amount of goods and services required by
economic agents. Before launching the production, which is
expenditure of money, entrepreneurs have to anticipate the
amount of revenues and expenses that may give them the
profits they expect. In observing the preference for liquidity
(currency) of people, Keynes concludes that if a market
economy is left to itself, it cannot have effective demand. So
society as a political unit, should replace the entrepreneurs in
the decision to invest in the extent of their deficiency. By
injecting investment continuously in circulation, Chinese
government has created high expectations of revenue of all
actors. Chinese banks gave loan schemes without taking into
account of the risk. China's financial firms are almost all
State-owned, with specific property rights and governance
structures. In fact, the banks create credits according to
Government’s command. Once the investment is introduced
in a fast-growing economy, all firms formulate high
expected returns, so production continues to increase and the
macro economy runs into an upward spiral. From 1990s,
Chinese investment reached 50% of GDP. The investment
rate has even exceeded those of Japan and South Korea for
their take-off period. Investment in fixed assets was always
double-digit more than sales of goods. Surplus of production
capacity is a common phenomenon in Chinese
manufacturing of end consumer products, which is an
evidence of the high expectations of entrepreneurs. The high
expectations come from several sources. One is no one
thinks State banks can collapse, so debts for banks and firms
are not frightening. The importance for Chinese government
is to keep money circulating in the economy. Another reason
is investment means that money will somehow be passed to
someone’s hands and the money will be spent somewhere.
For individual entrepreneurs, the expectation is someone will
buy the firm’s products sooner or later. If the entrepreneur is
in private sector, it will be a foreign client; if she is a State
entrepreneur, she must take the action of investing, thus
becomes others’ customer; if she is an institutional
entrepreneur, the customer can be a foreigner, a private
entrepreneur, a State-owned firm, or even a State-owned
organization in social sector (see flows ¥5 in Figure 1). Many
private firms in export sector turned to search domestic
customers after 2008 crisis, but they had strong expectations
of revenue. Thus, confidence beyond personal relations, with
the party as quasi-clergy in a secularized, quasi-religious
“developmentalist” State, turns out to be the clue for
understanding the dynamism of recent Chinese growth
(Manfred Nitsch and Frank Diebel, 2008).
On the other side, the real increase of consumption of
Chinese goods met more or less the expectations of Chinese
entrepreneurs, and made it possible that Chinese
Government continue its investment push strategy (see flows
¥6 in Figure 1). In fact, during the years, internal
consumption has increased rapidly, though comparing with
the even more rapid increase of supply and production
capacity in China, it is often neglected. First, the growth of
export demand constitutes an important monetary income
source to Chinese economy. The average annual earnings of
Chinese exports to the U.S. were in excess of 25% over the
2003-07 periods. China’s export now has a world market
Advances in Economics and Business 1(2): 72-88, 2013 83
share of 10%, and it contributes 40% of GDP and 25%
growth of GDP of the country. As China's export grows up,
export income from foreign exchange are converted into
Yuan. These revenues increase the incomes of workers in
export sector, who constitute in fact a major part of the
domestic market demand. This increasing demand then
strengthens the expectations of earnings of firms in other
sectors, such as township and village firms, foreign-invested
firms, and State-owned firms. China's domestic market
demand, after thirty years of growth, even with a low
consumption propensity, has begun to boom. Domestic
consumption occupies only 35% of its GDP, dropping from
45% in the 1980s, with an average increase rate of 1-2% per
year recently. But China's financial system continuously
allocates or leverages the financial resources to production
investment, to the infrastructure sectors dominated by
state-owned firms, and to other social sectors (which are
state-owned also) such as education, health, and public
security. These expenditures create many domestic demands,
particularly for State-owned sectors and other non-state
sectors. For example, China has an important export-oriented
manufacturing sector, but 60% of the firms in this sector,
mainly the grass roots entrepreneurs, buy their equipment
and machines of production from Chinese markets. They
create revenues to Chinese State-owned firms and other
firms with mixed ownership.
In the end of 2008, Chinese government announced an
economic stimulus package of 4 trillion Yuan investment in
response to economic crisis. The quantity may be bigger, but
the practice has been undertaken since 30 years. The so
called Chinese active fiscal policy was already evident to the
outside world during the Asian financial crisis in 1997 and
the economic recession during 2000-2001. But taking the
Chinese macroeconomic policy along, it is always a policy
designed for the crisis period of market economy. Though its
domestic consumption propensity is low, Chinese unique
financial system makes strong investment inducements, even
regardless of the marginal efficiency of capital.
Compensated by the export demand growth, the effective
demand of Chinese economy keeps high. Through its totally
State-controlled financial system and foreign exchange
regime, Chinese government jointly used monetary and
fiscal policy tools to expand the money supply and
investment scope. To some extent, China boosts its market
economy in adopting the propositions advocated by Keynes
for the period of economic and financial crisis. Whatever its
political reason, Chinese government’s short term
macroeconomic measures with money created a strong
linkage between the expectations of future revenue and the
current investment decisions among the grass roots
entrepreneurs, the State entrepreneurs, and the institutional
entrepreneurs. Schumpeter (1934) stated that without the
innovation activities of entrepreneurs, economy would
become a stationary circular flow without growth dynamics,
though he recognized the important role of bank credit to
entrepreneurial innovation. Combining all the monetary
flows into a unique circular arrangement to feed its non
innovative but somehow dynamic entrepreneurship
ecosystems, China in fact gives a very Keynesian solution to
the Schumpeterian problem of economic development. In
this sense, Chinese government is the ultimate and real
entrepreneur of its economy.
5. Growth Limits of Chinese
Entrepreneurship
From 1998 through 2010, China’s average annual growth
rate of real wages was 13.8%. But the year 2010 alone saw an
increase of 22% of wages. Migrant workers experienced real
wage increases of more than 11% in 2011. Suddenly higher
labor costs drove the injected credit into non industrial
sectors, which led to the bubbling of Chinese real properties
till now. Increased costs also made China's industrial
value-added output growth decelerate to 13.9 percent
year-on-year in 2011. Chinese government becomes aware
that under the glorious cover of the formidable macro growth
of GDP, entrepreneurship lack of indigenous innovation
capacity is the weak point of Chinese economy. It is also
aware of the importance of domestic demand for China’s
continuation of investment-driven circulation in the long
term, albeit that Chinese internal demand can absorb the new
investment for a certain period of time. In fact, the proportion
of export added value of industrial firms in total industrial
sales reached about 20% in 2004. After this peak, it declined
to 17% in 2008 and 12.7% in 2011. External demand
subtracted 0.5 percent from Chinese growth in 2011,
compared to a positive contribution of 1 percent in 2010. It
continued to contribute negatively in 2012, subtracting 0.3
percentage points. After many years of export growth,
Chinese government also accumulates large amount of
foreign currency reserve. Since 2009, new policies, initially
under the form of regional industrial restructuring and
upgrading packages, have been elaborated to move Chinese
firms upward along the global value chain.
3
With the
increasing input in R&D of multinational companies in
China, the country’s policy now is for reinforcing their
positions in the global value chain, mainly concerned of the
3 In the end of 2010, the Chinese central government published its first
Mid- to Long-term Industrial Restructuring and Upgrading Plan
(2011-2015). According to the plan, China targets an 8-percent growth in
value-added output for all industries over the following four years, a
2-percentage-point rise in the value-added ratio from the end of 2010, and a
10-percent annual increase in overall labor productivity, with the
value-added output of emerging industries accounting for 15 percent of the
country's total value-added output by 2015. As for major industrial
enterprises, expenditure on research and development will account for at
least 1 percent of their revenues. The proportion will rise to at least 3 percent
for key industrial enterprises, and they will double the number of patent
ownerships over the next four years, according to the plan. Industrial
enterprises should enhance their abilities to self-innovate, use advanced
technologies to transform traditional businesses, promote energy
conservation and eliminate outdated capacity. The enterprises are also
encouraged to improve product quality, produce high value-added goods,
create local brands, raise competitiveness, and explore overseas markets.
Over the next four years, the country will focus on developing the
equipment manufacturing industry, optimizing the raw material industry,
upgrading the consumer goods industry, improving the competitiveness of
the electronics industry, and promoting the development of service
industries closely related to industrial production, according to the plan.
(Source: Xinhua News Agency of China, 18/01/2012)
84 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
client-led ecosystem. On the other side, policy encourages
mainly State-owned firms and mixed firms to jump over the
existing global value chain and set up new business directly
in foreign markets, often through brown-field investment.
Both strategies are aimed to establish direct linkage with
foreign customers and users, but both encounter external and
internal difficulties.
5.1. Imitative Entrepreneurs: Barriers to Value Chain
Upgrading
An industrial chain includes activities of product design,
raw materials procurement, storage and transportation, order
processing, wholesale business, retail distribution, and
manufacturing. In contrast to the earlier catching-up of Japan
and South Korea, an economy today needs not to develop the
whole integrated sector; catching-up firms can instead from
the beginning position themselves in the global value chain.
From 1990s, most of functions of production and
components manufacturing have been moved to China. The
globalization of value chain industrialized the whole
economy and almost all sectors. This globalization gave an
opportunity to whichever Chinese firms, but specifically
small and medium sized non-State firms, to absorb and
develop production capacity. MNCs organize innovation
globally. On average foreign production is less innovation
intensive than home production. Comparing with central,
they are still periphery. Global standards and position in the
world value chains present ways in which firms from
emerging economies can overcome the barriers. But they
also can constrain the ability of firms based in emerging
economies to upgrade their capabilities and appropriate
greater value (Goldstein, A., 2008). Chinese firms’ position
in the global value chain is concentrated in manufacturing.
And electronic and technical products manufactured in
China contain many components produced in Western
countries or Japan, which are then exported to China. It is
estimated that 85% of the components of high-tech products
made in China from the United States or Japan. In the case of
some sophisticated products, the assembly is done in China
but all electronic components are imported. The Chinese
added value remains low.
There is additional value to be gained by developing
product and entering in marketing activities rather than
assembling components. Typically, the value added at the
system level is greater than the sum of the value added by the
components. But climbing up in global value chain needs
firms elaborate clear technological learning strategies and
make hard efforts overtime. For exporting relatively
low-technology products, learning is a typical routine of
Southeast Asian catch-up firms from OEM to ODM to OBM.
Learning started from production and component functions,
but later some firms extended to engineering, distribution,
product design, even marketing and after-sales service. A
discrete, stand-alone technology (e.g., the design of a
semiconductor chip), especially the technology of
production, is more easily transferred than a process
competence, which is entwined in the social fabric of a firm,
such as marketing capability. Innovation capability is not
limited technological; it refers to the capability of combing
market opportunities and technological advances. Besides,
product innovation and brand management are related to the
implicit knowledge (Tidd, J., J. Bessant and K. Pavitt, 2005).
Some Chinese mixed ownership firms originated from
institutional entrepreneurship entered into OEM production.
These firms also benefited from the boom of domestic
market. Often leveraging the technologies that they get from
foreign clients to the domestic market, they begin to master
all the functions along value chain, from product
development to marketing. In domestic markets, their fast
growth begins with cost advantages that large scale and
broad scope provide. They then continue with heavy
investments in manufacturing, marketing, and distribution.
These firms, when big enough, will also try to take use of the
former reserve of scientific and technological competence,
leaked out from former science and technology institutions.
They seek support for their technological activities which
they know they are not so good in doing OEM. As a result,
they are quick climbers in global value chain, since they can
leverage their advantages in domestic markets in
re-positioning in global value chain. Normally Western firms
are also alert on these firms, knowing they can become soon
competitors.
But most Chinese firms in global value chain are private
firms created by grass roots entrepreneurs in the southern
and coastal regions. They are small or medium sized and
have no formal access to science and technology resources in
China. They don’t have resources neither to exploit domestic
markets. They are often short of residual profit to re-invest
and they spend all the money in introducing production
technology and equipment to meet the requirements of
foreign clients, who are their sole technology provider and
controls their channel to foreign market. Serving as an OEM
base for a Western partner is a quick route to increased
manufacturing share without the risk. It can yields volume of
production and improve process, sometimes even the quality
of products. The Western partners’ distribution capability
allows OEM suppliers to focus all their resources on building
product advantage. But for OEMs it is not easy at all to enter
markets on their own and convert manufacturing share into
brand share. The downstream Western partner would not
provide enough information on how to tailor products to
foreign markets. So every product design transferred to an
OEM partner is more on technical information than on
customer preferences and market needs. Chinese OEM firms
know only their clients and what clients tell them about the
market. No direct access to foreign markets accounts for
most of Chinese firms’ decisions and their difficulty.
