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«Inaugural-Dissertation zur Erlangung des Doktorgrades des Fachbereichs Wirtschaftswissenschaften der Johann-Wolfgang Goethe-Universität Frankfurt am ...»

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large sections of the private sector operated in the informal economy.1210 On the other hand, blat is still used to obtain information, only that the type of information changed in post-soviet Russia. Before, it was information to overcome the shortcomings of a planned economy, whereas today it is information on money, business and tax evasion.1211 Even if Russian people started a business, it was typically less growth-oriented and more geographically confined than small businesses in China as Russian entrepreneurs value consumption over investment and expansion and thus reveal a more predatory behavior. In the literature this is referred to as the Russian enterprise being a worm and the Chinese a caterpillar (which has the ability to develop into a butterfly).1212 6.4.4. Guanxi networks versus Western forms of networks

–  –  –

In China, networks are seen as long-term strategic alliances to access information and resources like bank loans or supplies from unofficial sources, even in unstable political and economic surroundings, therefore supporting the flexibility of small firms. They are based on the long-term oriented reciprocity that is aimed towards the other not the self. This means that empathy and knowledge for the needs of the other are necessary which includes that anything reciprocated has to be of great value to the receiver and has to be of greater value than that received. Which means nothing else than that Guanxi always consists of unequal exchange, the ―generalized reciprocity‖ described above. This helps to sustain Guanxi in showing the veracity and well meaning of the giver. It also causes indebtedness and gratitude towards the giver which will secure that the favor will be returned sometime in the future, keeping the relationship dynamic and lasting.1213 Networks also complement the legal framework in guaranteeing the enforcement of contracts and serving as supporting entity in case of bankruptcies, by postponing or even preventing it. Moral principles are regarded as more influential than legality.1214 Additionally, they act ―as a form of collective memory, ensuring that a single failure need not be constituted simply as one individuKiess, 2007, p. 72f., 144f.

Ledeneva, 1998, p. 209.

Hsu, 2005, p. 323f.

Chen and Chen, 2004, p. 317f.

Hu, 2007, p. 54.

al‘s loss of investment but as an experience which others can learn from‖. 1215 Guanxi ―is a connection between people, not firms. Even if an individual is running a number of separate companies, the counter-party considers itself as still trading with the same entity, the person with whom he has Guanxi. He could not have different relationships with each company‖. 1216 As has been mentioned before, negotiations often take place at more informal locations like nightclubs or restaurants.1217 This process does not rely on legal contracts but involves dinner banquets and gifts to ensure the mutual Gănqíng which differentiates this process from corruption, as stated in the chapter on Guanxi and corruption above. In contrast to the often difficult negotiations in joint ventures between Chinese state enterprises and foreign companies, investments based on Guanxi are established much faster.1218 ―It‘s all Guanxi.

But they form a sort of group which no one else knows about. […] The members do not publicly announce that they have formed a group. They have no charter, and they pay no membership fees, nevertheless, these networks are very important‖.1219 In the West, markets depend on an elaborate legal system to enforce contracts, whereas the Chinese system depends on reputation and trust. Contrary to Western expectations, this does not increase transaction costs, but rather reduce them due to transactions taking place within flexible, but permanent networks within long-term relationships. It takes time to build up these networks but once established, they facilitate business although admittedly also limit the system‘s capacity to grow.1220 They exercise a strong incentive for fair and non-opportunistic behavior as cheating would lead to the exclusion from the network.

Networks therefore have strong regulating and sanctioning power.1221 ―In the past, we didn‘t have contracts in black-and-white; no legal documents were involved. A gentlemen‘s agreement will do. […] For the Chinese traders, the main thing is integrity, credibility‖.1222 Concluding transactions is more flexible when done with the help of Guanxi and favors smaller groups of people over more complex organizational structures: ―When there are problems, we can always talk it through. With Europeans, it‘s quite different. We work with many multinational companies…They are not flexible. They won‘t compromise and Krug and Mehta, 2004, p. 60f.

