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

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investment on transferable assets. And the single most transferable asset which entrepreneurs have is themselves and their social capital in the form of the ability to mobilize allegiances‖. These assets cannot be confiscated by local cadres and can be applied to as many different business opportunities as necessary to be successful. ―It is the ability of the entrepreneur to form alliances, and the subsequent rents from co-operation, which are crucial to the establishment and on-going profitability of firms‖.1305 Useful in times of prosperity and growth, the flexibility to move quickly from on sector or location to another derived from the small units of production turns out to be also a valuable asset during economic crises. Having relations to people with command over financial assets or supplies and distribution possibilities saves not only ‗transaction costs‘ but can secure survival in economically difficult times. As Barbara Krug writes, there are four aspects networks provide: first, facilitating access to insider information; second, social and political sanctioning to make up for a missing or inadequate legal system, thereby providing contractual security; third, ensuring ―that an entrepreneur can fail once yet return for a second attempt, but also forming a buffer against failure in the first instance‖; fourth, acting ―as a form of collective memory, ensuring that a single failure need not be constituted simply as one individual‘s loss of investment but as an experience which others can learn from‖.1306 Also, concluding transactions is more flexible when done with the help of Guanxi. It is more flexible than contracts because when doing business with people in ones network it is easier to find compromises or giving new chances, especially if otherwise one of the business partners would have to default. ―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 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‖.1307 In other words, ―risks are borne by the individuals and not absorbed by an external agency like a bank; neither is the contract between them bound by an external body, as in a legal institution‖.1308 Still, the advantages of Guanxi in contrast to formal contracts, which Krug and Mehta, 2004, p. 59.

Krug and Mehta, 2004, p. 60f.

Kiong and Kee, 1998, p. 82+86.

Kiong and Kee, 1998, p. 88.

in the West are considered as mandatory prerequisites for doing business because only those that can be enforced through law, are not recognized by ―the West‖.1309 Large networks help small enterprises to get access to more resources, even in unstable political and economic surroundings, therefore supporting their flexibility and the ability to adapt.1310 Having Guanxi to people with command over financial assets or supplies and distribution possibilities saves not only ‗transaction costs‘ but can secure survival in economically difficult times. It is used to obtain bank loans or supplies from unofficial sources, to make sure that in the competitive economy of China a firm can keep up with the market, raise its profit and build up good connections to officials. Networks are seen as long-term strategic alliances to access information and resources over indefinite periods of time. It is therefore within the logic of this system that contracts are of less use as they are based on a ―discrete transaction paradigm, which has a clear beginning when an agreement is finalized and a clear ending by performance‖. Also, the identities of the transacting parties are of no relevance within this paradigm.1311 Entrepreneurs ―pay more attention to the cultivation of friendship rather than simply maximizing their profit‖.1312 By and large, personal connections build on trust proved to be essential for doing business in China during economic reforms.1313 Hence, ―social relationships built on gift exchange provide a substitute form of trust that can improve the profitability of investment and reduce the risk of arbitrary bureaucratic interference that is not in the interests of the investors‖.1314 It mobilizes cultural values such as obligation and reciprocity to pursue ―both diffuse social ends and calculated instrumental ends", substituting for the not yet existing and complementing already existing market mechanisms.1315 Entrepreneurs outside the state sector developed informal economic institutions that ―enabled them to compete and cooperate in spite of disadvantageous or simply absent formal rules‖ in the decentralized markets of a newly established private sector.1316 This mode of production is particularly efficient in labor-intensive, quickly-changing and segmented markets such as those for textiles or the toys industries. Chinese family firms are successful because of their flexibility and ability to decide quickly. They operate less successfully in capitalSo and Walker, 2006, p. 17.

Fukuyama, 1995, p. 70ff.

Lovett; Simmons and Kali, 1999, p. 236.

Li and Li, 2007, p. 45.

Hamilton; Zeile and Kim, 1990, p. 108.

Smart, 1993, p. 398.

Yang, 1994, p. 35.

Nee and Opper, 2010, p. 8f.

intensive sectors where, due to complex production processes, profits can only be made when a certain volume of production is reached.1317

7.1.2. Types of Chinese enterprises Public sector The public sector consists of collective as well as state-owned enterprises (SOEs). The difference, traditionally, was that the state sector is the planned and the collective is the unplanned part of the state economy with workers or a locality owning the company.1318 Especially SOEs can be of various sizes and in the course of reforms smaller SOEs were privatized under the slogan ―grasp the big, release the small‖ (zhuada fangxiao).1319 In the collective sector, which is comprised of collectively-owned enterprises (COE) as some authors call it, a huge variety of different property rights structures can be found, namely township- (xiāngban), village- (cūnban) and team-run (duìban) enterprises that are owned by townships or villages, respectively. Another type of collective firm is the domestic state-collective joint venture (liányíng qǐyè). In Huang‘s terms it is translated as ‗alliance enterprise‘, liányíng being ―a 1980s euphemism referring to larger private-sector enterprises‖ that was replaced by the term sīyíng qǐyè later. Liányíng qǐyè are firms that are operated with the money of two or more peasant families.1320 Also, there is a governmentrun variety of shareholding co-operatives (gǔfèn hézuò qǐyè), which is only existent since 1992, and individually contracted collectives (gèrén chéngbǎo jítǐ qǐyè). The assets of the latter are originally financed by the collective.

Susan Whiting reports that for example in Yueqing the majority of privately-owned firms was granted collectives licenses as shareholding co-operative enterprises and therefore also appeared as collective in statistics. However, in government-run shareholding cooperatives the majority of the shares were hold by the township and the managers were appointed by the local government, which also intervenes if the firm runs into difficulties.

