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

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This approach will be compared to Eucken‘s theory of economic orders and the economic style concept. The latter is complementary to the holistic pattern model- approach of American Institutionalism as presented in this work. Economic styles differentiate the broader concept of economic systems into various types of real economies. A specific style is distinguished by characteristic behavioral patterns, organically evolved living conditions and activities as well as institutions, and is thus a qualitative instrument and explicitly not a quantitative one.17 It is a concept that is both highly subjective and relativistic: it creates a painting, rather than a photograph, of an economic era.

The fifth chapter is the beginning of the second part of the dissertation and is directed to the actual process of transformation and economic development in China. However, it first provides general definitions of development and transformation, the latter especially focusing on the gradual approach versus ‗shock therapy‘. Before demonstrating that the Chinese transformation and development process does not fit into these categories, Western development during the industrial revolution will be analyzed. This of course is only a very rough outline and focuses on Great Britain and Germany as illustrative examples. It will be contrasted to a short outline of the main features of the reform process since 1978, including related data concerning Chinese economic development.

After analyzing these historical events and facts the process of transformation will be evaluated. It is widely conceived as development defying all rules, and as a very pragmatic approach. It has been - and still is - a process of decentralized social learning in which local governments experiment with different solutions. The central government is merely the facilitator of this process, adopting the best experiments ex post and applying them to the Jackson and Deeg, 2006, p. 22ff.

Meyer-Abich and Schefold, 1981, p. 114.

entire country. Even without clearly defined property rights, the Chinese private sector thrived, pragmatic entrepreneurs accepting a relatively high level of uncertainty.

Complementing this theoretical analysis, closer attention will be given to the role of the family as the main driving force of economic development within the private sector. From a Western perspective, the family, and hence family firms, are conceived as an outdated mode of production for Capitalism, merely belonging to the private sphere. Consequently, the Western industrialization process was accompanied by the change and adaptation of family structures up to the point where traditional institutions were replaced to better fit the conditions of a capitalist economy heavily based on factory work. This is exemplified by the description of the transformation of traditional peasant households towards urban worker models, accompanied by a change in gender conception, division of labor and in lifestyle. This demonstrates the manner in which Capitalism is characterized by constant conflict and struggle, creating an ‗iron cage‘, as Weber and also Sombart argued. The subject of the link between social structure and economic development will be taken up again in chapter 8, when the implications of the industrial revolution for bourgeois families are analyzed.

This is contrasted with the role that the Chinese family assumed during the transformation process. Interestingly, the theoretical evaluation of the relation between Chinese family structures and the development of Capitalism changed enormously over time. From Weber to modernization theory the family has been conceived as an institution that is opposed to capitalistic development. Weber argued that Protestantism was able to shatter the ‗fetters of the sib‘ in contrast to the Chinese family whose values are based on Confucianism, and thus are not able to establish rational, bureaucratic companies and compete with the West.18 This evaluation of the family prevailed up until the 1960s within modernization theory, which argued that a personalistic culture is the cause of China's failure to develop capitalistic structures.

Since then, the assessment of the Chinese family has changed dramatically. Chinese familism is now conceived as ―motor of development‖, since their Guanxi relations were the starting point for many family businesses.19 The collective era seems to have created a desire for more autonomy, which then resulted in substantial entrepreneurial activities, especially in rural areas. Entrepreneurial instincts were preserved and could flourish within the institutions provided by economic reforms. The Chinese family combined tradition Weber, 1968, p. 237.

Wong, 1988, p. 146.

with the features of a capitalist society, and provided complementing institutions that helped private firms thrive.

This brings us to the subject of Guanxi, covered in the next chapter. Chapter 6 therefore starts with a definition of Guanxi and an extensive analysis of the concept from a cultural, sociological and economic perspective. It is broadly divided into a rural, more traditional, and an urban, more modern, version of Guanxi that is especially important for business practices. Guanxi is thereby presented as an evolving institution that adapts over time.

Since Guanxi is also often compared to corruption, one section of the chapter has been dedicated to this subject. It can also be analyzed from a gender perspective, which is done in the next part of the chapter. Not only does Guanxi disadvantage women, it is also instrumentalized to incorporate gender stereotypes for successful business negotiations. The last segment of the chapter is concerned with the specificity of Guanxi networks, but also with exploring commonalities with similar networks found in Germany, Italy and Russia.

Specifically, the concepts of Russian blat and Guanxi are compared.

The next chapter picks up the issue of the private sector and hence, private entrepreneurs. It argues that Chinese entrepreneurs have a specific, very pragmatic mindset, including Guanxi networks in their business practices. More than that, it will be shown that the boundaries between the private and the business sphere are not as clear-cut as is usual in the West. As will be again emphasized in chapter 8, except for all belonging to the ‗new rich‘, Chinese entrepreneurs do not form a bourgeois class and thus are not connected strategically through horizontal ties, nor are they organized within business organizations. Additionally, the Chinese entrepreneurial ethic is future-oriented and directed towards the family and close relations, since setting up an enterprise meant securing long-term benefits to the network. Social institutions were adapted and revived, also bridging the gap left by the breakdown of social order caused after the Cultural Revolution. It is argued that personal connections based on family structures prevail, and that small-scale production has a comparative advantage in the globalized economy of today. These key-factors determine the further development and success of the Chinese economy and the type of Capitalism arising. Small Chinese firms connected through Guanxi networks are able to respond to rapidly changing demand and motivate maximum efforts for modest pay.

