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

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Although the Chinese transformation towards Capitalism has gone a long way, it remains incomplete, and the Chinese type of Capitalism still undergoes constant change. It is a very complex, multifaceted process that works differently in China than in other capitalist countries. Its institutional framework is influenced not only by strong local cultural traditions, but also by the size and the correlating regional disparities of the country. However, Guanxi plays an important role in regulating the relations between the economy and the political system. It results in a certain pattern of ‗Chinese‘ entrepreneurial practices that include the important role of the family firms, especially wives in internal management functions, and support by business networks, facilitating informal financing.1623 Entrepreneurs are driven by the desire to not only provide for their family, but to enhance its reputation by money accumulation. This enabled SMEs to become very specialized producers that at the same time have access to economies of scale over flexible Guanxi networks, principally not much different than in the industrial districts of the Third Italy and in some other locations in Europe, as already mentioned above.

Although the private sector relies on one part of the ‗standard‘ instruments of a capitalist economy, which are first and foremost contracts and certain corporate forms, they are more dependent on Guanxi strategies to overcome this institutional uncertainty and volatile government policies for the Chinese private sector. Rather than depending on the supervisory role of the state and on large-scale bureaucratic enterprises, private entrepreneurs rely on the multiplication of small businesses that are arranged in clusters and thus achieve maximal flexibility. Within these clusters, not the state but Guanxi is essential for economic success.1624 Guanxi Capitalism relies on dynamics that are at the same time complementary and contradictory and which have their root in Chinese culture and history.1625 Consequently, Guanxi supports a system of network capitalism, that rather than being dependent on trust in formal institutions such as the law; it hinges more on trust that is based on interpersonal liabilities. Some authors claim that personal networks by definition have to be quite small-scale, since individual capacities to build up and maintain social connections are limited. 1626 However, as connections can have varying degrees of intensity Unger, 2002, p. 138-140.

McNally, 2007a, p. 190.

McNally, 2010, p. 3.

Redding and Witt, 2007, p. 211f.

and importance and also are spatially and chronologically distributed, Guanxi networks in general are of larger scale than other types of networks. This work therefore argues for the great significance that Guanxi has for Chinese Capitalism. Guanxi capitalism represents ―a distinct form of business practice derived primarily from the Chinese kinship system‖.1627 This work has also analyzed the link between a capitalist economy and a democratic political system, since Capitalism relies to a large part on the relationship between the economy and the state.1628 In theory entrepreneurs will with increasing wealth seek political influence in practice they interact with the local government, but are rather passive on a central level. They are not interested in system change, at least as long business is good and the economy grows. To that effect they seek to build up Guanxi with local government officials to achieve some embeddedness with the party-state. The Western-style legal framework, which over the course of reforms has been introduced by the central government, is neglected in favor of more powerful Guanxi relations. In turn ambiguous Guanxi relations enabled the central government to support private economic activity without having to surrender its ideology entirely. On the contrary, it allowed the government to maintain political power through economic success. Guanxi Capitalism achieves distinctive advantages for Chinese privately-owned firms by translating wealth into power, and thus manages to combine traditional with capitalist institutions.1629 These connections between local economic and political actors are sometimes also called ‗clan capitalism‘ and are a distinct feature of Guanxi Capitalism.1630 It has been shown that there is no Chinese bourgeois class in the making, and entrepreneurs do not conceive themselves as having something in common, except maybe concrete business plans. The continuous importance of the Chinese entrepreneur contradicts Weber‘s ideal-type notion of Capitalism and the role of entrepreneurs therein. In contrast to Weber‘s and Sombart‘s expectations concerning growing rationalization and bureaucratization, instead of entrepreneurs losing significance in the Chinese economic system they are still essential for the economic success of an enterprise. Entrepreneurs possess the necessary flexibility, the right instinct for profitable investments and the ability to mobilize connections and create alliances - valuable assets for the global production environment.

Weber‘s ideal-type framework has thus been contrasted with the reality of China, particularly the role of the private sector, entrepreneurs and their networks with a particular emGold; Guthrie and Wank, 2008a, p. 13.

Heilbroner, 1993, p. 68.

McNally, 2010, p. 3f., 21.

Redding and Witt, 2007, p. 211f., McNally, 2010, p. 4 phasis of how their co-operation (and interaction with the state) works. Weberian idealtypes of relationship are either purposive- or value-rational, hence either highly purposive and 'commodified' or more sentimental in nature. The 'bureaucratism' of modern China that many people and especially entrepreneurs conceive to be obstacles for business, falls outside this dichotomous categorization. Guanxi, however, has both value-rational and purpose-rational elements and is able to use connections ―cultivated for their intrinsic value as an instrument to achieve other ends, or even cultivates 'connections' with material gains in mind‖.1631 Different institutional frameworks in Europe did not lead to significantly different economic developments. So it might be fair to say that Capitalism itself is grounded upon some fundamental mechanism or spirit. The difference in style can be traced back to different policy decisions or to cultural aspects, forming specific types of Capitalism.1632 This would also accommodate the fact that Capitalism is obviously able to function under diverse political systems.

