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

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Foreign investors can set up various forms of joint ventures. The most common form is the equity joint venture. It is a limited liability company with the joint venture parties taking responsibility for losses and profits according to the ratio of their equity stake. They are also part of the hybrid sector mentioned by Goodman.1333 In sum, the non-state sector is a mixture of the most variant forms of ownership and financial structures and it differs a lot from official recordings. It also is very different spatially, so that different sets of enterprise forms exists in different localities, depending on the local institutional setting and preconditions. However, in general it seems safe to say that it is - at least in the case of actual collective and state-owned enterprises - a far less dynamic sector and less influential on the development of the Chinese economy than the private sector. Private sector The private sector is also defined as the non-state (opposed to ‗state‘) sector. The private sector consists mainly of two types of private enterprises, namely the sīyíng qǐyè, which is the official Chinese term for private enterprise. It stands for enterprises with at least 90 percent privately owned assets employing more than eight people. It also is the private variant of the shareholding co-operative. The number of employees distinguishes it from the smaller getihu (geti gongshanghu) of the so-called self-employed entrepreneur who employs less than eight workers. The getihu is not considered a formal enterprise legally.1334 This form of enterprise is also called household enterprise or even specialized household as they are typically family businesses that only employ (extended) family David Goodman: ―The emerging public sector in Shanxi: Entrepreneurs and enterprise as risk under reform‖. Paper prepared for UNSW-UTS Centre for Research on Provincial China, Taiyuan, October 2000, pp. 7-11 as quoted in Holbig, 2002, p. 37.

ten Brink, 2010, p. 21.

Holbig, 2002, p. 32f. The ideological rationale behind the eight employee limit comes from Marx‘ Kapital. Marx stated that capitalist with more than eight workers are exploitative and surplus accumulating, but the other merely household production units. Tsai, 2006b, p. 128.

members.1335 Also, there are the privately-run shareholding companies, so-called individually contracted (fake) collectives (jia jítǐ) which are financed by private individuals. Also Chinese-foreign joint ventures can be private, but often are also seen as rather hybrid ownership form.1336 In Wenzhou, the jia jítǐ were granted collective tax rates and the same eligibility for bank loans as collectives. However, they also were operated by private investors that had no restrictions on the number of employees but had certain guidelines for the distribution of after-tax profits. This arrangement was accepted locally, but contested already on the provincial level. It led to a nation-wide discussion on the status of this form of enterprise and in the end to a legitimization of it. ―In reality, there was little difference in the day-today management and operation of private firms before and after the transition to the shareholding cooperative form‖. As will be outlined in more depth below, this demonstrates the role model function of Wenzhou for the rest of the Chinese private economy.1337 The implications of running a private enterprise compared to collective enterprises will also analyzed in chapter 8. However, the case of Wenzhou is a particularly illuminating example of the development and difficulties of the private sector in China and will be discussed in depth below.

The methods of tax extraction employed by local governments are a major incentive to register as either private or collective firm. Depending on the ownership structure, these varied widely within and between localities (see also chapter 8).1338 However, ―[i]f one were to examine the organization of the textile industry...in China in the past decade...., it would be apparent that the economic organization in all of these sectors share organizational features of putting-out systems of productions that existed a century earlier.[…] Like a century ago, the production networks shaped by these big buyers [Walmart, Home Depot, Nike...] emphasize piecework (called batch-production system) and flexible work routines.

These factors give advantages to factories with low overhead (such as small and mediumsized family-owned firms) and to flexibility in organizing production networks that can expand or contract with changing demand. The technology used in such factories must necessarily match the manufacturing jobs being done and the resources available to those Nee and Sijin, 1990, p. 10.

Heberer, 2007, p. 20, Whiting, 2001, p. 36, 261.