So and Walker, 2006, p. 7.

Yang, 2002, p. 461f.

Granovetter, 1985, p. 490 and Yang, 1999, p. 104f.

Yang, 1994, p. 301.

Lovett; Simmons and Kali, 1999, p. 232.

Lesger, 1997, p. 269ff.

Kiong and Kee, 1998, p. 84.

let you go [if you need to make adjustments]. They don‘t share our mutual understanding.

The Europeans go according to the books and rules‖.1223 Informal ways of securing contracts based on mutual trust is preferred to contracting and ―chatting among firm owners is the main channel for a firm to collect information on market conditions [and] technology‖.1224 Pragmatism and uncertainty acceptance is an important feature of Chinese culture.1225 This tolerance toward ambiguity is an important Chinese virtue and a fuzzy chaotic status is interpreted as something from where "creativity can emerge‖.1226 It is in contrast to the Western urge to regulate every detail.





For similar reasons as within business connections, ties to local cadres are created (see also chapter 8). Having to maintain strong ties to local officials can be interpreted ―as evidence of poorly enforced legal property rights and an obstacle to the formation of a more complete market economy‖, which is the view mostly found in mainstream economics approaches.1227 As opposed to that it can also be understood as ―reasonably coherent strategies of entrepreneurs designed to produce stable expectations‖.1228 These networks actually seem to turn out as the most efficient and rational institutions able to deal with the specificities found in China, where ―making friend and making money‖ is not an unfeasible contradiction.1229 Another specific feature of Chinese networks are that in contrast to Granovetter‘s famous finding about the ‗strength of weak ties‘1230 for job search, meaning that it is more likely to find new employment through relationships with acquaintances instead through a closer core of friends, it is different for China. Chinese people tend to gain new employment through the ‗strong ties‘ of Guanxi networks that are built on trust.1231 However, if Guanxi connections are indeed equal to Granovetter‘s concept of ‗strong ties‘ and if they are indeed crucial for finding a job, is contested in the literature. Yanjie Bian, for example, argues that the ―combination of frequent interaction and reciprocal exchanges for expressive and instrumental purposes, high intimacy and mutual trust to each other, and strong ‗we-group‘ feelings toward each other‖ makes it equal to strong ties, because weak ties ―cannot meet many of these requirements‖.1232 Amy Hanser, on the other Kiong and Kee, 1998, p. 82, 86.

Li and Li, 2007, p. 40f.

China Reform Foundation, 2001, quoted in Zhu, 2007, p. 1508.

Zhu, 2007, p. 1508.

Wank, 1999, p. 248.

Wank, 1999, p. 249.

Souchou, 2002, p. 239ff.

Granovetter, 1973, see also chapter 3.

Lo and Otis, 2003, p. 140, Bian, 2008, p. 119.

Bian, 2008, p. 118.

hand, argues that not all relations, especially on the labor market can be called Guanxi and that instead of bridging holes of trust and information in the labor market, Guanxi networks themselves contain holes. Without explicitly saying so, she comes back to Granovetter‘s argument, that rather weak ties are the more essential factor to learn about new employment opportunities. In the end, she falls back on the standard argument of NIE that only a functioning labor market itself is the solution. She basically argues in Guthrie‘s line of thought that Guanxi is on the decline and will disappear with a complete institutional structure – Western style.1233 In my view, although Guanxi requires a high level of Rénqíng, they still need not be equal to strong ties, as can be elucidated by the examples of Guanxi given above (see fn 1065). A shared identity can also be achieved with ‗loose affiliations‘, hence, weak ties, it is not necessarily a matter of the frequency of interaction or spatial or emotional closeness.