Furthermore, these Chinese firms produce for foreign
outsourcers often on the second or third tier in the global
value chain. They are therefore subordinate to the will of
clients and weak for negotiation. To survive in these
conditions, firms over-invest in production capacity, ensure
cash flow on a daily basis, and suffer from fierce competition
Advances in Economics and Business 1(2): 72-88, 2013 85
with other local firms which is imposed by their international
buyers. That reduces the cluster effect which is the
coordination among small firms in working out innovative
ways of business. Their internal technological learning is
totally dependent upon the relation with foreign client.
Theoretically, developing firms can position them better in
global value chain through forming local network or
industrial clusters. Nevertheless, the export-oriented clusters
in China are characterized by the following aspects:
non-exclusivity of contracts; added levels of subcontracting;
foreign clients as sole technology source to subcontractors;
subcontractors responding to clients but being blind to the
market; risk of being eliminated from the value chain once
clients cancelling orders, etc. (Arvanitis, R. et W. Zhao,
2012).
Chinese towns and rural areas hosted dynamics where
OEM firms get the technology from their clients and sell
products abroad. The local governments were always under
pressure to keep employment and increase local GDP. So
they made efforts to build centers for technical innovation
and information, forged links of local firms with universities,
arranged for bank loans, organized fairs to promote sales, led
OEM producers to seek for markets and more customers, but
mainly in Chinese markets, etc. A few years ago there was an
initiative of local clustering policy, which had nothing to do
with national innovation policy which was biased towards
large State-owned firms or foreign company subsidiaries that
come with a proprietary technology. The local cluster policy
emphasized on organizing local innovation centers to help
firms climb up in global value chain. In effect, innovation
centers began to create networks of firms, improve
innovation capacities, and enhance communication with
universities and research centers. In some towns, local
government policy promoted innovation centers, especially
during difficult economic times, when a need for better
quality and higher priced products made sense in China. As
such, the innovation centers were mainly oriented toward
servicing the local industry, rather than maintaining a
competitive edge (Arvanitis, R., Qiu, H., 2009).
The conjuncture of new policies and 2008 crisis
interrupted this local policy for clustering. After 2000, the
unique financial system of China accumulated so much
foreign exchange gained by export of Chinese firms that the
Chinese Yuan was under huge pressure to revaluate. China
raised its exchange rate and imposed export tax. Chinese
government was also anxious of the problem of liquidity
surplus in domestic financial market. Four the following four
years, it raised interest and tries to tighten credit supply,
which increased the financial cost of investment projects in
export sector. Raw materials became more expensive than
before. Since 2007, Chinese central government also
tightened environmental regulations. Wages were rising. In
the beginning of 2008, China begun to implement the new
Labour Law, which increased enormously the labour cost for
firms, though the average wage of a Chinese worker was just
5% of an American worker, with almost the level of South
Korea in 1975. But soon Chinese private entrepreneurs
found more challenges coming from domestic policies. In
believing that Chinese industry should upgrade quickly in
global value chain and carry more technology-intensive
activities, Chinese government begun to force the factories
in coastal areas (especially in the deltas of Yangzi River and
Zhujiang River) to move to interior regions. At the same time,
the 2008 economic crisis caused a sharp slowdown in growth
of Chinese exports in the year, which drop from 30% to 7%.
For example, according to the Asian Footwear Association
statistics, in Guangdong areas, nearly 1,000 shoe factories
and related ancillary businesses were terminated or moved to
other areas in 2008. Also in the shoe-making province of
Zhejiang, according to Wenzhou Footwear Association, a
survey of 371 shoe-making firms showed that with 2 months
32 firms were shut down, and 52 stopped their activities.
The 2008-2009 crisis has more impact on the grass roots
entrepreneurs than on the institutional entrepreneurs. Many
Chinese export private firms quit the global value chain,
while the mixed ownership firms such as Haier or Midea had
turned to non-industrial sectors, investing heavily in real
properties, long before the crisis. Although Chinese labor
cost is higher now than before, its firms’
manufacturing/export competitiveness is still strong in terms
of total costs taking account of transportation, materials,
capital reserve and uncertainty in political environment.
Therefore, the future of the export industry in China is
probably less predictable than most other economies.
Employees, employers, Chinese officials are now in a
situation that they have never known. They have not yet
found their ways to climb higher in the existing value chain
and their initial previous seem to be counter balanced by the
current domestic policies and crisis.
5.2. Localized Entrepreneurs: Too Chinese to Be Global
Compared with small firms forced to climb and quit the
global value chains, the big Chinese firms trying to jump
directly into advanced foreign markets get much more
support from the government (Wang, W. and J.F. Huchet,
2008). But once leaving the specific domestic context, the
weak competitiveness of Chinese firms is never so evident.
Firm’s development in foreign market is in fact an
international entrepreneurial process (equivalent to
launching a new venture), including exploring and exploiting
opportunities, understanding consumers and market
dynamics, coming out with innovative business concept and
undertaking it with risk across national borders (Mcdougall,
P.P. and B. M. Oviatt, 2003). Chinese entrepreneurs are
context-specific and good in grasping the opportunities
created by the Chinese institutional arrangements. Going
abroad makes the institutional opportunity sources of
Chinese firms completely irrelevant. They are no longer able
to find the opportunities from the institutional background.
For example, networking is a powerful tool for
entrepreneurship. Although mainland Chinese entrepreneurs
are almost all experts in social networking (making the
famous Guanxi) within Chinese context, few are competent
86 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
in managing networks with foreigners once they are in a
foreign country. Mutual trust, share values, personal contact
and respect of other culture are all elements in
entrepreneurial networking in a foreign market. Chinese
firms often enter in non-compliance with the country's
accounting, tax laws, causing dissatisfaction with the local
government in turn, which lead to difficulty in obtaining
expatriate work visas, etc. The reason why Haier’s overseas
factories progressively succeeded is its full integration into
local network. As Ruimin Zhang, the CEO of Haier said:
"Haier's factory in the United States and other countries, are
not only to produce and sell products, but also to make
Haier’s culture, especially Chinese culture and local culture
together”. Another related factor for entrepreneurial firms
competing in international markets is the learning process,
often based on technological learning experience in domestic
market (Zahra, S.A. Ireland, R.D., and Hitt, M.A., 2000).
Learning capability is critical in helping firms overcome
their liabilities of foreignness, as much of this liability relates
to the foreign firm’s lack of local market knowledge. But for
entrepreneurship, knowledge about market, technology and
competition is often not the most critical asset of the firm to
achieve success. The most useful knowledge of
entrepreneurship in China is acquaintance with the hierarchy
and personal relations with key actors. Private Chinese firms
have no habit to learn from foreign markets and customers.
Again, the strategies and behavior of Chinese firms in abroad
reflect clearly the nature and characteristics of their modes of
entrepreneurship within the Chinese context.
Maybe the most significant characteristic of Chinese
State-owned firms’ internationalization is the role played by
the Chinese government. It has played a dominant role
through strategic choices that determined the localisation of
new activities linked to cooperation with foreign firms.
China's “going out” strategy encourages big domestic firms
to participate in international capital market and to directly
invest overseas. Chinese State is more and more acting as an
entrepreneur abroad. Under state oversight, there is an
increasing number of State-owned firms carrying out round
trip investments, searching for possession and control of
assets and resources, especially firms of raw materials. They
prefer brown-field investments, since they need real assets
and hope to gain access to cutting edge technologies difficult
to obtain at home either due to lack of local skills or because
of the reluctance of foreign firms to transfer technologies. In
the past, these firms expanded only in domestic market, in
which they enjoy a well protection of Chinese government.
In terms of technological learning, these firms are used to the
mode of international transfer from a MNC, negotiated and
arranged by the Ministries of government. That is why their
overseas acquisitions of technology and knowledge can be
simplified as purchasing raw material resources and physical
assets. Some of them even move the production facilities
back to their Chinese home base after acquisition. Typical
examples include BOE’s acquisition of Hynix from Hyundai,
SAIC’s acquisition of SsangYong Motor, Nanjing Auto’s
purchase of MG Rover, China Chem Bluestar’s acquisition
of Rhodia Silicon, and SAIC/NAC acquisition of Rover.
Until now, the most successful internationalization cases
of Chinese firms are those of non-State firms. Comparing
with Indian emerging MNCs, the private Chinese MNCs are
very few and very small. Some of them are searching to
control raw materials under certain cost level, thus it is rather
a strategy of vertical integration than internationalization.
Some are searching for expanding production capacity and
market share abroad. Some are pushed out of China due to
the rising costs of production. Some are developing global
brands and expanding their operations abroad, with a view to
tapping into foreign pools of knowledge through mergers
and acquisitions or green-field investment and the
establishment of overseas R&D. Accessing foreign sources
of knowledge has become one of the motives behind outward
investment decisions of a still small, but expanding, number
of Chinese firms, such as Lenovo, Haier, Huawei, ZTE.
Often the internationalization of these firms begins by OEM
production for foreign firms/clients, such as Chery’s OEM
production for Chrysler. Firms then buy similar activities
and functions in other countries, such as Wanxiang Group’s
multiple acquisitions in the North American
auto-components sector. The proximity factor played a part:
acquisition of necessary skills took place in nearby plants.
For example, Haier, trained its international cadres in the
Philippines before they were sent further afield. Those
engaged in one activity or a given production segment (for
example cheap cars) can turn out high volume, master
technologies, and profit from economies of scale that help
create a competitive advantage for entering other markets, as
exemplified by private automakers such as Geely and Chery,
who have begun making inroads abroad, especially in Asia
and the Middle East.
Their main problem is their mode of entrepreneurship
without innovation experience and basis. The non-State
Chinese firms emphasize on production facilities and vertical
integration to gain competitiveness in price; their focal point
is to enlarge market share. But these traditional domestic
business models are no more effective in advanced foreign
markets, just as the case of TCL’s failure integration of
Thomson Electronics, except a very few success stories, such
as Huawei. In fact innovation is vital to entrepreneurial
process in foreign markets, where serving the developed
world’s more quality-conscious consumers- who are also
typically loyal to established brands- requires firms to design
and deliver products not comparable to the offerings of
developing markets. Doing so requires big changes to the
design of products and processes, and changing from
low-cost competition strategy to innovation and learning
strategy.
6. Conclusion
With a second biggest economy in the world, China has
produced much less competitive firms than US, Europe,
Japan who arrived developed markets 30 years ago with their
Advances in Economics and Business 1(2): 72-88, 2013 87
cars and consumer electronics, and even South Korea who
arrived 15 years ago with the same categories of products,
though the quantity of firms and products “made in China”
never stops increasing. If Chinese economy is competitive,
its firms and entrepreneurs are not yet. This paradox is due to
the specific modes of entrepreneurship in China, which are
deeply embedded in its domestic institutions and Keynesian
macroeconomic measures.
Institutional structures create opportunities, but also
uncertainty. In the Chinese economy where most of financial
resources are controlled by the government and most of
opportunities are to be found within the multiplicity of
institutional arrangements, the focal point in
entrepreneurship is directed towards leveraging resources
among different firm ownership combinations. Chinese
entrepreneurs allocate their resources and creativity to
exploit these institutional opportunities, instead of searching
innovation and integrating new technology to meet market
demand. Once firms have been created, entrepreneurs will
establish the specific external linkages around and lead the
everyday business in the short-term to seek quick profit.
Thus technology learning becomes only an accessory
product in entrepreneurship. Since the launch of economic
reform, China has been imitating the Asian model of
export-led growth, while benefiting from the presence of
foreign firms via FDI as a conduit for acquiring technology
and management. In some successful Asian economies, there
has been a process of indigenization of technology (e.g.,
reverse engineering). China imported technology through
the entry of foreign capital, leaving the assimilation and
control of technology difficult. Entrepreneurship, in
Schumpeter’s sense, is based on innovation. Some Chinese
firms have backed their growth by research and innovation,
often with the continued support from government. But most
firms grew up without a pertinent inducement for innovation.
These characteristics of Chinese entrepreneurship constrain
a lot the innovation possibilities of Chinese firms when they
try to upgrade in the global value chain or gain direct access
to foreign markets. After the 2008 crisis, this Chinese mode
of entrepreneurship through constrained learning met its
limits.
