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

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Whiting, 2001, p. 193.

Bruun, 1993, p. 122.

Goodman, 2007, p. 181.

Krug and Mehta, 2004, p. 55.

Whiting, 2001, p. 147.

ent province. Another feature of this is to lease out part of the enterprise to subcontractors, which further confuses the ownership of an enterprise and its subunits.1526 This issue becomes even more pressing once the private firm grows in size, as with increasing profits officials seek to get more influence on the enterprise and obtain part of the surplus.1527 Therefore, entrepreneurs do not let their company grow over a certain size – they rather set up a new business that produces different products or in a different province. Another feature of this is to lease out part of the enterprise to subcontractors, which further confuses the ownership of an enterprise and its subunits.1528 This produces organizationally fuzzy business groups of small firms connected by kinship ties based on reciprocity and mutuality (qǐyè jituan 企业集团) ―that embody sizeable investments and considerable economies of scale even though the size of any unit of those clusters is small‖.1529 They help ―to pool information, finances and technological know-how‖.1530 The property rights of these arrangements are very ambiguous and remain diffuse, and thus help to bypass discrimination against legally private firms and give more security to the entrepreneur to reinvest.1531 This also demonstrates the mistrust of entrepreneurs in more formal arrangements on one hand, on the other hand the dense networks protect from overly greedy cadres. 1532 Entrepreneurs will focus their investment on transferable assets, of which their network is the most valuable one. These assets cannot be confiscated by local cadres but can be applied to as many different business opportunities as necessary to be successful.

The close connections to local administration are for the mutual benefit of both cadres and entrepreneurs, but the latter also need to secure profits for their families and networks and thus are forced to be extremely flexible. 1533 This contradicts the Western belief that personal relations are less efficient and more costly than contracts, leading to an "undercapitalization" and to firms being unable to grow over a certain size. Chinese entrepreneurs have a tendency to extend their networks rather than following Western corporate strategies, creating a whole set of different production Wank, 1999, p. 254.

McNally; Guo and Hu, 2007, p. 15f.

Wank, 1999, p. 254.

Wank, 1996, p. 837, McNally, 2006, p. 41. For example, the ownership structure of Huawei Technology Corporation, which has a sales revenue of about $5.7 billion, operating in more than 90 countries and being one of China‘s most successful private firms, is not known. ―Huawei is a microcosm of China‘s private sector – we know that it is there but we do not know its actual size and its boundaries‖. Huang, 2008, p. 10.

McNally, 2010, p. 4.

Zhu, 2007, p. 1508 and Wank, 1999, p. 252+267.

Zhu, 2007, p. 1510f. and Peng, 2004, p. 1057f.

Krug and Mehta, 2004, p. 59.

options.1534 Apart from the reasons already given, setting up new businesses gives also family members or other members of one‘s network the chance to be manager of their own firm. Entrepreneurs formed ―informal cooperatives among relatives and friends engaged in small-scale industry‖, allowing ―individual entrepreneurs to pool capital and skills‖ and attenuating the exposure to discrimination and other limitations on private investment.1535 Chinese entrepreneurs invest in diverse sectors and products to be able to move resources to activities and locations promising the most profit. This enables them to leverage gains and losses and to discover new markets and investments.1536 This is facilitated by the fact that they have no formalized bureaucratic system, but are connected over networks. As highly flexible, low-cost producers they thrive in markets that require fast reactions to demand changes.

As a consequence, the notion of core competence, one of the most important features of the Western understanding of conducting business ―turned out to be irrelevant to respondents in deciding which activities to engage in. For the most part, a firm is known, not by what is produces, but by who stands behind it, and that individual will seize on any profitable [...] opportunity which presents itself, with scant regard for any core competence the firm may, or may not, have‖.1537 The flexibility to move quickly from on sector or location to another derived from the small units of production turns out to be a valuable asset during economic reforms (and, for that matter, has also been a major fact in the recent global crisis, see the example of Wenzhou outlined in chapter 7.2.).

