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

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ties and values and to an increase of individualistic, selfish behavior. Being a citizen means to be an autonomous individual that can decide independently. The urban atomization that leads to a change of group-centered loyalty to individualism might also lead to societal individualism that is concentrated only on one‘s own life that make people indifferent to social commitment. Nevertheless, the institutions of a civil society are still missing in China and people doing volunteer work are often party members ordered to do so. State paternalism and socialist education rather leads to the image of a good citizen that is loyal to state and party and obeys their order without interfering or objection.1273 The authoritarian state has great impact on the action and beliefs of its populations who believe that the measures of the state are for their own best.1274 Another aspect of the specific Chinese mindset is their ethic of entrepreneurship. This can be regarded as another important reason for the extreme growth of private companies once the country opened up. An entrepreneur is defined as ―small-scale capitalist who attempts to parlay small capital into big earnings‖, investing ―one‘s resources […] in a longterm quest to improve the material well-being and security of some group to which one belongs and with which one identifies‖.1275 Thus, the entrepreneurial ethic is not short-term but future-oriented, neither is it merely for individual benefit. The group towards which those efforts are directed is mostly one‘s family and friends. To set up an enterprise during reforms was not done because of personal career considerations but first and foremost to secure long-term benefits to your network, the family in particular. So, Chinese entrepreneurs are more than capitalist ‗economic men‘ just greedy for money and materialist gain but rather concerned about long-term security.1276 The particular problems 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. The achievement orientation made families strive towards a ―societal marketization‖1277, which explains the mushrooming of private family-owned businesses and the hidden privatization of collectives. Past institutions were adapted and revived, also bridging the gap left by the breakdown of social order caused after the Cultural Revolution. This can also be interpreted as a ―restoration of older Chinese relationships‖ which formed new institutions Heberer, 2010, p. 5f.

Heberer, 2010, p. 6f.

Harrell, 1985, p. 216.

Harrell, 1985, p. 217.

Nee, 1996.

based on traditional values.1278 These institutions assisted in finding a unique way of business practices, creating a specific Chinese Capitalism based on Guanxi. Private enterprises worked according to the principles of the market economy, but still found their own way of doing business in those instable and risky circumstances.1279 Guanxi facilitated the reviving of the private sector during the economic reforms, becoming a more material exchange during the 1980s. It helped to establish small privatelyowned enterprises especially in rural areas. These firms were mainly run by families, which worked according to the principles of the market economy, but at the same time giving time and space to the entrepreneurs to find their own way of doing business in those instable and risky circumstances.1280 Hence, in contrast to the Western belief that secured property rights need to exist for sustained growth, the establishment of private enterprises despite unclear or stable specification proved once again the ―ambiguity [that] is the imperatively important feature of Chinese mindscape‖.1281 The obscure ownership structures of collective enterprises, specifically the TVEs, are an example that this pragmatism or uncertainty acceptance is an important feature of Chinese culture (see also below). As Casson, 1993 notes: ―Some cultures emphasize the importance of theory; it is important to understand the situation before acting, they maintain, and such understanding can only be provided by a theory of some kind.

Other cultures are more pragmatic; they suggest that it is sufficient to know that, on the basis of experience, a certain course of action produces good results in certain circumstances without knowing exactly why this is the case‖.1282 This tolerance toward ambiguity is an important Chinese virtue and a fuzzy chaotic status is interpreted as something from where "creativity can emerge‖.1283 Family ties are creating strong loyalties that motivate each family member. 1284 Young Chinese study hard for the sake of the family to earn the right for a manager position in the family business. This provides the advantage of creating a ‗natural authority‘ and not losing profit to external managers.1285 On the other hand, family firms are not required to give positions to all family members. Relatives and even sons who do not show sufficient talent are driven out of the family business.

Fukuyama, 1995, p. 94.

Krug, 2002b, p. 131ff. and Gold, 1985, p. 674.

Krug, 2002b, p. 131f.

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

Casson, 1993 Zhu, 2007, p. 1508.

Yang, 1994, p. 111.

Wong, 1988, p. 139.

Another characteristic feature of small family enterprises is their inheritance pattern.





When a firm is passed to the next generation, the sons are entrusted with a subsidiary unit for which they have the sole responsibility. This is seen as possibility to diversify the decision-making when a firm prospers and grows. This ―package of individual incentives and group insurance against failure […] encourages the emergence of highly motivated, risktaking entrepreneurs‖.1286 The firm is divided in equal parts between sons - thus preventing a company to grow over a certain size, which is now seen as advantage.1287 Although on the one hand the division of property among sons might be a weakening of economic power it also diversifies investments. This fosters the flexibility of the firms that are divided into several sub-branches in the ownership of one family, but under the command of different sons.1288 Economic development was also fostered by Guanxi because it is connected these small flexible firms to facilitate access to markets and supplies with the help of personal relationships. Often they would also subcontract to larger companies. Both enabled them to change products and the overall mode of production very quickly. This contrasts the huge multinational enterprises with strict hierarchies and a lot fixed investment capital, giving the small family firms of China a competitive advantage in the world market.1289 Small firms require only small start-up costs and adjust more flexible to changed market situations. This situation also produces a highly competitive market environment – if one firm collapses, new ones fill the gap quickly. In addition, the risk of so-called ―ad-hoc taxation‖1290 is minimized (see chapter 8). However, ―[d]espite official figures showing that small and medium sized firms employed 75 percent of China‘s workers and produced 68 percent of the gross industrial product in 2008, private firms have been virtually excluded from direct support in the form of preferential access to low interest loans. Though private firms sought economic stimulus money, state-owned banks routinely rejected loan applications submitted by private firms. Instead the massive economic stimulus has provided a huge subsidy to local governments and large state-owned enterprises and public corporations‖.1291 Guanxi now helped to solve the problem of distribution of scarce goods and bridge the weaknesses of instable dysfunctional institutions. The market economy evolved from a Greenhalgh, 1990, p. 90.