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doc_478475954.pdf
Chinese Entrepreneurship Institutions, Ecosystems And Growth Limits
Advances in Economics and Business 1(2): 72-88, 2013http://www.hrpub.org
DOI: 10.13189/aeb.2013.010204
Chinese Entrepreneurship: Institutions, Ecosystems and
Growth Limits
Wei Zhao
*
, Frank La Pira
Ecole Supérieure de Commerce Saint-Etienne,Address: 51-53, cours Fauriel BP 29, 42009 Saint-Etienne, France
*Corresponding Author: [email protected]
Copyright © 2013 Horizon Research Publishing All rights reserved.
Abstract This article gives an entrepreneurial
perspective on the competitiveness of China’s industries in
the economic globalization, especially since the 2008
financial crisis. It explains above all how China gained the
traditional competitiveness (from comparative advantage to
competitive advantage) through rapid technological learning
of its entrepreneurial firms. Behind these firms, it was the
Chinese State as an ensemble of economic actors who had
strong incentives to grow the whole industrial production
aggressively. During the global financial crisis and recession,
China took the lead in the turnaround. Now, it is expected to
take the lead in the next cycle of economic growth. However,
the external foundation underpinning China's fast growth is
in serious disarray. The shifting globalized economy is
challenging the Chinese entrepreneurs and its growth model.
The paper gives some clues on what China should do to be
competitive in the future. The empirical part of the research
is based on Chinese macroeconomic data and in-depth firm
level interviews in China during a long period of time.
1
1
The macroeconomic data were collected from the Chinese official
statistical yearbooks of various years, including China Statistical Yearbook
(2002-2012), China Industry Economy Statistical Yearbook (2005-2012),
China Trade and External Economic Statistical Yearbook (2005-2011),
China Science & Technology Statistical Yearbook (2000-2012), Statistics
Yearbook on Science & Technology Activities of Industrial Enterprises
(2007-2012). All these yearbooks are compiled by China’s National Bureau
of Statistics (with Ministry of Science & Technology or National
Development & Reform Commission for specialized statistics) and
published by the Beijing-based China Statistics Press. The main fieldwork
in China was carried out between March of 2007 and April of 2009 through
the research program “Innovation Potential of Chinese Industries”, financed
by the Hong Kong –based French Research Center on China (CEFC) and in
cooperation with the Research Institute of Guangdong Development (Sun
Yat-sen University in China). Empirical information is based on visits and
investigations of a number of government bodies and firms mainly in
Guangdong Province, which is often called the “world factory” due to its
lion share of 25.1% (2011) in China’s foreign trade value. At each visit,
in-depth interviews of 1-2 hours were undertaken first with local economic
and technological officials (mainly from Economy & Trade Commission or
Science & Technology Department at city or township level) and relevant
policy documents were collected. Government officials from the following
administrations were interviewed: Guangdong Textile and Apparel Industry
Association, Zhaoqing City Government (Guangdong), Jiangmen City
Government (Guangdong), Shuikou Municipal Government (Guangdong),
Xiqiao Municipal Government (Guangdong), Humen Municipal
Government (Guangdong), Dachong Municipal Government (Guangdong),
and Wuhan High-Tech District Administration Committee (Hubei). Most of
our firm visits were recommended, arranged and accompanied by local
governments, with their preferences of selecting the large sized, relatively
well performed and technologically sophisticated local firms and
entrepreneurial activities. At each firm visit, in-depth interviews lasting 1-2
hours with senior managers or company owners were also undertaken,
Keywords Entrepreneurship, China, Economic Policy,
Global Value Chain, Innovation, Business Ecosystem,
Technological learning
1. Introduction
Competitiveness is a comparative concept of the ability
and performance of a firm, sub-sector or country to sell and
supply goods and/or services in a given market (Berger, S.,
2006). It captures the awareness of both the limitations and
challenges posed by global competition, at a time when
effective government action is forced by budgetary
constraints and the private sector faces significant barriers to
competing in domestic and international markets. Paul
Krugman (1994) once notes that countries don't compete,
firms compete. He argues if national competitiveness has
any substantive meaning, it must reside in the factors about a
nation that facilitate productivity. But in practice, the
concept is still a mixture of situations at both national level
and firm level.
Economic globalization triggers questions on what
China’s competitiveness is and how it will compete. As
China has emerged as a major economic force, there is a
clear distinction between the ‘optimistic’ and ‘pessimistic’
camps. Some believe that China is emulating Japan, Korea
and the Asian ‘tiger’ economies and creating internationally
competitive, innovative, high-tech firms like Sony or Hitachi,
thus transforming itself into a modern industrialized country.
Some others say that Chinese economy already reaches its
followed by factory or site visit. Firms studied include: Fenghua High-Tech
Corporation (Zhaoqing), Huaiji Auto Accessories Company (Huaiji),
Zhaoqing Auto Parts & Accessories Company (Huaiji), Dachangjiang
Motorcycle Group (Jiangmen), Shuopu Motorcycle Technology Company
(Jiangmen), Hedy Group (Guangzhou), Delica Plumbing Equipment
Company (Shuikou), Shuikou Technological Innovation Center (Shuikou),
Yishion Group (Humen), Humen Textile Innovation Center (Humen),
Fumin Fashion City Company (Humen), Xiaiqo Textile Innovation Center
(Xiqiao), Dachong Furniture Technology Center (Dachong), Zhengda
Pharmaceutical Company (Wuhan), Balance Pharmaceutical Company
(Wuhan), Mike Bio-Pharmaceutical Company (Xiamen), North-East
Pharmaceutical Company (Changchun), Geely Group (Ningbo), Delphi
Shanghai Ltd. (Shanghai), Desano Bio-Pharmaceutical Company
(Shanghai), and Shanghai-Volkswagen Company (Shanghai).
Advances in Economics and Business 1(2): 72-88, 2013 73
limit and will soon collapse. For example, after two years of
nearly 12% GDP growth in 2006-07, Chinese growth slowed
to 9% in 2008. In late 2008, with the world financial crisis,
there was economic slowdown in China, closures of factories
and 20 million workers unemployed. But from 2009 to 2010,
China's GDP growth rate slightly jumped from 9.2% to
10.4%. However, pessimistic voice rises again when China’s
GDP growth rate fell from 9.2 % in 2011 to 7.8% in 2012.
This article takes neither an optimistic nor a pessimistic
perspective on Chinese economy. It tries to present a realistic
picture of China by evaluating its firms’ behavior and the
overall economic functioning. It proceeds in four stages.
Section 2 will summarize how Chinese firms and
entrepreneurs have gained competitiveness by now. Through
identifying their main paths of technological learning, it is
concluded that Chinese firms and entrepreneurs have
potential innovation capacity but are facing fundamental
constraints. Section 3 analyzes the institutional foundations
of entrepreneurship and enterprise creation in China. The
root of these institutional arrangements is firms’
socio-economic categorization based on ownership or
property rights. It is important to understand these
“administrative heritages” of firms, because they shape both
the current configuration of assets and capabilities, and the
cognitive orientations of entrepreneurs toward future growth,
including international growth. Section 4 extends the
analysis from the creation of entrepreneurs’ ecosystems to
the functioning of whole Chinese economy. Chinese
economic growth is due to its unique socialist Keynesian
model of macro financial circulation. Section 5 describes
how China is now promoting the competitiveness of its firms.
But all the strategies are facing severe challenges from the
globalized economy. Section 6 will conclude the paradox of
China’s macroeconomic performance and firm
competitiveness.
2. Entrepreneurship through Learning:
the Chinese Way
Traditional competitiveness of nations and firms refers to
comparative advantage based on resource endowments, as
well as competitive advantage based on cost-leading or
differentiation strategies of firms, sometimes based on
industrial clustering environment created by States. More
advanced competitiveness refers to higher level advantage of
firms based on innovation, especially when firms learn to
master the global value chain. The strategy of innovation
management consists of designing, developing and
implementing a recurring basis, with new products and
services to be valued in different markets according to firm’s
own technologies and core competencies. Recently, firms
and governments of advanced economies count on
developing competences in new fields of corporate social
responsibilities, sustainable development, and corporate
governance performance. More and more, competitiveness is
the combination of advantages created by firms and
governments in generating new rules of game, and is far
beyond the traditional competition in market place.
How well has China competed until now? China has been
able to export a number of sophisticated high-end products
based on its cheap labor and it has gained the
competitiveness in the traditional sense. From 1993 to 2004,
the rate of productivity growth of enterprises has exceeded
15%, with an average growth rate of TFP (total factor
productivity) of 4.7% in the period 2001-07. Productivity
growth fell dramatically to an average of 2.8%, however,
during the global financial crisis of 2008-2010, and
improved only marginally afterwards. The profit rate of
firms has increased by 6.7% in 2000 to 23% in 2006. The
Chinese industrial sector, the largest part of the economy,
reported average return on equity (ROE) of 13.8 percent in
the period 2001 to 2011. The good performance of Chinese
companies has shown a trend that they were entering the
door of innovation. By 2006, it seemed that the Chinese
industry has developed some capacity to innovate in terms of
R&D investments and creation of industrial technology
centers by multinationals in China (OECD, 2007). From
1995 to 2005, China had 19% growth in R&D budget on
reaching U.S. $ 30 billion per year. In 2006, in terms of R &
D expenditure and number of personnel in R&D, China was
the second country in the world. Since 2007, China’s R&D
expense ratio to GDP steadily increased from 1.49%, to
1.54% (2008), to 1.70% (2009), to 1.76% (2010), to 1.84%
(2011), to 1.97% (2012). The increasing activities in
technology development are certainly more visible in
Shanghai or Beijing. Some Chinese companies have shown
the "Success Stories". The group Huawei spent 9% of its
turnover, or 5.9 billion Yuan in R&D, and even established
an R&D center in Silicon Valley. The Lenovo Group has
also reached an R&D expenditure of 2.8 billion Yuan. More
and more companies in China incorporate higher added
value functions and lower the cost of each function,
including R & D. Some authors have concluded directly that
Chinese companies have developed a new model for
breakthrough innovation, the so-called cost innovation
(Williamson & Zeng, 2007).
Schumpeter (1934) emphasizes the fundamental function
of entrepreneur is innovation. The typical Schumpeterian
entrepreneur is different from simple administrative officer
or owner-capitalist of means of production. Entrepreneur is
the first person introducing a new thing to an economic
system. Entrepreneur is a true adventurer who does not
hesitate to think for innovation and must overcome the
resistance opposed to anything new that might challenge the
conformism. According to Schumpeter, entrepreneurial
activities of innovation are the very engine of economic
growth. But Chinese firms’ gaining of advanced
competitiveness is in fact a process of rapid catching-up. The
concept of "catching up" implies that the more an economy is
far from the maximum level of development, more
technological progress is rapid, because the costs of
adaptation and diffusion of technology are known to be
lower than the costs of innovation and invention that
74 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
advances the technological frontier (Benoît, F. ed., 2004).
While entrepreneurship in China is present, the
Schumpeterian innovation of creative destruction is absent.
Chinese entrepreneurship has not been dependent on
indigenous inventive capacity, but on the ability to “borrow”
technology from the world’s “technological shelf”, i.e., on
the basis of learning (Amsden, A., 1989). These foreign
designs, products or processes are not path breaking, but are
novel in the Chinese context. Learning in entrepreneurship
involves borrowing, adapting and improving upon foreign
designs. At cognitive level, learning of productive
knowledge and innovation based on articulation of new
knowledge are of the same logic. High level learning can
lead to formulate competitive advantage based on innovation.
This means that all learning activities have an internal
tendency and potential to become innovation. For catching
up economy, the more learning is approaching innovation,
the more important the role of system support provided by
the State.
Since the beginning of 1980s, China has been carrying out
a massive movement of foreign technology acquisition
throughout its industrial firms. Over time of the past 25 years,
Chinese entrepreneurs developed two patterns of
technological learning. Simply put it, one is based on
traditional arrangement of technology transfer, which is the
model adopted by most State firms, represented by
automobile firms under the form of joint ventures and large
State-owned electronic firms in the 1980s and 1990s. This
pattern of technology transfer emphasizes the thorough
assimilation of technological and the underlying scientific
knowledge. The key process is “reverse engineering”
followed by continuous quality improvement, product
development from imitation to innovation, and economic
transition from import substitution to export orientation.
