(TVEs)and FIEs-in the two provinces was virtually identical.In Jiangsu,domestic private firms accounted for 0.53 percent of the total value of industrial output,compared with Zhejiang's 0.57 percent.Historically,the two provinces had produced some of China's best entrepreneurs. In the 1930s and 1940s,many of the top industrialists in Shanghai came from these two provinces. In the 1980s and 1990s,the domestic private sector grew much faster in Zhejiang.In 1995,domestic private firms generated 38.7 percent of Zhejiang's industrial output value, compared with 10.5 percent in Jiangsu.12 After 1995,the two provinces began to converge somewhat.By 2001,domestic private firms generated 69.3 percent of the gross industrial output value in Zhejiang,compared with 44.7 percent in Jiangsu.(In Jiangsu,the private sector has developed faster since 1995(the period beyond our dataset)because of the large-scale privatization of TVEs.) Jiangsu and Zhejiang represent two contrasting development models in China,a phenomenon first noted by Professor Fei Xiaotong,China's most prominent sociologist.In Jiangsu,the"Sunan model"prevailed whereby the government played a significant role of sponsorship and operating in entrepreneurial management and supported collectively-owned TVEs rather than,or even to the detriment of,genuinely private firms.The Sunan model was 12The private sector is defined here as the residual of the industrial output value of all firms minus that of the SOEs, collective firms,and FlEs.By this definition,some of the firms tangentially owned privately are also counted as private firms,e.g.shareholding firms.A stricter definition of private firms,i.e.firms that are solidly controlled by private entrepreneurs,would yield a higher differential between Zhejiang and Jiangsu.The output value of privately-operated(siving)and individually-operated (geti)firms accounted for 34.4 percent of the total industrial output value in Zhejiang but only 6.2 percent in Jiangsu 11
11 (TVEs) and FIEs—in the two provinces was virtually identical. In Jiangsu, domestic private firms accounted for 0.53 percent of the total value of industrial output, compared with Zhejiang’s 0.57 percent. Historically, the two provinces had produced some of China’s best entrepreneurs. In the 1930s and 1940s, many of the top industrialists in Shanghai came from these two provinces. In the 1980s and 1990s, the domestic private sector grew much faster in Zhejiang. In 1995, domestic private firms generated 38.7 percent of Zhejiang’s industrial output value, compared with 10.5 percent in Jiangsu.12 After 1995, the two provinces began to converge somewhat. By 2001, domestic private firms generated 69.3 percent of the gross industrial output value in Zhejiang, compared with 44.7 percent in Jiangsu. (In Jiangsu, the private sector has developed faster since 1995 (the period beyond our dataset) because of the large-scale privatization of TVEs.) Jiangsu and Zhejiang represent two contrasting development models in China, a phenomenon first noted by Professor Fei Xiaotong, China’s most prominent sociologist. In Jiangsu, the “Sunan model” prevailed whereby the government played a significant role of sponsorship and operating in entrepreneurial management and supported collectively-owned TVEs rather than, or even to the detriment of, genuinely private firms. The Sunan model was 12 The private sector is defined here as the residual of the industrial output value of all firms minus that of the SOEs, collective firms, and FIEs. By this definition, some of the firms tangentially owned privately are also counted as private firms, e.g. shareholding firms. A stricter definition of private firms, i.e. firms that are solidly controlled by private entrepreneurs, would yield a higher differential between Zhejiang and Jiangsu. The output value of privately-operated (siying) and individually-operated (geti) firms accounted for 34.4 percent of the total industrial output value in Zhejiang but only 6.2 percent in Jiangsu
widespread in much of southern Jiangsu and three cities,namely Wuxi,Suzhou,and Changzhou, are considered to be the progenitors of this model.The other is the "Wenzhou model"which is characterized by a heavy reliance on private initiatives,a non-interventionist style by the government in the management of firms,and a supportive credit policy stance towards private firms.Wenzhou,a city in southern Zhejiang province,is the best known example of this model (hence its name).13 The Sunan and Wenzhou models differ in several dimensions.First,government control of firms was far more restrictive in Jiangsu.In 1985,the Wuxi government adopted the following measures:(1)penalties for skilled workers who left collective TVEs for other jobs and for barring their family members from jobs in TVEs;(2)deliberately checking entrepreneurial registration documents and procedures;and(3)limiting managerial staff's pay to a maximum of three times of the average payroll (Luo 1990:150).Wenzhou favoured a far more laissez-faire policy stance and did not exercise this kind of micro-management. Second,Jiangsu mildly suppressed the development of private firms.Tight labour regulations led to a reduction of availability of quality human capital which was drawn to the private sector.Strict procedures of registration prevented private entrepreneurs from registering their firms as collective firms,which is a common mechanism to evade restrictions on private firms.Jiangsu wanted to conserve raw materials and energy and to protect TVEs as much as possible from competition for human and financial resources.Private enterprises"are tolerated, 1This paper takes the difference between these two models as given rather than exploring their origins.Jin and Qian(1998)have found evidence that stronger ties with the central government tend to be associated with higher collective to private output ratios.This explanation fits the Jiangsu/Zhejiang story.Historically,the central government retained stronger ties with Jiangsu than it did with Zhejiang. 12