Fukuyama, 1995, p. 90ff.

Hamilton; Zeile and Kim, 1990, p. 125.

Yang, 2002, p. 469ff.

Krug and Mehta, 2004, p. 55.

Nee and Opper, 2010, p. 7.

vehicle to ease consumption of every day goods to a means to access a more restricted area.1292 Kinship networks not only serve as shelter to protect private property, but through that also increase security and reduce transaction costs, additionally providing information on supplies or business opportunities. All in all, networks ―lower entry barriers and raise the survival and success rates of private entrepreneurs‖.1293 At the beginning of the transition to a market economy in China, due to the yet lacking legal and institutional environment, entrepreneurs overcame those obstacles in establishing good relations with local cadres. They founded ‗red hat enterprises‘, which means nothing else than to be registered as collective (hence wearing red caps, dai hong maozi) but being privately-run in reality. These collective enterprises, in the beginning often in form of cooperative shareholdings (gǔfèn hézuò, 股份合作) contained the advantages of collective ownership, such as easier access to bank loans and reduced tax rates, but at the same time allowed the entrepreneur to have control over the firm‘s assets but ―no guarantees of their rights as owners‖.1294 Still, these firms were highly dependent on the tolerance of the local government, had to share their profits with them or were else at risk that local authorities break their promise to protect the private property. The existence of red hat enterprises shows the mistrust of entrepreneurs in more formal arrangements and official government protection. At the same time, dense networks serve protective powers if cadres become too greedy and predatory.1295 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.1296 Opposed to that David L. Wank understands this as ―reasonably coherent strategies of entrepreneurs designed to produce stable expectations‖.1297 These networks actually seem to turn out as the most efficient and rational institutions able to deal with the specificities found in China.

Efficiency when applied to Guanxi thus has a broader meaning. It is less rationalistic and ―extends beyond a strictly economic consideration‖.1298 This promotes "organizationally diffuse‖ groups of collaborating firms ―connected by particularistic ties of kinship" Baek, 2000, p. 63, Gold, 1985, p. 662.

Yang, 2002, p. 466ff., Peng, 2004, p. 1059.

Whiting, 2001, p. 121f., 145, 162.

Zhu, 2007, p. 1510f. and Peng, 2004, p. 1057f. See also chapter 8.

Wank, 1999, p. 248.

Wank, 1999, p. 249.

Kiong and Kee, 1998, p. 93.

and gives more security to the entrepreneur to reinvest.1299 The reciprocal and mutual supporting relations of the co-operating businesses allow resorting to ―considerable economies of scale, and the networks of both large and small firms can be extended‖.1300 This mode of production prevents the drain of capital and enables (but also forces) the entrepreneur to be extremely flexible. As supplies cannot always be secured on usual ways (meaning, without personal connections) this adds to the importance of investing in as many different products as possible to achieve the maximum profit. To achieve this, not only a certain organization of the enterprise is necessary, but even more so personal connections. As a consequence, the notion of core competence, one of the most important features of the Western understanding of conducting business is not really applicable to many privately-owned firms as it is not a relevant factor when considering further investments.

This again reinforced the strengths of personal ties which not only are needed but are also the most helpful tool in such an economic environment.1301 Having no formalized bureaucratic system, these firms connected over networks are highly flexible, low-cost producers. More than that, they thrive in a market that requires fast reactions to changes in demand. Additionally, the emergence of niche markets and the need of flexible specialization favored the small-sized Chinese family enterprises. Multinational corporations increasingly subcontracted to small and medium enterprises, therefore Chinese firms could gain market shares for low-end, labor-intensive products, trading across borders with the help of networks.1302 Instead of ‗putting all eggs in one basket‘, Chinese entrepreneurs invest in diverse branches and products, thus, in economically difficult times they can move resources to activities and locations promising the most profit, being able to leverage gains and losses, thereby also discovering new markets and investments.1303 All in all, 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‖.1304 As can be seen, this is almost the complete opposite to the Western notion of doing business. Even considered the relatively large amount of transaction or sunk costs does not prevent this system to be extremely successful. Also, ―entrepreneurs […] concentrate their Wank, 1999, p. 267.

McNally, 2006, p. 41.

Cf. Jinchuan, 2004, p. 51ff.

Lever-Tracy, 2002, p. 512.

Lever-Tracy, 2002, p. 519.

So and Walker, 2006, p. 7.



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