Japan, and South Korea to some degree, are successful
examples of this model. The South Korean experience shows
the switch from basic productive capability to a more
complex technological capability is linked, but not
exclusively, to the introduction of R&D, to some
organisational sophistication process, and to the integration
of technology and markets in the strategy of the firm (Kim,
2000). Chinese government supported fully this pattern of
technology transfer, interfered in the transfer process within
firms directly or indirectly, and even forced the transfer
behaviour sometimes. Correspondingly, Chinese
government elaborated series of industrial and technological
policies in service of this model, built up institutional
infrastructures to promote the imitation to innovation
process, reinforced Chinese basic research and industry
linkages in purpose of drawing indigenous technological
capabilities from technology transfer. The current national
innovation system modulated by government is for this way
of technological learning at firm level.
But there was another way of learning in China, practiced
mostly in the non-state firms (many of them are in
electronics industry) emerging after Chinese economic
reform and open-door policy. Chinese entrepreneurs learnt
their technologies from serving their clients and competing
in the market. This model of learning that the most dynamic
Chinese entrepreneurs are experiencing can trace their
origins to East Asian catching-up model (see for example the
work of Hobday, 1997). In fact, learning in the emerging
Chinese enterprises has not created a new paradigm for the
learning literature. On the contrary, the learning experience
of the Chinese enterprises is an ordinary process, a follower
of the Southeast Asian model. Even firms advancing more
rapidly toward an innovation frontier are in this pragmatic,
down-to-earth catching-up model, upgrading cumulatively
productive and control knowledge.
2
These firms introduce
new models as long as their foreign clients provide them new
blueprints. Firms that seem to enter in a transitional stage in
upgrading from a basic productive learning to more
sophisticated technology learning maintain the same
diversified types of contacts with their clients, aggregating
more sources of knowledge and trying to keep a multiplicity
of external sources. These firms follow a mixed pattern of
interactive learning, maintaining a variety of sources of
technology, keeping a large portfolio of clients and products,
accepting to be both OEM providers for some products and
an autonomous brand for others, depending on the market.
During the last 25 years, the progressively fierce
competition in Chinese market made the non-state emerging
firms flourish over the State-owned enterprises. Thus the
practical learning pattern prevailed over the formal transfer
pattern in industry. But these emerging firms obtained little
support or backup from the arrangements of Chinese
innovation systems due to their institutional status. Even
some local governments begun to construct supporting
arrangements for these firms by promoting local industrial
clusters, such as in Guangdong Province (Zhao, Wei,
Arvanitis, R. and La Pira, F., 2011), the State innovation
policy is still biased to serve the state firms. There is a deep
institutional and organizational gap between the dominant
practice of technology development in mainstream firms
with strong catch-up characteristics and the legitimate
system of innovation set up by government with target of
indigenous innovation. Except the few Chinese super star
companies which are innovative and accidentally fell into the
government expectations, because they practiced interactive
learning at the same time benefiting from innovation system
due to their special status (such as Lenovo, Haier, Huawei,
which begun to have international expansion), most of
Chinese emerging firms are continuing to reinforce their
capability of production and investment, instead of
2
This observation is mainly based on detailed case studies of 19
automobile and electronic firms in China, carried out during 1998
and 2006. Most of the joint-venture companies in Chinese
automobile industry during the period were included and most of
the studied electronic firms were found in Guangdong Province,
China’s then most important province of electronic products
manufacturing and exporting. Full case evidence and analysis can
be found in Zhao, Wei (2000 and 2013), and Arvanitis, Rigas, Wei
Zhao, Haixiong Qiu and Jian-niu Xu (2006).
Advances in Economics and Business 1(2): 72-88, 2013 75
upgrading to innovation, even some of them are beginning to
expand these production capabilities abroad. Chinese
enterprises are still concentrated on production capabilities
and difficult to enter find themselves in other higher
value-added functions, such as product design, logistics and
transportation, material integration, marketing, design, and
selling, etc. Even some Chinese enterprises begun to invest
in R & D, their new higher value-added functions are found
mostly in domestic value chains in China. Many case studies
prove that Chinese enterprises have little capability of
innovation in the global value chains.
China’s technological learning at the firm level brings
nothing new to the existing models of catch-up firms in
South Korea and other newly industrialized economies
(Hobday, M., 1995; Kim, L., 1997; Amsden, A., 2001).
Though these paths of technological learning led South
Korean firms from imitation to innovation, for Chinese firms
they only bring them potential capability of innovation. The
growth regime of Chinese catch-up has been based on a
combination of particular economic and social factors by
now, such as growing need for consumption in domestic and
foreign market, large scale investment in infrastructure for
20 years, a pool of cheap labor market without limit, in the
absence of social protection and safety at work, an increased
supply of skilled labor (during the last 10 years university
graduates has increased significantly), and free from
intellectual property protection, etc. But to turn this potential
into real innovation, Chinese firms also encounter three main
constraints: the institution for entrepreneurship (the
mechanism problem of origination of new firms), its position
in global value chain (the linkage problem with technology
suppliers and good buyers), and sustaining market demand
for more sophisticated products (the linkage problem with
customers and consumption). The following sections check
these three aspects in more detail.
3. Institutional origins of the Chinese
Entrepreneurship
It is often neglected that Schumpeterian entrepreneurship
involves more actors than just one single entrepreneur, so the
context of entrepreneurship must be taken into account. This
context includes other groups and individuals whose
cooperation is needed for a successful business performance.
Since 30 years, thousands of new enterprises were created in
China. During 1998 and 2007, the number of above-scale
industrial firms in China increased from 165 thousand to 302
thousand, with an increase by 5.8 times of manufacturing
sales. There is no shortage of capitalist entrepreneurs and
bureaucrats in China who also have a strong ambition to
create a powerful ‘national team’ of firms which will be
genuine global competitors. However, to understand why
China has plenty of entrepreneurial activities while is still
lack of innovation, it is necessary to look into the histories of
entrepreneurship, and find the reasons within the Chinese
institutional contexts. It is the institutional condition of
creating new firms in China impedes the entrepreneurship to
embody innovation from the beginning. In fact, the
entrepreneurship in China has a background of dual
economic emergence of the private sector and the renascent
state sector, and co-evolution between new market players
and former planning players. For over 20 years China has
developed a very special socialist market economy,
characterized by the dominance of government control, but
with emergence of a private sector composed by Chinese
local firms, Chinese overseas firms, and foreign firms. In
parallel to the emerging private sector, China has also
sustained and even reinforced its state sector, transforming
itself from the old planned style to a new Keynesian system.
Private enterprises are permitted to compete and operate in a
free market environment, but the State grasps most of the
benefits and redistribute to state-owned sectors.
3.1. Renascent Entrepreneurship within State Sector
Many wrongly believe that after the Soviet-style planned
economy, reform since 30 years is leading China towards a
capitalist market economy, in which private individuals and
corporations own the means of production and, motivated by
the desire for profit, compete in free markets under
conditions of limited restraint by government. Many forget
that China’s fundamental economic institutions are ruled by
socialist principles, deeply rooted in its political system.
State sectors include SOE which is the core part. SOE are
diversified firms under government control established by
and around administrative bureaus during the 1980s. With
the gradual opening of China in 1978, China’s political
authorities fostered connections between Chinese SOE
subsequently leading to the creation of these business groups.
The motivation for promoting such a development was
influenced by the success of the Japanese Kereitsu or the
Korean Chabeol. In 1995, the official numbers given was 20,
000 business groups in the country when it was also reported
that they accounted for approximately one quarter of the total
state-owned assets. In 1997, the State Council selected
industries while incorporating small and underperforming
state companies at the same time. Along with making China
the “world factory” in the 1990s, resources, especially
financial resources, were drawn back to the State sectors.
Today, the share of SOE in business is estimated between
20% and 50%; some of them are large enough such as
Sinopec, State Grid, and China National Petroleum. Some of
them are in the process of internationalization. At first there
were only reductions in the planned sector and business
changes, and there was no emergence. But gradually the
State sector has learned to react to the pressure from private
sector. China was eventually able to develop a new State
sector that renews their activities by adopting new
technologies and management systems, with funding from
the profits channeled through the Sate-controlled financial
institutions (banks, stock market, insurance companies,
investment funds, or direct payments to local governments,
particularly through their tax offices, etc.). The emerged
76 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
State owned firms dominate the most important
infrastructure sectors, such as telecommunications,
petroleum, chemicals, even in automobiles and some
electronics. It should be noted that the state sector also
includes other organizations supporting the SOE: public
health institutions, education, science and technology,
finance, labor, etc. A recent example is Commercial Aircraft
Corporation of China (CACC), a state-owned enterprise
from China created in May 2008 by merging the commercial
aircraft operations of two other existing state-owned
enterprises, AVIC 1 and AVIC 2. The Chinese government
has publicly stated its goal to make China a competitor in the
global jumbo jet market by 2020. CACC’s predecessor,
AVIC 1, has already announced that it will be launching the
maiden flight of ARJ21, a 70-100 seat passenger aircraft
sometime during the year of 2009.
The firms created or renewed in the course of this State
sector reemergence are mostly orthodox firms in the eyes of
government and their growth is due mainly to subsidization
from government. In China, there is a bias in favor of large
State-owned enterprises in the design of policy instruments
for innovation. This bias appears to influence the choice of
policy instruments. For instance, programs for private-public
partnerships for innovation, which have emerged in OECD
countries as instruments to foster long-term industry-science
linkages, have found their place in China to promote SOE
and universities cooperation. In fact, Chinese policy mixes
are characterized by the strong legacy of the planned
economy, as the programs – literally “plans” in Chinese – are
the main instruments for addressing policy priorities. The
operation of national innovation system is very centralized,
and the relation between State and SOEs are much closed.
Chinese central government has purposefully followed the
catch-up trajectory of Japan and South Korea, constructing
national system specifically in service of state-owned
enterprises. These firms continue to obtain State’s support
and take use easily resources in the national system of
innovation.
Many big Chinese firms grew up in following this pattern,
which reminds us always of the story of South Korea. In the
South Korea case, a high rate of investment was maintained
largely through the channeling of large amounts of
subsidized credit to industrial enterprises controlled by the
Chaebol (large, family-run conglomerates), although state
enterprises played an important leading role in certain
sectors (steel and petrochemicals, for example). Indeed, the
high leveraging of investments was a central structural
feature of the South Korean development model. But
technological catch-up and international competitiveness
require more than high rates of investment. The allocation of
subsidies has rendered the government not merely a banker,
but an entrepreneur, using the subsidy to decide what, when,
and how much to produce. This State-entrepreneurship
involved a combination of import-substitution and
export-promotion. Cheap credit and access to protected
domestic markets were provided to the favored Chaebol
enterprises in exchange for achievement of export targets. If
an enterprise failed to meet state export targets, the subsidies
would be scaled back accordingly. Using these methods, the
South Korean government was able to promote the
development of internationally competitive production in a
succession of new industries- textiles, shipbuilding, steel,
automobiles, and consumer electronics. These industries
successfully assimilated technologies obtained through the
importation, and licensing agreements with foreign (mainly
Japanese) corporations. Foreign direct investment also
played an important, though subsidiary, role, mostly in the
form of joint ventures. Such ventures were particularly
important in electronics. More broadly, Korea’s heavy
industrial program was spearheaded by the large Korean
Chaebols, all of which had close ties with the Japanese
conglomerates (or large firms) through joint ventures upon
whom they were largely reliant for technology transfers. The
South Korean government’s strong and sophisticated
external negotiating stance, and its efforts to arrange the
importation of management and engineering consultants
(again mainly from Japan), were crucial factors in the
country’s acquisition of the foreign technologies, expertise,
and capital needed for industrialization” (Amsden, A., 1989).
This pattern of entrepreneurship is less similar to that of
Japanese firms. Comparing to South Korea, Japanese
State-firm structure adopted flat organizational form, with
less degree of hierarchy between the higher level of
government and lower level of firms. Japanese firms
emphasized on experience accumulation and continuous
progress in quality. Japanese firms had a unique intrinsic
learning pattern which integrated closely design, production,
marketing and R&D to invent new production methods, such
as JIT and Lean Production. Chinese big State firms intended
to take the route of Japanese firms, but in a much less
successful degree. Their efforts in international technology
transfer are exactly in the same way as Korean firms, but also
in a much less successful degree. Nevertheless, they get
much stronger support from Chinese government than their
South Korean and Japanese counterparts.