12 widespread in much of southern Jiangsu and three cities, namely Wuxi, Suzhou, and Changzhou, are considered to be the progenitors of this model. The other is the “Wenzhou model” which is characterized by a heavy reliance on private initiatives, a non-interventionist style by the government in the management of firms, and a supportive credit policy stance towards private firms. Wenzhou, a city in southern Zhejiang province, is the best known example of this model (hence its name).13 The Sunan and Wenzhou models differ in several dimensions. First, government control of firms was far more restrictive in Jiangsu. In 1985, the Wuxi government adopted the following measures: (1) penalties for skilled workers who left collective TVEs for other jobs and for barring their family members from jobs in TVEs; (2) deliberately checking entrepreneurial registration documents and procedures; and (3) limiting managerial staff’s pay to a maximum of three times of the average payroll (Luo 1990: 150). Wenzhou favoured a far more laissez-faire policy stance and did not exercise this kind of micro-management. Second, Jiangsu mildly suppressed the development of private firms. Tight labour regulations led to a reduction of availability of quality human capital which was drawn to the private sector. Strict procedures of registration prevented private entrepreneurs from registering their firms as collective firms, which is a common mechanism to evade restrictions on private firms. Jiangsu wanted to conserve raw materials and energy and to protect TVEs as much as possible from competition for human and financial resources. Private enterprises “are tolerated, 13 This paper takes the difference between these two models as given rather than exploring their origins. Jin and Qian (1998) have found evidence that stronger ties with the central government tend to be associated with higher collective to private output ratios. This explanation fits the Jiangsu/Zhejiang story. Historically, the central government retained stronger ties with Jiangsu than it did with Zhejiang
but their development has been constrained by limits on loans,restricted access to inputs,and environmental and other regulations"(Svejnar and Woo 1990:80). In contrast,the Wenzhou model was more laissez-faire.The centrepiece of the Wenzhou model was an active informal credit market servicing private enterprises,much of which was not sanctioned by the central government.Despite the dynamism of the private sector,"the state banking system was neither willing nor jurisdictionally able to meet the credit needs of the new generation of individual entrepreneurs"(Tsai 2002:122-3).Informal financing mechanisms include rotating credit associations(hui),money houses,and credit cooperatives.The Wenzhou government began to recognize the importance of informal credit as early as in the mid-1980s and tried to regulate,rather than banning,informal finance.These informal financial facilities played a critical role in providing seed capital to many of the private firms in Wenzhou,which laid down the foundation for their fast growth in the 1990s(Tsai 2002:157-8). 3.Foreign ownership and domestic private sector development:Four hypotheses The well documented legal and financial treatments on domestic private firms can affect the ownership structures of foreign affiliates in two ways.First,they operate on the incentive side:private entrepreneurs might seek foreign firms as business partners to access the relatively superior legal protection and regulatory treatment accorded to foreign firms.4These incentives 14This incentive is not limited to establishing FIEs.The lack of legal protection created a nation-wide phenomenon of so-called"red-hat"firms-private firms registered as collective or even state-owned firms in order to access more political protection accorded to these firms.But this was not a costless arrangement.Private entrepreneurs had to cede substantial equity shares to the government,sometimes leading to acrimonious conflicts over the true ownership of these firms. 13