Thus, it is difficult to categorize Guanxi connections as either strong or weak ties. Also, looking at more typical categories that characterize network types outlined in chapter 3, Guanxi networks are multiplex in that they are not only incorporating different types of relationships, there exist no different networks for different spheres like business, politics or social life. The Chinese tolerance towards ambiguity and a high level of pragmatism results in not categorizing a specific person who consequently can take on different roles in different situations. It is also more relying on generalizing reciprocity and informal social capital, as already outlined above. Additionally, Guanxi networks not only work within the ―small islands of prosperity within the sea of misery‖ 1234 as the European (regional and strategic) networks do.

The typical argument of NIE of having networks as organizational unit as another way of reducing transaction costs and enhancing efficiency, is also tracing cultural differences back to the Western rationality argument, which in the end leads to the all-encompassing criteria of efficiency as sole objective of a rational enterprise. This argues again in Weber‘s sense. History is deterministic so that rational Capitalism in the Western sense is the epiphany of modernity which denies a possible difference between cultures. The Western discourse has great difficulty in considering social systems as open or emotional and in this sense ‗irrational‘ which includes having no clear cut boundaries between society, politics Hanser, 2008, p. 160f. See also above, chapter 6.1.3. and esp. fn 1040 the debate between Mayfair Yang and Douglas Guthrie.

Piore and Sabel, 1984, p. 6.

and the economy.1235 In contrast, the flexible production of Chinese networks is based on trust and is determined by its institutional environment.1236 ―The point is that the technology in use reflects the way the economy is socially organized, as well as the product being made. That young girls made cloth on single-spindle looms a century ago or that the women (and often men too) in households gather around the dining table to assemble computer parts today does not indicate economic involution or capitalistic ineptitude of any kind. But is does indicate that we cannot understand how economies work unless we understand how they are organized in some holistic way‖.1237 Herrmann-Pillath, 2000, p. 114f.

Herrmann-Pillath, 2000, p. 116f.

Hamilton and Chang, 2003, p. 205.

7. Capitalism, the private sector and Guanxi in the 20th century 7.1. The development of the private sector since 1978 7.1.1. The development of the Chinese private sector and the role of entrepreneurs

–  –  –

The transformation of the Chinese economic system after 1978 from a planned to a market economy based on competition and the division of labor went surprisingly smoothly, especially compared to similar processes in Middle- and East Europe. The economic reforms in general were made possible by the revitalization and creation of institutions to expand, regulate, and channel economic transactions especially and foremost in the private sector. They developed in areas where State-Owned Enterprises (SOEs) were less dominant and thus complemented the institutions existing in the planned economy for the allocation of goods and services. The (re-)newed institutions were a response to the organizational problems arising in agriculture, industry, and commerce in the course of reforms.

The central government gave space to local governments in finding their own way of dealing with the reform process, than choosing the most successful structures to ex post legitimize the actions in introducing legal structures and corresponding laws for enforceable rights, supporting individual autonomy.1239 This development is enforced by the central government that gave supremacy to local officials who influenced the local development.

They were often motivated to strongly support local economic growth often not complying with central state regulations. An ―array of essentially private ownership forms emerged […] with the knowledge and support of sub-provincial local officials but well ahead of the regulations and laws designed to govern them‖.1240 Private entrepreneurs collaborate with government officials, ―creating and benefiting from a web of bureaucracy-business alliances. While this can be traced back to the pre-communist years, the reform and open policy did not eliminate but deepened this Chinese tradition‖.1241 It can be easily argued that the Chinese transformation was only possible with the emergence of entrepreneurs and privately-owned enterprises. The particular problems Yang, 1994, p. 8.

Holbig, 2002, p. 41.

Whiting, 2001, p. 145.

Zhu, 2007, p. 1510f.

found in the Chinese economy after their entrance in the global market were most efficiently faced with the re-utilization of the Chinese family, family enterprises and personal networks as a means to do business the Chinese way. Thus, they adapted and revived past institutions, also bridging the gap left by the breakdown of social order caused after the Cultural Revolution. Those institutions based on traditional values assisted in finding a unique way of business practices, creating a specific Chinese Capitalism based on Guanxi.1242 For the Chinese social and economic system, kinship always played an important role.



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