3.2. Grass Roots Entrepreneurship
But originally there was one kind of entrepreneurship in
China: the private sector, or non-State sector, since private
sector did not exist before, it has itself emerged as an island
in the sea, which is sometimes described as bamboo
capitalism (Economist, 2011). This pattern of
entrepreneurship includes firms under different forms:
red-hat enterprise, FDI from HK, TW and Macau, the
late-comers business, etc. The private firms originated from
the better exploitation of the residual resources in State
sector. These resources were circulated outside the State
sector system. The strength of these companies is very
uncertain. They need to live and survive to create a clean
living space, a specific knowledge, a learning exercise for
both organizational and technological aspects, which can
make them stronger. All other phenomena are logical
consequences that flow from this first and only
Advances in Economics and Business 1(2): 72-88, 2013 77
entrepreneurship in China. These new enterprises took the
share of manufacturing in the global value chains, in
exploiting the abundant and low-cost labor resources in
China. Most of them exported to foreign markets and earned
foreign exchange. Most of them were also in nature local
FDI. In fact, the FDI occupied more than 40% of Chinese
GDP, and FDI firms occupied 55.48% of national import and
export, 87% of Chinese high-tech exports, and 90% of
Chinese high-end automobile export. From the late 1990s,
there begun to have more and more real Chinese private
firms participating in global value chains. This
export-oriented non-State sector constituted the main growth
engine of Chinese economy during the last 25 years.
These Chinese entrepreneurs do not depend on support
from China’s national innovation system constructed by
government. The entrepreneurs may be called “grassroots”,
because in their creation and growth process they get little
attention and support from government. They are almost
outside the sight of government. Their emergence is due to
the combination of Chinese comparative advantageous
domestic endowments, such as cheap labour, huge internal
market space, abundant natural resources (Lin, J. Y., 2012),
and the globalization of value chain and the recent
formulation of international innovation system. The learning
pattern of this entrepreneurship consists of a double process:
one is taking part of the global value chain of industrial
production; the other is taking use of Chinese comparative
advantages in industrial production. The double process is
nothing mysterious than just a normal industrialization
process.
The disruption between 1980s and the before is the
worldwide separation of functions of a value chain of
production. Industrial production includes a series of
functions from design of product to selling to client,
sometimes until service after sales. Some steps imply
production or transformation of manufactured goods; other
steps consist of providing services or information. Nowadays,
these functions are subcontracted one after another by the big
brands to low-cost producers. Along this process, ownership
linkages are replaced by the contractual relations between
independent firms. These firms may be located in different
places in the planet but are linked around a value chain
(Berger, S., 2006). From 1990s, most of functions of
production and components have been moved to China. The
movement is not at firm level, but at industrial level,
meaning all industries move their production and
components sections to China. The globalization of value
chain didn’t industrialize some specific firms in China, but
the whole country and its whole industries. This
delocalisation of industries to China gave a golden
opportunity to whichever Chinese firms, but specifically
small and medium sized non-State firms, to absorb and
develop production capacity. Learning started from
production and component functions, but later some firms
extended to distribution, product design, even marketing and
after-sales service. It is a typical routine of Southeast Asian
firms from OEM to ODM to OBM.
On the other side, grassroots Chinese entrepreneurship
also benefited from the boom of huge domestic market. By
leveraging technologies that they get from foreign clients to
the domestic market, these Chinese firms begun to master all
the functions in the value chain, from product development,
through production, to marketing. They set up big vertical
integrated organization to coordinate their activities, just as
big firms for mass production in US in the 19
th
century. The
fast growth begins with cost advantages that large scale and
broad scope provide in relatively technologically advanced
and capital-intensive industries in China. It continues with
heavy investments in manufacturing, marketing, and
distribution. Also geographic expansion and moves into
related product markets both lead to economies of scale, and
economies of scope in Chinese market. These firms, when
big enough, will also try to take use of the former reserve of
scientific and technological competence, leaked out by
former science and technology system in China, to
industrialize the design and technology to mass production.
But this linkage is always difficult to be inserted into formal
plan of the State.
Thus most firms in this pattern of entrepreneurship, even
those active in R&D now, have both limited capabilities and
a low propensity to innovate. The private sectors include
only business firms, with little support from other sectors.
Key factors include an emphasis on quantity rather than
quality, which is a legacy of their entrepreneurship routine,
the availability of cheap but insufficiently skilled labour, the
lack of managerial know-how, a mode of governance that
does not encourage managers to take the risk of innovating,
the persistence of a government support system that tends to
crowd out rather that encourage emerging private business
investment in risky projects, and a financial system that is
not supportive to them. In fact, many of the grassroots firms’
innovation depends upon the various forms of public support
granted by the different levels of government to tenants of
science and technology parks. But the recent period has seen
the clusters of small firms in some regions, notably Zhejiang,
Jiangsu and Guangdong provinces.
3.3. Boundary and Brokerage Entrepreneurship
The institutional aspect of Chinese firms has been widely
explored by Chinese scholars (Yasheng Huang, Xielin Liu,
Justin Yifu Lin, etc.). This dual emergence of private
enterprises (national IDE) and the renewed State sector
creates a bias of access to certain strategic resources
(technological, human, financial and even organizational)
for entrepreneurship. The type of ownership (property rights)
of an entrepreneurial course will determine its possibilities to
get the support from outside the firm (education institutions,
university research, public technology centers, banks loans,
information sharing, etc.). Grass root entrepreneurs
encounter major obstacles to the development of innovation
(funding, control of strategic products, inability to recruit top
level personnel, impossibility to get support in technical
activity when it is not part of public companies or public or
78 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
quasi-public bodies), even from the very start-up phase.
Most grass root entrepreneurs have to find cooperation with
state sectors, and enter into partnership with the State, in
order to gain the needed resources. The solution is often to
mix the private entrepreneurship with that in State sector and
find a new institutional arrangement (red-hat of firm,
subcontracting from SOE, fake joint-venture with SOE,
subordinating to a non-profit public organization, etc.).
All these ways can be called institutional entrepreneurship
in China. Most firms in this pattern have a hybrid
institutional form of ownership from the beginning. They are
often semi-public and semi-private firms, or the collective
firms with vague ownership classification, or the mixture of
State-assets and private investments. The State-owned
aspects of firms permit them to have very specific insertion
within the national innovation system and create a
firm-specific context different from that of industrialization
pattern. But their private or non-state aspects make firms
adopt industrialization-type learning pattern. The uniqueness
of this pattern is that entrepreneurs should have institutional
access to resources provided by national policy and
innovation system, benefit the equivalent regulation
environment as the SOEs; at the same time, their firms’
operation adopts totally the model of grassroots firms (mass
production, cheap labour force exploitation, assimilating
technologies from foreign clients, competing by price
advantage and quantity, etc.). Moreover, entrepreneurship of
this pattern skilfully combines the strong points from both
State and market, brokering between State-controlled
resources and market power. For example, a firm of this
pattern can well integrate its R&D projects into national
planning and get governmental subsidies, even direct
investment in development; at the same time, it may use its
huge production capacity to push its foreign clients to give
more technologies, or to acquire foreign surplus production
capacity and move it back to China. Entrepreneurs take
advantage of the former immobilized technological reserves
in planned innovation system and new technological
knowledge of foreign clients and partners (Lu, Q., 1997).
They in fact create an economic and technological
convention between different systems, and their success
depends on the brokerage capability of entrepreneurs.
Some of Chinese firms that have already acquired global
visibility and market presence, even in high-technology
sectors, such as Huawei, Haier, TCL and Lenovo, are typical
cases of this pattern of entrepreneurship. Most
R&D-intensive Chinese firms usually emerged from the
public research sector. This is the case for three leading
Chinese producers of personal computers: the predecessor of
Lenovo, Legend, was nurtured in the Institute of Computing
Technology of the Chinese Academy of Sciences; Founder
Electronics was a spin-off from Beijing University; and
Tsinghua Tongfang originated from Tsinghua University.
Some of these large successful firms are now investing
abroad in R&D. The small and less famous firms of
brokerage pattern, such as Jinling Corporation, Fenghua
Hi-Tech Company, Huaiji car parts firms and Dachangjiang
Motorcycle Group, adopted in fact very similar routine of
giant successful Chinese firms. The disappearance of one
side of system may destroy the firm, such as the case of
Fenghua High-Tech Corporation. But it should not be
forgotten that the joint-ventures in China, especially the
joint-ventures between SOEs and MNCs are also following
this process of entrepreneurship, even under a more
structured organization and with less brokerage effects.
These joint-ventures may follow more the pattern of State
sector entrepreneurship if Chinese government imposes
more control and the foreign investors have less confidence
(the cases of JVs in automobile industry), or may follow the
pattern of grassroots entrepreneurship, if the Chinese partner
is a private entrepreneur and the foreign partner is well
recognized, and its market power is protected by Chinese
government (the case of Wahaha-Danone dispute). In any
case, finding the appropriate institutional arrangement is the
key element if the joint-venture wants to have successful
growth in the domestic or export markets. But normally
Sino-foreign joint-ventures are less successful cases of
institutional entrepreneurship comparing to typical Chinese
super star firms.
Since 30 years, the double emergence of State
entrepreneurship (State-own firm reform, attracting foreign
direct investment, export-led strategy) and private
entrepreneurship (informal privatization of state-assets,
township and village enterprises, and private firms)
continuously created a variety of business firms in China,
though the life-cycle of each specific firm was often short.
Curiously, such intensive entrepreneurial activities didn’t
lead the whole economy to evolve from imitation to
innovation, just as Japanese and Korean economies did. The
reason is that most of entrepreneurs’ resources and creation
are contributed to Chinese unique institutional contexts to
make the so-called institutional innovation. For
entrepreneurs, firm is a cognitive focusing device or
dominant logic device for collective action. The institutional
identity of the firm serves to give a social and legal basis for
the coordination, production and collaboration of resources.
Institutional arrangement of ownership rights is needed to
establish to control resources, and a generalized labor
contract to coordinate resources. But in China, this
institutional arrangement of ownership will subsequently
determine more or less the firm’s internal relationships and
activities (organizational form, quality management, human
development efforts, and compensation systems) and
specific external linkages with suppliers, customers, and
knowledge institutions. Thus it becomes the close focus and
dominant logic of entrepreneurs in China. The innovation
requires collaboration with outside and other organization,
and focus on market, not institution itself. Nevertheless this
Schumpeterian innovation lies outside the focal scope of
Chinese entrepreneurship.
4. Macroeconomic circular of Chinese
Entrepreneurship
Advances in Economics and Business 1(2): 72-88, 2013 79
Firm’s production activities establish the linkage between
investment and consumption. As a firm is created, it will
enter into various interactions with other institutions and
organizations (public authorities, universities, labor market,
foreign buyers, laboratories, technical research centers,
suppliers, financial institutions, users, consumers, clients,
consultancies, investors, competitors, partners, etc.). It will
also get involved into a chain of activities (undertaken by the
firm or joint activities it carries out with other actors, e.g.,
searching government support to export to foreign markets,
which is in fact a joint activity of firm and government,
sometimes with banks). These activities, for theoretical
purpose, can be roughly clustered in three categories:
financing, producing and consuming. Financing activity
often implies investment, such as R&D, new product
development, the decision to purchase and finance
equipment, removal of plants, etc. Producing activity
includes purchase, supply and logistics, equipment
maintenance and operation, manufacture of components,
quality control, and delivery of product, etc. They are mainly
internal activities of a firm, but often contain its suppliers,
connected companies, cooperative, sub-contractors, and
specialized suppliers, often located in the same area.
Consuming activity includes marketing, selling, services,
distribution and logistics, market research, product design,
product usage, in relations with users, clients, consumer, and
market data, etc. Firm is embedded in all these activities. We
may define all these business activities and interactions
among actors beyond the frontier of a firm as a business
ecosystem. An entrepreneur’s ecosystem is, throughout time,
a number of economic activities carried out in relation with a
series of actors around a project of industrial production of
an existing firm or an entrepreneur. As a concrete
environment, ecosystem can generate opportunities that can
be then exploited by the entrepreneurs.