13 but their development has been constrained by limits on loans, restricted access to inputs, and environmental and other regulations” (Svejnar and Woo 1990: 80). In contrast, the Wenzhou model was more laissez-faire. The centrepiece of the Wenzhou model was an active informal credit market servicing private enterprises, much of which was not sanctioned by the central government. Despite the dynamism of the private sector, “the state banking system was neither willing nor jurisdictionally able to meet the credit needs of the new generation of individual entrepreneurs” (Tsai 2002: 122-3). Informal financing mechanisms include rotating credit associations (hui), money houses, and credit cooperatives. The Wenzhou government began to recognize the importance of informal credit as early as in the mid-1980s and tried to regulate, rather than banning, informal finance. These informal financial facilities played a critical role in providing seed capital to many of the private firms in Wenzhou, which laid down the foundation for their fast growth in the 1990s (Tsai 2002: 157-8). 3. Foreign ownership and domestic private sector development: Four hypotheses The well documented legal and financial treatments on domestic private firms can affect the ownership structures of foreign affiliates in two ways. First, they operate on the incentive side: private entrepreneurs might seek foreign firms as business partners to access the relatively superior legal protection and regulatory treatment accorded to foreign firms.14 These incentives 14 This incentive is not limited to establishing FIEs. The lack of legal protection created a nation-wide phenomenon of so-called “red-hat” firms—private firms registered as collective or even state-owned firms in order to access more political protection accorded to these firms. But this was not a costless arrangement. Private entrepreneurs had to cede substantial equity shares to the government, sometimes leading to acrimonious conflicts over the true ownership of these firms
are expected to be positively correlated with the extent of constraints on private firms.Second, they operate on the capabilities of private firms.Whatever incentive to form joint ventures with foreign firms,private firms might be constrained in making resource contributions to FDI projects.Credit constraints can lead to more concessions of equity shares(and thus bigger share of foreign ownership)as a way to alleviate their financial constraints or as a result of weaker bargaining power. In this paper,four hypotheses(HI through H4)are proposed.H1 and H2 are used to test whether the general bias in the treatment of private firms vis-a-vis TVEs affects the structure of foreign ownership.We expect to observe stronger incentive and capability effects among private firms than among the more privileged TVEs.H3 and H4 are designed to test whether there is a difference between Jiangsu and Zhejiang in the strength of the incentive and capability effect which are supposed to be weaker in Zhejiang than in Jiangsu. HI states simply that the joint ventures partially owned and run by private firms have bigger share of foreign ownership than those partially owned and operated by TVEs.H2 is an extension of HI by operationalizing the credit constraint effect.If credit constraints compel private entrepreneurs to seek foreign firms as sources of finance(i.e.the incentive effect)or weaken their bargaining power when negotiating with foreign firms(i.e.the capability effect),it would be true,ceteris paribus,that those private firms with a greater demand for capital tend to form alliances with foreign firms at the expense of equity shares. H3 and H4 tell the tale of the two provinces.H3 states that the effects of HI and H2 are either absent or weaker in Zhejiang than in Jiangsu because of their differences in the institutional environment for private firms.All else being equal,the share of foreign ownership in those joint ventures with private firms as partners in Zhejiang would be smaller compared 14
14 are expected to be positively correlated with the extent of constraints on private firms. Second, they operate on the capabilities of private firms. Whatever incentive to form joint ventures with foreign firms, private firms might be constrained in making resource contributions to FDI projects. Credit constraints can lead to more concessions of equity shares (and thus bigger share of foreign ownership) as a way to alleviate their financial constraints or as a result of weaker bargaining power. In this paper, four hypotheses (H1 through H4) are proposed. H1 and H2 are used to test whether the general bias in the treatment of private firms vis-à-vis TVEs affects the structure of foreign ownership. We expect to observe stronger incentive and capability effects among private firms than among the more privileged TVEs. H3 and H4 are designed to test whether there is a difference between Jiangsu and Zhejiang in the strength of the incentive and capability effect which are supposed to be weaker in Zhejiang than in Jiangsu. H1 states simply that the joint ventures partially owned and run by private firms have bigger share of foreign ownership than those partially owned and operated by TVEs. H2 is an extension of H1 by operationalizing the credit constraint effect. If credit constraints compel private entrepreneurs to seek foreign firms as sources of finance (i.e. the incentive effect) or weaken their bargaining power when negotiating with foreign firms (i.e. the capability effect), it would be true, ceteris paribus, that those private firms with a greater demand for capital tend to form alliances with foreign firms at the expense of equity shares. H3 and H4 tell the tale of the two provinces. H3 states that the effects of H1 and H2 are either absent or weaker in Zhejiang than in Jiangsu because of their differences in the institutional environment for private firms. All else being equal, the share of foreign ownership in those joint ventures with private firms as partners in Zhejiang would be smaller compared