Whiting, 2001, p. 159-163. Local entrepreneurs wanted their private firms to be considered as collective in nature (because this was considered as more secure). However, it also meant that local officials have control over the firm‘s assets. Wenzhou‘s party secretary stated: ―A collective enterprise is too public; a private enterprise is too private – if too public, one fears domination; if too private, one fears having one‘s ‗capitalist tail‘ cut off. Shareholding cooperatives are both public and private combined and are the most appealing‖.

Whiting, 2001, p. 212.

running the businesses. Inevitably, the technology used in such circumstances is simpler and less costly than that deployed in larger vertically integrated factories‖.1339 7.1.3. The Chinese private sector: definition and some data

–  –  –

As already indicated in chapter 5, the Chinese data collection is far from being transparent. The same goes for a definition of the private sector and the question, which firms and ownership structures are defined to be included. Measures like ‗red hat‘ entrepreneurs or nebulous ownership arrangements like in the TVEs make that a difficult task. Traditionally, Chinese statistics differentiate four ownership structures: state-owned, collective, private and foreign-funded. Among those, the ‗private‘ category was always the most difficult to define. Even the terminology is complicated: the Chinese term for private sector, sīyíng jīngjì, is more commonly used in the eastern provinces (literally it means privately operated economy), whereas in less developed provinces, the term mínyíng jīngjì is preferred to avoid capitalist connotations with the word sī (meaning private). Even more sensitive is the expression non-state sector (or non publicly-owned economy: fēi gōngyǒuzhi jīngjì). It comprises all ownership forms that are not state-owned, including sīyíng qǐyè and getihu, but also foreign-invested enterprises and other very diverse ownership forms such as shareholding companies and so-called ‗red hat‘ enterprises, i.e. nominally collective, but actually private enterprises. This variety of enterprise types, that includes hybrid forms of ownership structure, makes this term statistically less transparent.1341 Moreover, as already mentioned before, David Goodman finds that an entire new sector developed between state and privately-owned firms. He subsumes all hybrid forms of ownership in a hybrid sector he calls the ‗new public sector‘. He even claims that entrepreneurs engaging in this sector are the more successful ones, which makes the notion of the dynamic private versus the inert state sector difficult to uphold.1342 A more recent terminology is to distinguish between SMEs (zhong xiao qǐyè, reportedly 80 to 90 percent of Chinese enterprises) and large enterprises (most of which are SOEs), which also does not reveal much about the Hamilton and Chang, 2003, p. 204.

Huang, 2008, p. 13.

Holbig, 2002, p. 32.

David Goodman: ―The emerging public sector in Shanxi: Entrepreneurs and enterprise as risk under reform‖. Paper prepared for UNSW-UTS Centre for Research on Provincial China, Taiyuan, October 2000, pp. 7-11 as quoted in Holbig, 2002, p. 37f. See also chapter 8.2.

ownership.1343 Since 1988, when the first amendment of the constitution and a corresponding law on the regulation of private enterprises were enacted, the official Chinese term for private enterprise is sīyíng qǐyè. It stands for enterprises with at least 90 percent privately owned assets employing more than eight people. The latter criterion distinguishes it from the smaller getihu (geti gongshanghu), which is the so-called self-employed entrepreneur who employs less than eight workers and is not considered a formal enterprise legally. Together, these two forms form the private sector as such, which is said to produce 20 percent of China‘s GDP in 2001, following data obtained from Heike Holbig.1344 Data of the NBS on the private sector has the additional caveat that it is biased towards larger firms and only includes those with a sales volume over five million Yuan. Hence, an OECD study of 2005 using this data comes to the conclusion that the private economy accounted for 52.3 percent of industrial value-added in 2003, compared with 27.9 percent in 1998.1345 However, in contrast to the categorization used by the NBS that defines ownership by their registration status, the OECD uses a conventional definition of firm ownership, taken from contemporary theories of the firm, namely that ―ownership should be defined in terms of what shareholder controls the ‗residual rights‘ of the firm, in the sense of who dictates unforeseen contingencies‖.1346 Thus, they separate firms by the type of controlling shareholder.