4.1. Dynamic Ecosystems of Chinese Entrepreneurship
The exploitation opportunities provided by business
ecosystems are the dynamic sources of Chinese
entrepreneurship. In Chinese environment, new firms are
created, often as result of investment. Entrepreneur and the
new firm’s linkages with other actors are almost
predetermined by the institutional foundation of the firm
ownership from its day of birth. For example, a private
entrepreneur knows more or less how it will get labor, what
forms of its network of suppliers will be, what its relations
with banks will be, with whom it is able to cooperate with
other firms in the industry, etc., before the firm is created
legally. These institutionally determined linkage possibilities
will specify more or less the ways the entrepreneur
undertakes different activities. Thus entrepreneurs and firms
in China are extended to different types of business
ecosystems, once they get involved in activities regarding
investment of production and consumption of products.
Chinese firms are not only different in internal capability, but
also in terms of their linkages as producers with financing
and consumption opportunities, provided by their specific
ecosystems.
Entrepreneurship within State sector mainly forms an
investment-led ecosystem. The system is like a 'producer'
chains leading to demands of the market (both consumers
and corporate customers). For State-owned firms, the weight
of business is located upstream and all activities, from
manufacturing to marketing, are then guided by the
possibilities of gaining investment. These firms are often
legacies of former planning system in China, but under new
form. Chinese governments often play the role of
corporations, bankers and universities, and are the most
powerful and biggest investors in the economy. The
investment in State-owned firms is for investment itself,
because new investment attracts more investment. In 2008,
the State-owned enterprises (excluding the financial
institutions) owned net assets of up to 17 trillion Yuan, and
were almost all good-quality assets. The producing activities
are normally in the upstream and monopoly sectors, such as
infrastructures (telecommunications, transportation, etc.) or
raw materials (petroleum, chemistry, etc.), equipped with
advanced machinery and well-organized, well-paid
employees. Huge fixed assets attract more investors (foreign
and Chinese). When State makes investment in these firms, it
includes also many programs of technology development,
specifies formal links with universities and partnerships with
banks. At firm level inside, the size is very important, and
investor relations are fundamental. At government level,
there is often strong involvement to implement industrial
policy. In this kind of business ecosystem, entrepreneurs
don’t worry too much about the market, since customers or
markets are already there. The consumption of their outputs
is relatively stable and strong, often with the intervention of
state or government (e.g., in pharmaceutical sectors, the
State buys). Their market is domestic. The main customers
of the State-owned firms are in fact other types of firms
(private, foreign, and mixed ownership firms, etc.) as well as
employees from other sectors (increasing population of
migrating peasant workers, for example). The strategic
positioning of these firms brings them revenues from other
firms comfortably. Implementation of national strategies for
employment, social stability, attracting foreign investment
gives a lot of opportunities of growth for State-owned forms.
A typical case, the State-owned Fenghua High-Tech
Corporation, was ever the most innovative Chinese
high-technology producer in semi-conductor. The firm had
strong production capacity with low cost, and gained an
important foreign client. After losing its foreign client, it
turned to State for more investment to survive. Under the
direction of the State, many banks gave loans, and the firm
also had privilege to be listed on stock market.
As for most private entrepreneurs and their small and
medium-sized firms, they often find themselves in a
client-led ecosystem. The basis of this ecosystem is the
interaction between producer and customer, often abroad.
The dynamics does not rely on the firms themselves but on
the relationship between the foreign client and the local firm.
80 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
Typical firms are often the suppliers specialized in OEM
mode, with their foreign clients who are themselves
producers in foreign markets. Their relationship is that of
outsourcing production for a foreign client, or assembly
products according to foreign specifications, sometimes
under the arrangement of compensatory trade (the same type
as the Maquiladoras in Mexico). Foreign client is also
supplier of technology to Chinese firm which is user of that
technology. Foreign companies as clients are forcing
Chinese manufacturers to improve product quality and
processes to meet their increasing demands, so they
dominate the relationship. At the same time, foreign
companies provide technical assistance to Chinese firms,
who do not know the market of Western consumers, but only
their clients (Western firms). Consequently, few firms are
able to monitor changes of habit and needs of users, and to
take these changes into account in the design and operation
of their products. Some products exported from China are
placed in very demanding foreign markets, but these
products are sold by multinationals. This has greatly reduced
the chances of learning from markets. In fact, to the Chinese
producer, the foreign client has become the barrier to its
market access. But the producing activities are well
developed on specific request of client. It is characterized by
lower prices by a desire to improve and move up in the
market, the use of a pool of unlimited labor supply from
countryside, but a very high turnover rate that is bad to
production quality. To be attractive to foreign firms, local
governments often intervene to regulate the problems of
manpower (security, control of unions, lower wages, job
maintenance, etc.) to make firms flexible and efficient, and
cost of production remain low enough. The investment for
launching such production is very low, and local
governments provide funds, helping also entrepreneurs to
develop contacts with foreign clients. Sometimes, local
governments act as intermediaries to make liaison with
universities, technology centers, etc. Examples of industrial
clusters in Guangdong Province, such as Shuikou, Dachong,
and Nanhai, are all towns in specialized products
manufacturing.
Different from normal private entrepreneurs, institutional
entrepreneurship and the corresponding firms (Chinese
red-hat firms, wholly foreign owned subsidiaries, powerful
private entrepreneurs, etc.) often evolve their business into a
real market-led business ecosystem. Here the opportunity is
mainly Chinese domestic mass market and composed of
non-demanding consumers. The chain of production is
guided by the final consumer. The firms have the ability to
adapt to conditions of sale. Firm’s producing activity, from
product design to delivery, is then guided by the needs of
customers. The biggest difference between the opportunities
provided by this ecosystem and the client-led ecosystem is
that it is not a client, who dominates the relation, but the
producer develops and manages a network of distributors to
sell the product directly to consumers, and firms directly
receive the feedbacks of consumers. Downstream activities
are important to firms: the challenge is to achieve control and
anticipate consumer needs (definition of trademark, etc.).
Many entrepreneurs started their business as traders. Then
they became producers under OEM arrangement for foreign
customers. But gradually, they focus on the Chinese market
(the requirements are lower than those of foreign customers)
to build marketing power. Yishion Group in Humen, one of
the biggest Chinese apparel retailers (known as the Chinese
Zara), was originally a clothing producer, and then it
established and managed a national network of distributors,
and outsourced the production to some local providers. Sales
revenues come from domestic consumers, who are also
workers in SOE and private firms. In Chinese markets,
consumers are not so in demand of high-quality products.
The low disposable income made consumers demand for
conventional products at low prices. The example of foreign
retailers such as Carrefour highlighted this characteristic.
Carrefour has relied on low prices; its price is even lower
than that of Chinese supermarkets. Carrefour is engaged in a
price war with Chinese competitors. With this policy and
despite the strict limitation imposed by the central
government, Carrefour has expanded rapidly and has made
considerable profits. Also, China's savings rates are at up to
half of its gross domestic product and are much higher than
in other countries. Workers save money and have low
consumption propensity. If firms want to keep their
production activities going on, they have to find ways to earn
margin from the weak consumption. Their strategy is to
expand production capacity to benefit from scale economy.
The increasing ability production industry in China is based
on the slow growth of domestic demand and high
expectation of entrepreneurs to reach mass production.
Entrepreneurs in this situation spend considerable resources
to forge links with their environment, with research
institutions, suppliers and customers. Many entrepreneurial
firms originated from other ownership categories can be
evolved in this kind of ecosystem. Jinling Washing Machine
Company, a local State-owned company in Jiangmen,
transformed itself into a scaled producer led by foreign client,
then extended to a market-led ecosystem.
4.2 Creation of Entrepreneurs’ Long-Term Expectations
But how the whole Chinese economy without
Schumpeterian entrepreneurship and innovation achieves to
gain consecutive growth? The answer is found in
understanding the macro monetary circular overflowing its
various ecosystems of entrepreneurial activities. China’s
whole process of economic functioning and monetary
circular can be shown by the Figure 1 as below.
Advances in Economics and Business 1(2): 72-88, 2013 81
Figure 1. The Entrepreneurship-based Circular of Chinese Economy
Above all, China's unique monetary, banking and
financial system is in fact a State-owned sector. Chinese
Government has full control over money circulation process
and uses the whole financial system (including its stock
markets) as a huge financing machine for its economic
expansion. In China, the use of interest rate as monetary
policy tool is only recent. Government has managed the
quantity of money through banks and financial institutions.
The Chinese macro monetary and financial system has
several characteristics. First, China's banks and financial
institutions can effectively absorb the economy's monetary
savings (see flows ¥1 in Figure 1). China's total savings rate
increased from 36% in 1996 to 51% in 2007. Even if the
interest rate is zero, China's savings would be still very high.
This is because the whole financial sector is
government-owned; households are not worried about the
risk of bank failure and expect that the financial sector will
always exist. And they don’t know where to put their money,
except saving in the banks. For a period of time, China's
households even threw their money into the stock market in
believing there is no risk of losing, because the stock market
is a government-run. Household savings in China are about
20 per cent of gross domestic product, increasing during 11
years from 19% to 22%. A high amount of savings comes
from large companies in China. In fact, saving rate of
government and business sectors increased during 11 years
from 17% to 29%, contributing 80% of the growth. These
savings were mainly transformed to industrial investments in
large firms through Chinese financial system. State-owned
and large firms continued to expand their productive
capacity. While small and medium-sized enterprises, which
employ 80 per cent of workers, have minimal access to
financial services because that sector is dominated by four
large banks that primarily serve large companies. In effect,
the skewed financial structure in China means that ordinary
households and small and medium-sized companies have
been subsidizing big corporations and the new rich class
through the banking system with low interest rates. In
addition to savings, the Government absorbs money through
taxes and fees from firms and households (see flows ¥2 in
82 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
Figure 1). Since reform and opening of the economy,
Chinese fiscal revenue is always at high speed of growth. In
addition, the Chinese currency Yuan is not freely convertible.
China's foreign exchange system absorbs most of the foreign
exchange earnings of Chinese exports enterprises, and
foreign currency brought by foreign investors (for direct
investment or financial investment). Before this foreign
currency flows into China's economy, they must be
converted into Chinese currency to enter into the circulation
in domestic market. This money, through the banks and the
SAFE, becomes in fact Government’s foreign exchange
reserve. Besides, Chinese government set up a floating
exchange rate system with reference to a basket of currencies.
Since 2005, under international pressures, it has appreciated
20% of RMB exchange rate against the U.S. dollar. In fact,
Chinese government is the biggest capitalist who produces
and operates the economy’s money, including RMB and
foreign exchange (see flows $3 and ¥3 in Figure 1).
Under the Government’s command, the key function of
Chinese State-owned financial system is "investment
transfusion", meaning channeling and allocating the savings
and financial resources to investment projects in the real
economy (see flows ¥4 in Figure 1). The result of these
continuous waves of investment is the ‘piling up’ of different
types of productive ecosystems in China (Arvanitis, R., P.
Miège, and Zhao, W., 2003). Entrepreneurial firms,
especially new ventures, are receivers of these investments.
But entrepreneurship in China has to go through the
institutional filters which clarify the ownership of new firm.
Ownership category then has big impact on the subsequent
concrete situation of the firm. It determines with which
institutions of knowledge it can establish linkages, as well as
the nature of its interactions with financial institutions and
users, clients, markets, suppliers, competitors, foreigners, etc.
These linkages with others evolve into different ecosystems.
Most banks in China are large banks and have no internal
process adapted to give credits to small private entrepreneurs.
They are used to finance the key projects within planned
frameworks. “Investment transfusion” is biased to
entrepreneurship within State-owned sector. Through the
financial system, China uses private accumulations and
foreign financial resources to feed its State-owned sector
entrepreneurship. Tools of direct financing such as capital
market are also for this purpose. It is not surprising to find
that Chinese local governments and banks fund the sectors of
steel, cement, road building, bridge building, real estates, etc.
These infrastructure sectors accounted for about 30% of total
economic output in 2007 and were dominated by
State-owned firms, who had always the heritage of the
classic “thirsty for investment” of socialist enterprises.