After the analysis of Chinese private entrepreneurs the differing types of enterprises in the private sector are described; and to present a more complete picture the collective sector is also briefly described. This illuminates the huge variety of ownership structures and the difficulties of defining private (or rather non-state) and collective enterprises. This is again emphasized in the next section that gives an overview of the size and other data on the private sector.

The private sector is not a homogenous formation but varies across sectors and regions;

this will be shown in the case of Wenzhou. This was one of the first provinces to heavily privatize and also one of the regions most severely hit by the economic crisis of 2008. Statistical data will be complemented with more anecdotal evidence from newspapers, to give more in-depth insight into the economic development in Wenzhou in particular, and China in general, showing how Guanxi is used as an instrument to enhance economic success. It will be shown that in China it is not the corporation that survives, but rather Guanxi, and thus the Chinese variety of Capitalism proves to be more sustainable than is believed by the conventional view.

One issue that has been raised in the section on Wenzhou is the relationship between private entrepreneurs and the state. This subject is further scrutinized in chapter 8. For comparison, the self-conception and discourse on the image of German bourgeois entrepreneurs will be briefly analyzed, as well as their relation to the state. In contrast to Western development, where the middle class was the driving force for democratization and the formation of a civil society, a similar trend cannot be detected in China. Chinese entrepreneurs seem not to be on their way to forming a bourgeois class, and they do not seek political participation. Hence, they only negotiate with local – not central - governments for beneficial business conditions. Guanxi include also local officials and, depending on the local scheme of development – which itself is strongly based on cadre behavior – the private sector is either promoted or discriminated against. The strategies of Guanxi that protect against predatory government action are described in detail.

However, as powerful economic actors, private entrepreneurs are also wooed by the central government. To this end entrepreneurs have been invited to join the CCP, among other measures a move aimed at preventing the formation of a power outside state control.

Chinese private entrepreneurs consider being part of the political system, and thus enhancing their social status, as contributory to the success, growth and reputation of their companies, facilitating access to bank loans and obtaining vital information. However, their interest ends when the benefits for business are satisfied.

In turn, the pragmatic attitude toward the transformation process is also apparent in the development of laws concerning the private sector. Issues such as private property rights were designed following local experiments, for example in Wenzhou, and the state turning a blind eye towards virtually illegal activities and gradually adjusting the existing laws (and, if necessary, also ideologies). It is therefore presented as an example of institutional change by layering and converting. Other laws were adopted from the USA or Europe, such as of laws regulating insider trading, or labor law. Although the central government enacted comprehensive, complete laws, the legal system is still far from complete, not only because of the lack of an independent jurisdiction. On the one hand, this is caused by the distrust of Chinese people against top-down formal institutions and their preference for informal solutions such as Guanxi; on the other hand, this is caused by the lack of the cultural and social adjustment of these laws to a Chinese socio-economic environment that also needs to incorporate unwritten rules. Networks are capable of supporting and sanctioning their members by the threat of shame and loss of reputation. Guanxi is thus considered more effective than formal law. Additionally, 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. As contracts are conceived as a means of dealing 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 an exact opposite of a formal legal system since it is rather part of the legal system, completing and complementing Chinese legal culture. China manages to combine the new laws with old traditions and in accepting local differentiations; it constructed a legal system that in no small part relies on Guanxi to be effective.

The final chapter presents conclusions, arguing that it is possible to achieve economic success with a variety of Capitalism based on a different set of institutions. There is not one ‗best practice‘ for a country to follow regarding the dynamics and regulations of a capitalistic economy, but this depends on the specifics of the institutional background. There are diverse ways to develop efficiently. Guanxi is an essential part of the Chinese type of Capitalism. Guanxi Capitalism revived authoritarian traditional institutions and made China a competitive force in the global market. Instead of regarding small family businesses as an outdated mode of production, Chinese economic success relies on the flexibility and personal networks of privately-owned firms. Thus it is argued that the rationality of Guanxi Capitalism is based on the unique framework of China‘s culture and history. It has been shown that personal relations were always of importance throughout the Chinese history and are deeply ingrained in Chinese culture. So even though from a Western thinking this might be deemed inefficient, from a Chinese point of view Guanxi not only includes economic considerations, but also factors like reputation and long-term benefits for the family.

2. Institutions and Institutionalism

“Another hidden source of error in historical writing is the ignoring of the transformations that occur in the condition of epochs and peoples with the passage of time and the changes of periods. Such changes occur in such an unnoticeable way and take so long to make themselves felt, that they are very difficult to discern and are observed only by a small number of men“.20

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