Why has China succeeded so spectacularly in the span of just three decades since the launch of Deng Xiaoping’s (鄧小平) economic reforms? The reasons that are usually cited are China’s compelling demographic, geographic and broad cultural factors. What is less understood is that China’s success has also depended on its entrepreneurs — and their deeply rooted patterns of activity.
There are two key aspects of Chinese entrepreneurship. Traditionally, successful Chinese businessmen emphasized trust and reliability in fulfilling commitments (xinyong), the gradual development of sentiments (ganqing) with customers and suppliers and the ability to build on networks of relationships (guanxi) that are often based on common origins or kinship. They also stressed the need to be bold, frugal and highly driven to succeed, as well as the ability to adapt to changing market conditions.
Some of these characteristics are more culturally specific than Joseph Schumpeter’s description of entrepreneurship as a process of “creative destruction” might imply. However, boldness and adaptability are in line with Schumpeter’s emphasis on forming new combinations and doing things in new ways. For example, traditional businesses, from fabric wholesaling to banking and salt mining, evolved elaborate profit-sharing schemes among owners, partners and employees as their businesses expanded over time or into outlets across the country.
When new forms of business such as textile manufacturing and department stores came to China from the West in the late 19th century, Chinese businessmen quickly adopted them and adapted them to local conditions. More recently, local managers who took on McDonald’s franchises transformed several aspects of the business to fit Chinese tastes and habits.
A second aspect of Chinese entrepreneurship is the kind of institutions and the management style that it embodies. I have studied many Chinese firms that flourished from the early 19th to the mid-20th century.
They all seem to have the following core features: One, they are small to medium size, with a relatively simple organizational structure; two, they have considerable overlap of ownership by individuals linked by family and kinship ties, or by partnerships among kin and family friends; three, they have centralized and disciplined decisionmaking; four, they empoly personal and family networking, which encourages opportunistic diversification, transcending regional and national boundaries to expand; five, they encourage cooperation with affiliate firms to reduce transaction costs in sourcing, capital acquisition and contracts; and six, they enjoy a high degree of strategic adaptability.
These structural features fit well with Chinese merchants, who did not want to see their companies grow so large that they attracted official attention. Successful businessmen could build up extensive holdings by owning or sharing several businesses. Since China never established male primogeniture, this meant that when a businessman died, each son could have his own business to start with.
Likewise, the functional features of Chinese entrepreneurship were heavily dependent on cultural values, particularly given a financial and legal system that was often unreliable. Thus, control and management were carried out mostly by family members and kin, with support through networking with those in an established relationship of trust.
Of course, one special group today comprises the children of officials, from powerful national party leaders to local satraps who use their family connections to their advantage.
However, this group’s members are usually not among the most successful entrepreneurs; none, for example, has been included in the annual Forbes list of the 10 richest people in China. The great majority of the roughly 24 million private individuals estimated to have gone into business between 1980 and 2005 were ordinary folk with very small capital — usually obtained by pooling the savings of family members and perhaps friends.
Their businesses include small stores or a stand on a busy sidewalk selling specific goods or providing some service. Only about 3 million of these businesses gained sufficient size and organization to form limited-liability corporations that issued shares. And all firms with annual revenues of US$1 million or more seem to have required some form of support from party officials, who serve as gatekeepers for all forms of licensing, sourcing and financing.
In recent years, some of these controls have been relaxed. Attending to the gate-keeping role of party officials has become less of a necessity, but networking and party connections continue to matter.
Moreover, aside from a relatively small number of joint ventures with foreign partners and state enterprises that are in fact hybrid public-private firms, most businesses today, including listed companies, remain family owned or dominated. Some may have grown large in size and scale, but only to the point where they could compete efficiently in international markets. Even the small number of national companies that have grown large are relatively small when compared with the Japanese kereitsu or the Korean chaebol.
Chinese entrepreneurs nowadays are particularly well adapted to take advantage of new market trends brought about by rapidly changing fashion and similarly rapid technological progress. Their relatively small companies and their efficient decisionmaking processes allow them to remain nimble and to react quickly.
In addition, their often highly diversified structure and their loose network of affiliates and supply chains allow Chinese entrepreneurs to reconfigure business strategy and production facilities quickly, thereby bringing new products to market with shorter lead time.
Despite continuing political restrictions imposed by an authoritarian regime, Deng succeeded beyond his wildest imagination.
Wellington K.K. Chan is a professor of humanities and history at Occidental College.
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