Chinese Government’s investment push approach has
created a high degree of aggregate effective demand at
domestic level. According to Keynes (1936), effective
demand is the anticipated demand by entrepreneurs. They
calculate the output they must make in order to provide the
optimum amount of goods and services required by
economic agents. Before launching the production, which is
expenditure of money, entrepreneurs have to anticipate the
amount of revenues and expenses that may give them the
profits they expect. In observing the preference for liquidity
(currency) of people, Keynes concludes that if a market
economy is left to itself, it cannot have effective demand. So
society as a political unit, should replace the entrepreneurs in
the decision to invest in the extent of their deficiency. By
injecting investment continuously in circulation, Chinese
government has created high expectations of revenue of all
actors. Chinese banks gave loan schemes without taking into
account of the risk. China's financial firms are almost all
State-owned, with specific property rights and governance
structures. In fact, the banks create credits according to
Government’s command. Once the investment is introduced
in a fast-growing economy, all firms formulate high
expected returns, so production continues to increase and the
macro economy runs into an upward spiral. From 1990s,
Chinese investment reached 50% of GDP. The investment
rate has even exceeded those of Japan and South Korea for
their take-off period. Investment in fixed assets was always
double-digit more than sales of goods. Surplus of production
capacity is a common phenomenon in Chinese
manufacturing of end consumer products, which is an
evidence of the high expectations of entrepreneurs. The high
expectations come from several sources. One is no one
thinks State banks can collapse, so debts for banks and firms
are not frightening. The importance for Chinese government
is to keep money circulating in the economy. Another reason
is investment means that money will somehow be passed to
someone’s hands and the money will be spent somewhere.
For individual entrepreneurs, the expectation is someone will
buy the firm’s products sooner or later. If the entrepreneur is
in private sector, it will be a foreign client; if she is a State
entrepreneur, she must take the action of investing, thus
becomes others’ customer; if she is an institutional
entrepreneur, the customer can be a foreigner, a private
entrepreneur, a State-owned firm, or even a State-owned
organization in social sector (see flows ¥5 in Figure 1). Many
private firms in export sector turned to search domestic
customers after 2008 crisis, but they had strong expectations
of revenue. Thus, confidence beyond personal relations, with
the party as quasi-clergy in a secularized, quasi-religious
“developmentalist” State, turns out to be the clue for
understanding the dynamism of recent Chinese growth
(Manfred Nitsch and Frank Diebel, 2008).
On the other side, the real increase of consumption of
Chinese goods met more or less the expectations of Chinese
entrepreneurs, and made it possible that Chinese
Government continue its investment push strategy (see flows
¥6 in Figure 1). In fact, during the years, internal
consumption has increased rapidly, though comparing with
the even more rapid increase of supply and production
capacity in China, it is often neglected. First, the growth of
export demand constitutes an important monetary income
source to Chinese economy. The average annual earnings of
Chinese exports to the U.S. were in excess of 25% over the
2003-07 periods. China’s export now has a world market
Advances in Economics and Business 1(2): 72-88, 2013 83
share of 10%, and it contributes 40% of GDP and 25%
growth of GDP of the country. As China's export grows up,
export income from foreign exchange are converted into
Yuan. These revenues increase the incomes of workers in
export sector, who constitute in fact a major part of the
domestic market demand. This increasing demand then
strengthens the expectations of earnings of firms in other
sectors, such as township and village firms, foreign-invested
firms, and State-owned firms. China's domestic market
demand, after thirty years of growth, even with a low
consumption propensity, has begun to boom. Domestic
consumption occupies only 35% of its GDP, dropping from
45% in the 1980s, with an average increase rate of 1-2% per
year recently. But China's financial system continuously
allocates or leverages the financial resources to production
investment, to the infrastructure sectors dominated by
state-owned firms, and to other social sectors (which are
state-owned also) such as education, health, and public
security. These expenditures create many domestic demands,
particularly for State-owned sectors and other non-state
sectors. For example, China has an important export-oriented
manufacturing sector, but 60% of the firms in this sector,
mainly the grass roots entrepreneurs, buy their equipment
and machines of production from Chinese markets. They
create revenues to Chinese State-owned firms and other
firms with mixed ownership.
In the end of 2008, Chinese government announced an
economic stimulus package of 4 trillion Yuan investment in
response to economic crisis. The quantity may be bigger, but
the practice has been undertaken since 30 years. The so
called Chinese active fiscal policy was already evident to the
outside world during the Asian financial crisis in 1997 and
the economic recession during 2000-2001. But taking the
Chinese macroeconomic policy along, it is always a policy
designed for the crisis period of market economy. Though its
domestic consumption propensity is low, Chinese unique
financial system makes strong investment inducements, even
regardless of the marginal efficiency of capital.
Compensated by the export demand growth, the effective
demand of Chinese economy keeps high. Through its totally
State-controlled financial system and foreign exchange
regime, Chinese government jointly used monetary and
fiscal policy tools to expand the money supply and
investment scope. To some extent, China boosts its market
economy in adopting the propositions advocated by Keynes
for the period of economic and financial crisis. Whatever its
political reason, Chinese government’s short term
macroeconomic measures with money created a strong
linkage between the expectations of future revenue and the
current investment decisions among the grass roots
entrepreneurs, the State entrepreneurs, and the institutional
entrepreneurs. Schumpeter (1934) stated that without the
innovation activities of entrepreneurs, economy would
become a stationary circular flow without growth dynamics,
though he recognized the important role of bank credit to
entrepreneurial innovation. Combining all the monetary
flows into a unique circular arrangement to feed its non
innovative but somehow dynamic entrepreneurship
ecosystems, China in fact gives a very Keynesian solution to
the Schumpeterian problem of economic development. In
this sense, Chinese government is the ultimate and real
entrepreneur of its economy.
5. Growth Limits of Chinese
Entrepreneurship
From 1998 through 2010, China’s average annual growth
rate of real wages was 13.8%. But the year 2010 alone saw an
increase of 22% of wages. Migrant workers experienced real
wage increases of more than 11% in 2011. Suddenly higher
labor costs drove the injected credit into non industrial
sectors, which led to the bubbling of Chinese real properties
till now. Increased costs also made China's industrial
value-added output growth decelerate to 13.9 percent
year-on-year in 2011. Chinese government becomes aware
that under the glorious cover of the formidable macro growth
of GDP, entrepreneurship lack of indigenous innovation
capacity is the weak point of Chinese economy. It is also
aware of the importance of domestic demand for China’s
continuation of investment-driven circulation in the long
term, albeit that Chinese internal demand can absorb the new
investment for a certain period of time. In fact, the proportion
of export added value of industrial firms in total industrial
sales reached about 20% in 2004. After this peak, it declined
to 17% in 2008 and 12.7% in 2011. External demand
subtracted 0.5 percent from Chinese growth in 2011,
compared to a positive contribution of 1 percent in 2010. It
continued to contribute negatively in 2012, subtracting 0.3
percentage points. After many years of export growth,
Chinese government also accumulates large amount of
foreign currency reserve. Since 2009, new policies, initially
under the form of regional industrial restructuring and
upgrading packages, have been elaborated to move Chinese
firms upward along the global value chain.
3
With the
increasing input in R&D of multinational companies in
China, the country’s policy now is for reinforcing their
positions in the global value chain, mainly concerned of the
3 In the end of 2010, the Chinese central government published its first
Mid- to Long-term Industrial Restructuring and Upgrading Plan
(2011-2015). According to the plan, China targets an 8-percent growth in
value-added output for all industries over the following four years, a
2-percentage-point rise in the value-added ratio from the end of 2010, and a
10-percent annual increase in overall labor productivity, with the
value-added output of emerging industries accounting for 15 percent of the
country's total value-added output by 2015. As for major industrial
enterprises, expenditure on research and development will account for at
least 1 percent of their revenues. The proportion will rise to at least 3 percent
for key industrial enterprises, and they will double the number of patent
ownerships over the next four years, according to the plan. Industrial
enterprises should enhance their abilities to self-innovate, use advanced
technologies to transform traditional businesses, promote energy
conservation and eliminate outdated capacity. The enterprises are also
encouraged to improve product quality, produce high value-added goods,
create local brands, raise competitiveness, and explore overseas markets.
Over the next four years, the country will focus on developing the
equipment manufacturing industry, optimizing the raw material industry,
upgrading the consumer goods industry, improving the competitiveness of
the electronics industry, and promoting the development of service
industries closely related to industrial production, according to the plan.
(Source: Xinhua News Agency of China, 18/01/2012)
84 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
client-led ecosystem. On the other side, policy encourages
mainly State-owned firms and mixed firms to jump over the
existing global value chain and set up new business directly
in foreign markets, often through brown-field investment.
Both strategies are aimed to establish direct linkage with
foreign customers and users, but both encounter external and
internal difficulties.
5.1. Imitative Entrepreneurs: Barriers to Value Chain
Upgrading
An industrial chain includes activities of product design,
raw materials procurement, storage and transportation, order
processing, wholesale business, retail distribution, and
manufacturing. In contrast to the earlier catching-up of Japan
and South Korea, an economy today needs not to develop the
whole integrated sector; catching-up firms can instead from
the beginning position themselves in the global value chain.
From 1990s, most of functions of production and
components manufacturing have been moved to China. The
globalization of value chain industrialized the whole
economy and almost all sectors. This globalization gave an
opportunity to whichever Chinese firms, but specifically
small and medium sized non-State firms, to absorb and
develop production capacity. MNCs organize innovation
globally. On average foreign production is less innovation
intensive than home production. Comparing with central,
they are still periphery. Global standards and position in the
world value chains present ways in which firms from
emerging economies can overcome the barriers. But they
also can constrain the ability of firms based in emerging
economies to upgrade their capabilities and appropriate
greater value (Goldstein, A., 2008). Chinese firms’ position
in the global value chain is concentrated in manufacturing.
And electronic and technical products manufactured in
China contain many components produced in Western
countries or Japan, which are then exported to China. It is
estimated that 85% of the components of high-tech products
made in China from the United States or Japan. In the case of
some sophisticated products, the assembly is done in China
but all electronic components are imported. The Chinese
added value remains low.
There is additional value to be gained by developing
product and entering in marketing activities rather than
assembling components. Typically, the value added at the
system level is greater than the sum of the value added by the
components. But climbing up in global value chain needs
firms elaborate clear technological learning strategies and
make hard efforts overtime. For exporting relatively
low-technology products, learning is a typical routine of
Southeast Asian catch-up firms from OEM to ODM to OBM.
Learning started from production and component functions,
but later some firms extended to engineering, distribution,
product design, even marketing and after-sales service. A
discrete, stand-alone technology (e.g., the design of a
semiconductor chip), especially the technology of
production, is more easily transferred than a process
competence, which is entwined in the social fabric of a firm,
such as marketing capability. Innovation capability is not
limited technological; it refers to the capability of combing
market opportunities and technological advances. Besides,
product innovation and brand management are related to the
implicit knowledge (Tidd, J., J. Bessant and K. Pavitt, 2005).
Some Chinese mixed ownership firms originated from
institutional entrepreneurship entered into OEM production.
These firms also benefited from the boom of domestic
market. Often leveraging the technologies that they get from
foreign clients to the domestic market, they begin to master
all the functions along value chain, from product
development to marketing. In domestic markets, their fast
growth begins with cost advantages that large scale and
broad scope provide. They then continue with heavy
investments in manufacturing, marketing, and distribution.
These firms, when big enough, will also try to take use of the
former reserve of scientific and technological competence,
leaked out from former science and technology institutions.
They seek support for their technological activities which
they know they are not so good in doing OEM. As a result,
they are quick climbers in global value chain, since they can
leverage their advantages in domestic markets in
re-positioning in global value chain. Normally Western firms
are also alert on these firms, knowing they can become soon
competitors.
But most Chinese firms in global value chain are private
firms created by grass roots entrepreneurs in the southern
and coastal regions. They are small or medium sized and
have no formal access to science and technology resources in
China. They don’t have resources neither to exploit domestic
markets. They are often short of residual profit to re-invest
and they spend all the money in introducing production
technology and equipment to meet the requirements of
foreign clients, who are their sole technology provider and
controls their channel to foreign market. Serving as an OEM
base for a Western partner is a quick route to increased
manufacturing share without the risk. It can yields volume of
production and improve process, sometimes even the quality
of products. The Western partners’ distribution capability
allows OEM suppliers to focus all their resources on building
product advantage. But for OEMs it is not easy at all to enter
markets on their own and convert manufacturing share into
brand share. The downstream Western partner would not
provide enough information on how to tailor products to
foreign markets. So every product design transferred to an
OEM partner is more on technical information than on
customer preferences and market needs. Chinese OEM firms
know only their clients and what clients tell them about the
market. No direct access to foreign markets accounts for
most of Chinese firms’ decisions and their difficulty.