To this day, the Chinese cultural tradition of Guanxi is related to a private economy which success depends mainly on small family firms based on paternal authority and personal trust rather than a legal system. Also, inside those enterprises, individual rights stand back behind the significance of personal networks and kinship relations which can be a competitive advantage in today‘s global economy.1538 Hence, ―‗[n]etwork capitalism‘ is built from the ground up and does not tend to overly rely on legal contracts and the supervisory role of the state. It rather depends on a myriad of small-scale businesses. In comparison to ‗coordinated capitalism‘, these businesses do not tend to expand into large bureaucratic structures, but rather achieve wealth accumulation through the multiplication of small ventures. To overcome the disadvantage of small size, large numbers of firms coalesce into clusters of businesses that can display enormous flexibility in adjusting to changCf. Jinchuan, 2004, p. 51ff.

Whiting, 2001, p. 147.

Lever-Tracy, 2002, p. 519.

Krug and Mehta, 2004, p. 58f.

Yang, 2002, p. 467. See also Clegg, 1990, p. 105-129 and Hamilton; Zeile and Kim, 1990.

ing circumstances. These clusters are linked through horizontal networks of particularistic ties based on trust (Guanxi), which ―provide the underpinning basis for a complex network-based organizational structure‖‖.1539 8.2.2. Role of jurisdiction in China

–  –  –

As a result of the close and interdependent relations of local government and private entrepreneurs, the Chinese legal system ―has been characterized by policy experimentation, leading to informal and spontaneous legal developments, which then are legally clarified and codified‖.1541 This meant in practice that ―business involves not so much doing what is explicitly legal but rather doing what is not expressly forbidden‖.1542 Although impartial courts were established by the central government, legal actions are rarely taken and if so, only for supra-regional or international issues or for suing a person that is not part of one‘s network.1543 Courts are still viewed as easily to manipulate and therefore corrupt and the concept of universal rights and individual jurisdiction are perceived as alien and imported from the West, therefore solving problems within ones networks based on mutual obligations is considered far more effective.1544 Networks are not only able to support their members but also to enforce sanctions upon them. This incorporates the fear of losing ‗face‘ and evokes the feeling of shame and loss of reputation. Not only are networks considered more effective, the recourse to the formal courts are often also viewed as failure to solve the problem through the network and at the same time not be able to follow the etiquette of society. The only exception for this is if the court is geographically distant to the place where ones business is located and if the person taken to court is not part of one‘s network.1545 This mistrust towards courts can be traced back to China‘s history. Over the most part, China was ruled by an emperor and his laws had to be implemented by local officials, of whom many were prone to corruption. This exposed people to official exploitation and McNally, 2007a, p. 190. Quote within from Robison and Beeson, 2000, p. 13.

Zhu, 2007, p. 1510.

McNally, 2006, p. 27ff.

Wank, 1999, p. 252.

Wank, 1999, p. 264ff.

Peng, 2004, p. 1050: ―A noble man would sacrifice self-interest to honor his obligations, whereas a commoner would forsake his obligation to serve his self-interest.‖ Wank, 1999, p. 264ff.