With this method they seek to overcome the usual difficulties with defining the private sector. Share capital greater than 50 percent determines which kind of firm it is: state, collective or private. They also find that ―[t]he growth of the private sector has not been even across the country. An overwhelming share of private industrial output is produced in the eastern coastal region (Zhejiang, Guangdong and Jiangsu provinces), that has been at the forefront of all types of reforms. In this region the share of industrial value added from the private sector is 63 percent against only 32 percent in other regions. These other regions are about five years behind in the development of the private sector. However, the central, western, and north-eastern regions‘ private sectors have been growing faster than the coastal areas‘ over the five years to 2003, suggesting that catch-up is underway‖.1347 By 2007, the value-added of the eastern coastal provinces had increased to 80 percent; it had also increased to almost 50 percent in the rest of country, except in the underdeveloped western provinces (and Heilongjiang in the Northeast). This is evidence of the growing Holbig, 2002, p. 34f.

Holbig, 2002, p. 32f., Nee and Opper, 2010, p. 6.

Huang, 2008, p. 14f., Dougherty and Herd, 2005.

Dougherty and Herd, 2005, p. 8.

Dougherty and Herd, 2005, p. 8f.

convergence within the country – at least when the poorer Western provinces are excluded.1348 Huang uses the same methodology than the OECD Economic Survey but comes to a far lesser percentage, namely 22 percent of industrial value-added in 2005. Throughout his book he bases his arguments on the relatively small size of private sector. His measures are so significantly smaller because he defines a certain type of ownership as collective, not private, namely the legal-person shareholding firms because he argues that these are owned by firms via cross-shareholding, which means that they are merely subsidiaries of SOEs.1349 However, the ―hallmarks of a market economy is the role and magnitude of the private sector…there is no straightforward answer to this seemingly direct question about the size of the Chinese private sector….deliberately vague ownership structures‖.1350 According to an article of BusinessWeek of 2005, the private sector already reached a share of 70 percent of the private sector in GDP.1351 The article does not give a source for this estimate, but it is commonly found in more recent articles on the private sector, probably extrapolating the share of Eastern provinces to the entire country. According to the OECD Economic survey of 2005, the ―private sector was responsible for as much as 57 percent of the value-added produced by the non-farm business sector in 2003‖. This report also regards the private sector as the driving force of development and economic growth.1352 A ADB report of 2007 finds that ―[t]he PRC‘s private sector now accounts for more than 40 percent of GDP, 60 percent of growth, and 75 percent of the new jobs being generated‖.1353 However, this data is difficult to verify as in official statistics small private enterprises are not registered and many private enterprises are still registered as collectives to escape predatory taxes and fees (see also chapter 8). If the fēi gōngyǒuzhi jīngjì was reported, it already in 1996 had a share of 31 percent of industrial output value and 53 percent of consumer goods retail sales and were growing ever since.1354 In terms of absolute numbers there were 1.76 million sīyíng qǐyè registered in 2000 and 2.03 million in the end of 2001, employing 24.06 persons. The number of getihu has during that period of time officially decreased from 25.71 million at the end of 2000 to 24.23 million at the end of 2001 (from a peak of 31 million in 1999). Heike Holbig traces that back to a technical change in statisOECD, 2010, p. 106f.

Huang, 2008, p. 16ff.

Huang, 2008, p. 8.

Gang, 2005, accessed 25 November 2010.

OECD, 2005, accessed 25 November 2010 Asian Development Bank, 2007, p. 48 and similar Dougherty and Herd, 2005.

Holbig, 2002, p. 35.

tical recording and an overall confusion on how to count that category correctly.1355 The private sector with both forms of private enterprises together employed 82.63 million people at the end of 1999 and only 74.77 a year later, due to the decrease of registered getihu. Another unofficial data source estimated 130 million employees in the private sector for 2000 and the China Daily cites a study that by 2005 29.3 million private businesses (getihu and sīyíng qǐyè together) employ over 200 million people and are accounting for

49.7 percent of GDP.1356 However, nobody knows for sure how many people are actually working in the private sector.

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