Furthermore, these Chinese firms produce for foreign
outsourcers often on the second or third tier in the global
value chain. They are therefore subordinate to the will of
clients and weak for negotiation. To survive in these
conditions, firms over-invest in production capacity, ensure
cash flow on a daily basis, and suffer from fierce competition
Advances in Economics and Business 1(2): 72-88, 2013 85
with other local firms which is imposed by their international
buyers. That reduces the cluster effect which is the
coordination among small firms in working out innovative
ways of business. Their internal technological learning is
totally dependent upon the relation with foreign client.
Theoretically, developing firms can position them better in
global value chain through forming local network or
industrial clusters. Nevertheless, the export-oriented clusters
in China are characterized by the following aspects:
non-exclusivity of contracts; added levels of subcontracting;
foreign clients as sole technology source to subcontractors;
subcontractors responding to clients but being blind to the
market; risk of being eliminated from the value chain once
clients cancelling orders, etc. (Arvanitis, R. et W. Zhao,
2012).
Chinese towns and rural areas hosted dynamics where
OEM firms get the technology from their clients and sell
products abroad. The local governments were always under
pressure to keep employment and increase local GDP. So
they made efforts to build centers for technical innovation
and information, forged links of local firms with universities,
arranged for bank loans, organized fairs to promote sales, led
OEM producers to seek for markets and more customers, but
mainly in Chinese markets, etc. A few years ago there was an
initiative of local clustering policy, which had nothing to do
with national innovation policy which was biased towards
large State-owned firms or foreign company subsidiaries that
come with a proprietary technology. The local cluster policy
emphasized on organizing local innovation centers to help
firms climb up in global value chain. In effect, innovation
centers began to create networks of firms, improve
innovation capacities, and enhance communication with
universities and research centers. In some towns, local
government policy promoted innovation centers, especially
during difficult economic times, when a need for better
quality and higher priced products made sense in China. As
such, the innovation centers were mainly oriented toward
servicing the local industry, rather than maintaining a
competitive edge (Arvanitis, R., Qiu, H., 2009).
The conjuncture of new policies and 2008 crisis
interrupted this local policy for clustering. After 2000, the
unique financial system of China accumulated so much
foreign exchange gained by export of Chinese firms that the
Chinese Yuan was under huge pressure to revaluate. China
raised its exchange rate and imposed export tax. Chinese
government was also anxious of the problem of liquidity
surplus in domestic financial market. Four the following four
years, it raised interest and tries to tighten credit supply,
which increased the financial cost of investment projects in
export sector. Raw materials became more expensive than
before. Since 2007, Chinese central government also
tightened environmental regulations. Wages were rising. In
the beginning of 2008, China begun to implement the new
Labour Law, which increased enormously the labour cost for
firms, though the average wage of a Chinese worker was just
5% of an American worker, with almost the level of South
Korea in 1975. But soon Chinese private entrepreneurs
found more challenges coming from domestic policies. In
believing that Chinese industry should upgrade quickly in
global value chain and carry more technology-intensive
activities, Chinese government begun to force the factories
in coastal areas (especially in the deltas of Yangzi River and
Zhujiang River) to move to interior regions. At the same time,
the 2008 economic crisis caused a sharp slowdown in growth
of Chinese exports in the year, which drop from 30% to 7%.
For example, according to the Asian Footwear Association
statistics, in Guangdong areas, nearly 1,000 shoe factories
and related ancillary businesses were terminated or moved to
other areas in 2008. Also in the shoe-making province of
Zhejiang, according to Wenzhou Footwear Association, a
survey of 371 shoe-making firms showed that with 2 months
32 firms were shut down, and 52 stopped their activities.
The 2008-2009 crisis has more impact on the grass roots
entrepreneurs than on the institutional entrepreneurs. Many
Chinese export private firms quit the global value chain,
while the mixed ownership firms such as Haier or Midea had
turned to non-industrial sectors, investing heavily in real
properties, long before the crisis. Although Chinese labor
cost is higher now than before, its firms’
manufacturing/export competitiveness is still strong in terms
of total costs taking account of transportation, materials,
capital reserve and uncertainty in political environment.
Therefore, the future of the export industry in China is
probably less predictable than most other economies.
Employees, employers, Chinese officials are now in a
situation that they have never known. They have not yet
found their ways to climb higher in the existing value chain
and their initial previous seem to be counter balanced by the
current domestic policies and crisis.
5.2. Localized Entrepreneurs: Too Chinese to Be Global
Compared with small firms forced to climb and quit the
global value chains, the big Chinese firms trying to jump
directly into advanced foreign markets get much more
support from the government (Wang, W. and J.F. Huchet,
2008). But once leaving the specific domestic context, the
weak competitiveness of Chinese firms is never so evident.
Firm’s development in foreign market is in fact an
international entrepreneurial process (equivalent to
launching a new venture), including exploring and exploiting
opportunities, understanding consumers and market
dynamics, coming out with innovative business concept and
undertaking it with risk across national borders (Mcdougall,
P.P. and B. M. Oviatt, 2003). Chinese entrepreneurs are
context-specific and good in grasping the opportunities
created by the Chinese institutional arrangements. Going
abroad makes the institutional opportunity sources of
Chinese firms completely irrelevant. They are no longer able
to find the opportunities from the institutional background.
For example, networking is a powerful tool for
entrepreneurship. Although mainland Chinese entrepreneurs
are almost all experts in social networking (making the
famous Guanxi) within Chinese context, few are competent
86 Chinese Entrepreneurship: Institutions, Ecosystems and Growth Limits
in managing networks with foreigners once they are in a
foreign country. Mutual trust, share values, personal contact
and respect of other culture are all elements in
entrepreneurial networking in a foreign market. Chinese
firms often enter in non-compliance with the country's
accounting, tax laws, causing dissatisfaction with the local
government in turn, which lead to difficulty in obtaining
expatriate work visas, etc. The reason why Haier’s overseas
factories progressively succeeded is its full integration into
local network. As Ruimin Zhang, the CEO of Haier said:
"Haier's factory in the United States and other countries, are
not only to produce and sell products, but also to make
Haier’s culture, especially Chinese culture and local culture
together”. Another related factor for entrepreneurial firms
competing in international markets is the learning process,
often based on technological learning experience in domestic
market (Zahra, S.A. Ireland, R.D., and Hitt, M.A., 2000).
Learning capability is critical in helping firms overcome
their liabilities of foreignness, as much of this liability relates
to the foreign firm’s lack of local market knowledge. But for
entrepreneurship, knowledge about market, technology and
competition is often not the most critical asset of the firm to
achieve success. The most useful knowledge of
entrepreneurship in China is acquaintance with the hierarchy
and personal relations with key actors. Private Chinese firms
have no habit to learn from foreign markets and customers.
Again, the strategies and behavior of Chinese firms in abroad
reflect clearly the nature and characteristics of their modes of
entrepreneurship within the Chinese context.
Maybe the most significant characteristic of Chinese
State-owned firms’ internationalization is the role played by
the Chinese government. It has played a dominant role
through strategic choices that determined the localisation of
new activities linked to cooperation with foreign firms.
China's “going out” strategy encourages big domestic firms
to participate in international capital market and to directly
invest overseas. Chinese State is more and more acting as an
entrepreneur abroad. Under state oversight, there is an
increasing number of State-owned firms carrying out round
trip investments, searching for possession and control of
assets and resources, especially firms of raw materials. They
prefer brown-field investments, since they need real assets
and hope to gain access to cutting edge technologies difficult
to obtain at home either due to lack of local skills or because
of the reluctance of foreign firms to transfer technologies. In
the past, these firms expanded only in domestic market, in
which they enjoy a well protection of Chinese government.
In terms of technological learning, these firms are used to the
mode of international transfer from a MNC, negotiated and
arranged by the Ministries of government. That is why their
overseas acquisitions of technology and knowledge can be
simplified as purchasing raw material resources and physical
assets. Some of them even move the production facilities
back to their Chinese home base after acquisition. Typical
examples include BOE’s acquisition of Hynix from Hyundai,
SAIC’s acquisition of SsangYong Motor, Nanjing Auto’s
purchase of MG Rover, China Chem Bluestar’s acquisition
of Rhodia Silicon, and SAIC/NAC acquisition of Rover.
Until now, the most successful internationalization cases
of Chinese firms are those of non-State firms. Comparing
with Indian emerging MNCs, the private Chinese MNCs are
very few and very small. Some of them are searching to
control raw materials under certain cost level, thus it is rather
a strategy of vertical integration than internationalization.
Some are searching for expanding production capacity and
market share abroad. Some are pushed out of China due to
the rising costs of production. Some are developing global
brands and expanding their operations abroad, with a view to
tapping into foreign pools of knowledge through mergers
and acquisitions or green-field investment and the
establishment of overseas R&D. Accessing foreign sources
of knowledge has become one of the motives behind outward
investment decisions of a still small, but expanding, number
of Chinese firms, such as Lenovo, Haier, Huawei, ZTE.
Often the internationalization of these firms begins by OEM
production for foreign firms/clients, such as Chery’s OEM
production for Chrysler. Firms then buy similar activities
and functions in other countries, such as Wanxiang Group’s
multiple acquisitions in the North American
auto-components sector. The proximity factor played a part:
acquisition of necessary skills took place in nearby plants.
For example, Haier, trained its international cadres in the
Philippines before they were sent further afield. Those
engaged in one activity or a given production segment (for
example cheap cars) can turn out high volume, master
technologies, and profit from economies of scale that help
create a competitive advantage for entering other markets, as
exemplified by private automakers such as Geely and Chery,
who have begun making inroads abroad, especially in Asia
and the Middle East.
Their main problem is their mode of entrepreneurship
without innovation experience and basis. The non-State
Chinese firms emphasize on production facilities and vertical
integration to gain competitiveness in price; their focal point
is to enlarge market share. But these traditional domestic
business models are no more effective in advanced foreign
markets, just as the case of TCL’s failure integration of
Thomson Electronics, except a very few success stories, such
as Huawei. In fact innovation is vital to entrepreneurial
process in foreign markets, where serving the developed
world’s more quality-conscious consumers- who are also
typically loyal to established brands- requires firms to design
and deliver products not comparable to the offerings of
developing markets. Doing so requires big changes to the
design of products and processes, and changing from
low-cost competition strategy to innovation and learning
strategy.
6. Conclusion
With a second biggest economy in the world, China has
produced much less competitive firms than US, Europe,
Japan who arrived developed markets 30 years ago with their
Advances in Economics and Business 1(2): 72-88, 2013 87
cars and consumer electronics, and even South Korea who
arrived 15 years ago with the same categories of products,
though the quantity of firms and products “made in China”
never stops increasing. If Chinese economy is competitive,
its firms and entrepreneurs are not yet. This paradox is due to
the specific modes of entrepreneurship in China, which are
deeply embedded in its domestic institutions and Keynesian
macroeconomic measures.
Institutional structures create opportunities, but also
uncertainty. In the Chinese economy where most of financial
resources are controlled by the government and most of
opportunities are to be found within the multiplicity of
institutional arrangements, the focal point in
entrepreneurship is directed towards leveraging resources
among different firm ownership combinations. Chinese
entrepreneurs allocate their resources and creativity to
exploit these institutional opportunities, instead of searching
innovation and integrating new technology to meet market
demand. Once firms have been created, entrepreneurs will
establish the specific external linkages around and lead the
everyday business in the short-term to seek quick profit.
Thus technology learning becomes only an accessory
product in entrepreneurship. Since the launch of economic
reform, China has been imitating the Asian model of
export-led growth, while benefiting from the presence of
foreign firms via FDI as a conduit for acquiring technology
and management. In some successful Asian economies, there
has been a process of indigenization of technology (e.g.,
reverse engineering). China imported technology through
the entry of foreign capital, leaving the assimilation and
control of technology difficult. Entrepreneurship, in
Schumpeter’s sense, is based on innovation. Some Chinese
firms have backed their growth by research and innovation,
often with the continued support from government. But most
firms grew up without a pertinent inducement for innovation.
These characteristics of Chinese entrepreneurship constrain
a lot the innovation possibilities of Chinese firms when they
try to upgrade in the global value chain or gain direct access
to foreign markets. After the 2008 crisis, this Chinese mode
of entrepreneurship through constrained learning met its
limits.
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