caused them to distrust official institutions.1546 Still, as Bourdieu argues, the state sought to concentrate ―juridical capital‖, which in his terms is ―an objectified and codified form of symbolic capital […], delegated and guaranteed by the state, in a word bureaucratized‖. It is the foundation of the ―specific authority of the holder of state power‖.1547 A legal culture is defined as consisting of a ―pattern of reciprocal influences between parallel phenomena of law and society‖. In China, the societal reaction to legal reforms, which not only are perceived as being imported from the West, but to a large part actually are, represent indeed responses to the latter fact. These laws have been designed to fit the economic and political conditions of their originating culture, whereas the reactions on the Chinese side are influenced by local culture.1548 Usually, legal norms develop gradually in accordance to local history and traditional norms. In interaction with the economic and political development, hitherto unwritten rules are transformed into formal laws. Thus, imported law needs to be altered in accordance to local traditions. ―This local acceptance of imported law norms may depend on a process by which traditional norms that are unresponsive to new realities are discarded (‗delegitimization‘) and replaced by new norms as part of evolving belief system (‗transvaluation‘)‖.1549 Corresponding Chinese custom, personal interactions are carried out based on relations and the unwritten rules of Guanxi which are considered far more effective for solving any kind of problem.1550 This impedes the assertion of a bourgeois concept of freedom and a juridification of relationships in a Western sense, as personal connections are valued over contracts and law. Legal rights are not conceived as individual entitlement (in terms of being entitled to something) rather in the sense of dispensing justice (punish malfeasance), which is consistent with the Chinese notion that individuals can only exist embedded in their social environment. The Western ideals of democratic principles, civil liberty, equality and independent justice, all universal values coming from the age of enlightenment, have no corresponding tradition in China.1551 The significance of Guanxi is often seen in its coexistence with law and legal institutions, only together providing a complete legal system.1552 In contrast to courts, Guanxi is conceived to provide security and predictability for legal issues as formal legal institutional are still conceived as too weak to manage business relations and allocate resources, implyKiong and Kee, 1998, p. 91f.

Bourdieu, 1999, p. 63-66.

Potter, 2008, p. 181.

Potter, 2008, p. 182.

Peng, 2004, p. 1050.

Pohl, 2002, p. 115f.

Potter, 2008, p. 180.

ing that once the formal legal system is complete, Guanxi will not be necessary any more.1553 In contrast, other authors argue that because ―China‘s legal system is increasingly influenced by common law rather than codified civil law traditions, the role for Guanxi is likely to increase, pending the development of a body of law on which interpretations of general principles and norms might be based‖.1554 In this view, Guanxi is interpreted as coping mechanism. An elaborate legal system can thus diminish but never totally erase the role of Guanxi because it has little influence if not complemented by informal Guanxi relations. Potter argues that the dominant role of the state apparatus and the limited formal constraints of its actions are in favor of the persistence of Guanxi. This notion justifies the parallel existence of Guanxi and a formal legal system. As contracts are conceived as a means to deal with people who are not trusted, laws are only necessary when a relationship is not based on mutual trust. However, it might be misleading to regard Guanxi as exact opposite of a formal legal system as it is rather part of the legal system in completing and complementing the Chinese legal culture.1555 During the last 30 years the central government created a virtually complete set of laws, covering most aspects necessary for an elaborate legal framework equal to that of a fully developed economy, including the protection of property rights and the establishment of impartial courts. As a very recent example, a document issued on 13 May 2010 by the China's State Council named Several Opinions of the State Council on Encouraging and Guiding the Healthy Development of Private Investment promotes the private sector. It states that private capital is allowed to establish financial institutions and encourages investments in infrastructure and basic industries. Also, it ―require[s] the competent governmental departments across the nation to pay enough attention to the work on encouraging and guiding the healthy development of private capital, spare no time to work out specific measures and build favorable policy environment and public opinion atmosphere for the sound development of private investment‖.1556 As often the case with legal documents issued by the central government, it includes few specifics. The exact meaning for example of ―healthy development‖ and how the financial institutions are supposed to be designed is not expliXin and Pearce, 1996.

Potter, 2008, p. 194f.

Potter, 2008, p. 180. Potter adds: ―The traditional Guanxi system retains its importance, but must operate alongside an increasingly formal set of largely imported rules and processes made necessary by the increased complexity of social, economic, and political relations…As an expression of social capital, Guanxi operates along with other mechanisms of economic or symbolic capital for regulating social, economic and political relationships‖, p. 183.

A document issued on May, 13 2010 by the China's State Council online (http://www.chinaipr.gov.cn/ news/government/654035.shtml). In Chinese available under http://www.gov.cn/zwgk/2010-05/13/ content_1605218.htm, both accessed 8 June 2010.

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