It is a standard argument within mainstream economics that growing global involvement and the pressure of liberalization, particularly in finance, will even out the differences between countries and of different forms of Capitalism, and will lead to the convergence of institutions. In the same line of thought researchers like Markus Taube argue that although for example China is increasingly important for the shape of the global economy, it still needs to follow the basic rules of a market economy and therefore a ‗sinicization‘ of the economy will not occur.1633 However, diverging structural conditions result in a variety of Capitalism that is based on a different set of institutions. As has been recognized by international development agencies, there is not one ‗best practice‘ for a country to follow the dynamics and regulations of a market economy, but depending on the specifics of its institutional background, there are diverse ways to efficiently implement Capitalism.1634 It can also be assumed that Capitalism is a very robust mechanism. Despite the gloomy predictions of many economists that Capitalism is doomed and will be replaced by another system such as Imperialism (Lenin) or Socialism (Marx, Schumpeter) or else is anticipated to reach the end of the accumulation process (Smith, Keynes), today it is more influential than ever.1635 However, as the example of Wenzhou and its survival of the financial crisis of 2008 have shown, also Guanxi Capitalism has a stable character. It was demonstrated Dittmer, 1995, p. 30.

Amable, 2003, p. 3.

Taube, 2007b Amable, 2003, p. 9, McNally, 2006, p. 17.

Heilbroner, 1987, p. 353.

that entrepreneurs employ their contacts to local officials to facilitate their embeddedness in dense networks and thereby maintain their business or starting afresh if failing in one specific sector. The connections to politicians proved to be extremely helpful. People utilized their ties to local cadres, which in turn due to their local embeddedness were inclined to support private enterprises. The extreme flexibility, the forgiveness and experiences of their networks, investing in a whole portfolio of products and the usage of underground banking facilities - these together help entrepreneurs survive. This is not equal to the survival of a specific enterprise whose dissolution would be tolerable, because the failure of one business is not considered to be a personal failure. It is rather the existence of networks that gives the necessary stability and security, especially in times of economic crises. Within China different strategies are at work to cope with the impact of capitalist transformation, especially in regions with a large collective sector. In the latter case, mainstream macro policies, such as the stimulus package, were also of significance for the recovery of the Chinese economy. However, this dissertation stresses the importance of the private sector and hence the influence of informal connections, and also that Guanxi is an indispensable and vital factors for the successful restoration of the Chinese economy. Although Wenzhou serves as an illuminating example and similar ones can be found throughout China, it is very important to keep in mind that ―China is a continental system which contains a large number of different social and cultural practices. Its 34 provincial-level jurisdictions are most usually country-sized by the standards of the rest of the world‖.1636 Still, industrial clusters in rural China developed spontaneously in various places depending on local traditional culture, local resources and also ―local capable persons‖.1637 Chinese Capitalism based on networks and small private businesses thus proves to be an alternative embodiment of Capitalism that is also sustainable. Personal relations are not separated into a private and a business sphere or exchanged for other, in Western thinking more rational, means of doing business, since they include factors like reputation and longterm benefits for their family. Guanxi is a permanent part of Chinese society and wields a strong influence on the economic system, while maintaining its core identity. Guanxi proved to be a powerful tool in its ability to adapt. Despite all the assumptions of mainstream economics, the Chinese economy is extremely successful and its economic system works quite efficiently, even though Western-style institutions do not (yet) exist or are not put to use. It does not merely react to changes within society, with traditional forms forced Goodman, 2007, p. 176f.

Li and Li, 2007, p. 49.

to subordinate to market forces. It complements Western institutions to meet economic demands, and thus forms a specific type of Capitalism based on Guanxi. Guanxi is not an irrational mode of economic activity that is inferior to rational-legal institutions. Chinese Capitalism uses unique Chinese elements combined with Western institutions, its history and culture forming a distinctive type of doing business, and also shapes a specific capitalistic society. Both modes will coexist in a newly defined institutional and cultural style of modernity.

In contrast, personal relations expose comparative efficiency as they are chosen as the most capable instrument for the private sector in China, with the result that ―the growth of export production has taken place outside of the state sector of industry, within foreign funded, rural and township, and privately owned enterprises‖.1638 The Chinese form of rational Capitalism does not destroy long-existing culturally and historically embedded institutions, yet it still disadvantages individuals, especially women and bases its success in part on social inequalities. Hence, there are mainly two institutional changes to the Chinese economy: the introduction of a legal-rational regime by the state and the "increasing class and gendered nature or Guanxi".1639 Part of Guanxi is that it "traps women and the poor while benefiting fraternal business associations".1640 It is however important to emphasize that there are also sectors and enterprises that do business the Western way, but still with a Chinese turn. Western-style institutions are adapted and although contracts are used, especially in sectors with a lot of FDI and in former SOEs, personal relations are of greater importance in China than in the West since the individual is seen as part of a bigger whole (family or networks). Those features are immanent to Chinese culture and although changed and adapted, they will not wither away. By contrast, contracts have a very long tradition in the West in the regulation of relationships between individuals, whereas in China obligations to other people are derived from morality and propriety. A juridification of personal relations in this tradition is difficult to envision. In a particularistic culture such as the Chinese one, justice and rights are not understood to be an individual entitlement.

On the other hand, because Chinese family firms operate most efficiently in laborintensive low- and medium-technology industries producing for export, their success might merely be temporary. If unable to provide the necessary capital and sufficiently highly skilled workers needed to develop capital-intensive high-technology industries, Guanxi and Wilson, 2007, p. 249.

Yang, 2002, p. 466.

Ong, 1999, p. 116f.

family ties might become an obstacle again. Indeed, small-scale enterprises will certainly not play an important role in every sector of the economy. Even within the private sector small privately owned firms concentrate on branches where they can exercise their comparative advantage of fast reactions to changes in demand and thus complement the more Western-style institutions of other sectors.

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