A major objective for local officials to run enterprises with this kind of ownership form was the possibility to acquire shares in the more successful enterprises.1321 One major type of collective enterprises are the so-called Township and Village enterprises (TVEs). TVEs have a somewhat complex structure, but often are also misinterpreted Fukuyama, 1995, p. 104ff.

Goodman, 2007, p. 181.

Dickson, 2007, p. 835.

Huang, 2008, p. 74f.

Whiting, 2001, p. 35f., 159, 223.

in the literature as being mostly collective, overseeing the large fraction of private ownership among them. However, Huang traces this back to a different understanding of what a TVE is in its English and Chinese usage.1322 The term TVE first appeared in 1984 to replace the ‗commune and brigade enterprise‘.

Already the terminology proves to be complicated as there are actually two Chinese terms that are both expressed as TVE in English. One is xiāngzhen qǐyè, meaning rural and urban enterprises, which includes also rural private enterprises. The second term, xiāngcūn qǐyè, means township and village enterprises, which refers to collective TVEs only. The English term TVE is actually a subset of xiāngzhen qǐyè. Huang claims that most Western economists assume that collective TVEs represent the entire TVE sector; however it subsumes also private businesses.1323 In literature on the topic written in German, this confusion seems to be less widespread. Huang also maintains that these private TVEs are not to be confused with so-called ‗red hat‘ enterprises, which are typically larger-scale private enterprises that are falsely registered as collective. Private TVEs in contrast are fully private with their ownership officially known. However, both types are included in official Chinese statistical data as TVE. In its Chinese usage, TVE is a locational concept, rather than a concept defining ownership.1324 Naughton defines TVEs as having an ―unusual ownership and corporate governance setup…Originating under the rural communes, most TVEs were collectively-owned‖.1325 Also in the interpretation of Markus Taube, TVEs are synonymously used for the rural productions sector that included collective and private rural enterprises, with the private forms dominating.1326 Especially the latter were during the 1980s formally legitimated and were regarded as useful complementation of the state and collective enterprises. However, property rights structures remained intransparent and unspecific. In contrast to Huang, Taube claims that many private TVEs were actually ‗red-hat‘ enterprises and registered as collective TVE as also for private TVEs access to markets, resources and loans was restricted.1327 Naughton attributes the rapid growth of TVEs between 1978 and the 1990s to a mixture of favorable factors, namely that TVEs ―faced factor prices ratios that reflected China‘s true factor endowment‖. Worker‘s wages were less than 60 percent of works in SOEs and Nee and Su, 1996, p. 124-127, Huang, 2008, p. 74-76.

Huang, 2008, p. 74, 106. He quotes Barry Naughton as example but on p. 281 of the same book Naughton actually states that many TVEs were de facto private firms. Naughton, 2007, p. 281.

Huang, 2008, p. 75.

Naughton, 2007, p. 271.

Taube, 2007a.

Taube, 2007a, p. 154-159.

as TVEs usually did not have access to subsidized loans. Thus, they were most successful in sector with a low capital-labor ratios because then the advantage of low wages were the biggest. Also, TVEs ―were able to share in the monopoly rents created for state firms‖ which means that rural industries were extremely profitable – on average, the rate of profit on capital was 32 percent, but declined over time. Naugthon argues that the success of this type of firm can be traced back to the existence of empty niches in combination with the ‗first-mover-advantage‘ of TVEs that were the first to be allowed to enter previously protected markets. Competition between TVEs gradually drove profits down. The third reason for Naughton is the institutional framework of TVEs. Specifically, he refers to the partnership with local governments that depending on locations were highly motivated to promote economic growth. Also, formal taxes were low and local governments also facilitated access to bank loans. TVEs were also geographically concentrated in coastal areas which gave them a spatial advantage also by their closeness to urban areas. As last advantage Naughton lists the organizational diversity of TVEs that resulted in their flexibility to adapt to various opportunities and environments.1328 However, the official legal sanctioning of the TVE sector in 1997 came at a time when de facto many TVEs transformed into private enterprises because the political climate was favorable towards the private sector.1329 By 2004, over 90 percent of all TVEs were privately owned; with the privatization being more formal than real in nature as many TVEs had been ‗red hat‘ enterprises and thus already been privately-owned.1330 In the public sector also falls a variety of hybrid forms of ownership and what David Goodman calls ‗new public sector‘ that is open to market dynamics but also public equity.

Ownership is ―more usually mixed than the official categories of the economy into state, collective, private and foreign-funded‖.1331 He identifies four different types of enterprises comprising this hybrid sector. He lists the ―urban enterprise‖ that includes collective and share-based companies that were established by SOEs and pre-reform-type urban collective; ―rural enterprises‖ that include collectives and stock companies established by villages or townships; ―wholly or partly foreign-funded enterprises‖ which are often former private or state-run enterprises that have been transformed into larger firms by FDI and ―public sector private enterprises‖ that are private enterprises that became collectives by cooperation with local governments or share-based public companies with the original indiNaughton, 2007, p. 271-293, similar analyses also in Hui, 1999, p. 31-37, Riskin, 1987, p. 299, Oi, 1999 and Hu, 2007.

Taube, 2007a, p. 154-159.

Dickson, 2007, p. 835.

Goodman, 2007, p. 181.

vidual entrepreneur staying the head of the company.1332 Additionally, the Chinese Company Law defines limited liability companies as a legitimate company type. This type of enterprise needs a minimum of capital of 30,000 Yuan in either cash, industrial property or land use rights, with less than 50 shareholders. Another recognized company type is the ‗company limited by shares‘ which requires a minimum share capital of 5 million Yuan. It is established by share offer but needs the approval of Chinese securities regulators.

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