Entrepreneurship and China:History of Policy Reforms and Institutional Development Charles E.Eesley 7-10-2009 "The storm center of the world has shifted...to China,whoever understands that mighty Empire...has a key to world politics for the next five hundred years." -U.S.Secretary of State John Hay,1899 China is like a sleeping giant.And when she awakes,she shall astonish the world. --Napoleon Bonaparte,1803 One of the greatest untold secrets of history is that the 'modern world'in which we live is a unique synthesis of Chinese and Western ingredients.Possibly more than half of the basic inventions and discoveries upon which the'modern world'rests come from China. And yet few people know this.Why? -Robert Temple-The Genius of China:3.000 Years of Science.Discover Invention,1986 en we couldn't even read,the Chinese knew all the --Voltaire:The Philosophical Dictionary,1764 Introduction Why is it that we see one country create numerous R&D intensive companies and start-ups while another remains full of farmers,and a third is full of small proprietors cottage industries,and retail firms?Why do countries follow such divergent development paths and how do individuals'occupational choices interact with government policies and institutional reform?These are large questions which will likely occupy sociologists,economists,political scientists,and politicians for decades to come This paper has a more modest goal of tracing the evolution of China's transition from planned to market economy by examining the institutional and policy reforms believed to have had an impact on private business over the years.Rather than the traditional route of first discussing theories and then the empirical results attempting to adjudicate among
Entrepreneurship and China: History of Policy Reforms and Institutional Development Charles E. Eesley 7-10-2009 "The storm center of the world has shifted . . . to China, whoever understands that mighty Empire . . . has a key to world politics for the next five hundred years." --U.S. Secretary of State John Hay, 1899 China is like a sleeping giant. And when she awakes, she shall astonish the world. --Napoleon Bonaparte, 1803 One of the greatest untold secrets of history is that the 'modern world' in which we live is a unique synthesis of Chinese and Western ingredients. Possibly more than half of the basic inventions and discoveries upon which the 'modern world' rests come from China. And yet few people know this. Why? --Robert Temple - The Genius of China: 3,000 Years of Science, Discovery and Invention, 1986 Four thousand years ago, when we couldn't even read, the Chinese knew all the absolutely useful things we boast about today. --Voltaire: The Philosophical Dictionary, 1764 Introduction Why is it that we see one country create numerous R&D intensive companies and start-ups while another remains full of farmers, and a third is full of small proprietors, cottage industries, and retail firms? Why do countries follow such divergent development paths and how do individuals’ occupational choices interact with government policies and institutional reform? These are large questions which will likely occupy sociologists, economists, political scientists, and politicians for decades to come. This paper has a more modest goal of tracing the evolution of China’s transition from planned to market economy by examining the institutional and policy reforms believed to have had an impact on private business over the years. Rather than the traditional route of first discussing theories and then the empirical results attempting to adjudicate among
them,I first lay out the history and more recent changes in China related to innovation and entrepreneurship in particular.Then I focus more on theoretical frameworks which can help guide our thinking about explaining the forces in the environment impacting Chinese private entrepreneurship over time.At this point there is relatively little empirical work in China,but where I can locate empirical tests of the theories,I incorporate them into this section Historical Policy Changes and the Impact on Entrepreneurship Entrepreneurship was all but eliminated after Mao Zedong and the Chinese Communist Party won the Chinese Civil War and founded the People's Republic of China in 1949(Whyte and Parish,1984).New opportunities have opened up as China has undertaken the(quickly progressing,but as yet incomplete)shift from redistributive bureaucracy to open markets(Nee,1996).Entrepreneurs have played a strong role, beyond what reformers may have initially expected,in building the market economy from breaking state monopolies to supplying new jobs(MeMillan&Woodruff,2002) From 1989 to 2004 the compound annual growth in the number of newly registered private sector businesses in China has been 29%vs.1%in the United States(State Statistics Bureau).From 1978 to 2004 the number of people employed in private business went up by 300 times in China. Insert Figure 1 here Clearly,policies and institutions have been changing rapidly,but relatively little analysis has been done on the impact on entrepreneurship and firm strategy in China to
them, I first lay out the history and more recent changes in China related to innovation and entrepreneurship in particular. Then I focus more on theoretical frameworks which can help guide our thinking about explaining the forces in the environment impacting Chinese private entrepreneurship over time. At this point there is relatively little empirical work in China, but where I can locate empirical tests of the theories, I incorporate them into this section. Historical Policy Changes and the Impact on Entrepreneurship Entrepreneurship was all but eliminated after Mao Zedong and the Chinese Communist Party won the Chinese Civil War and founded the People’s Republic of China in 1949 (Whyte and Parish, 1984). New opportunities have opened up as China has undertaken the (quickly progressing, but as yet incomplete) shift from redistributive bureaucracy to open markets (Nee, 1996). Entrepreneurs have played a strong role, beyond what reformers may have initially expected, in building the market economy, from breaking state monopolies to supplying new jobs (McMillan & Woodruff, 2002). From 1989 to 2004 the compound annual growth in the number of newly registered private sector businesses in China has been 29% vs. 1% in the United States (State Statistics Bureau). From 1978 to 2004 the number of people employed in private business went up by 300 times in China. --------------------------- Insert Figure 1 here --------------------------- Clearly, policies and institutions have been changing rapidly, but relatively little analysis has been done on the impact on entrepreneurship and firm strategy in China to
determine whether China is likely to upgrade to more R&D intensive entrepreneurial activity (Cull Xu,2006;Nee,1998;1992;1996;Peng&Heath,1996;Steinfeld,2007). Two general features of China's reform have been gradual,local and sectoral experimentation along with partial reforms or what has been referred to as a dual-track approach(Gregory,Tenev,&Wagle,2000).The Chinese economy was organized regionally (as opposed to centrally like the Soviet Union)since about 1958.Due to the regional nature of China's political system and reforms,institutional change and economic development has not been uniform across China(Nee,1996).Since 1980 promotions and tax revenue were tied to local economic development("eating from separate kitchens",or fenochf),government officials at the local level had strong incentives to bend the rules and become creative with local policy towards private firms Thus,a reform may be tried out in one province and years later be copied in other provinces or adopted centrally.Certain geographic areas,such as Zhejiang and Jiangsu provinces have a long history of private enterprise and as discussed below,certain areas were targeted for early experiments in market reforms.The details varied by province. but one example of a revenue sharing agreement with the central government that provided incentives for experimentation in local policy was that after Guangdong province paid a fixed amount(perhaps 1 billion yuan)to the central government,it could keep the rest,making local governments residual claimants on any local economic development.Contracts of this form became widespread after 1988 and were expanded to sub-provincial governments as well (Qian,1999).While this set-up led to incentives for local government officials to experiment and to bend the rules,it also fragmented the Chinese market for firms by largely preventing trade and economic ties between regions
determine whether China is likely to upgrade to more R&D intensive entrepreneurial activity (Cull & Xu, 2006; Nee, 1998; 1992; 1996; Peng & Heath, 1996; Steinfeld, 2007). Two general features of China’s reform have been gradual, local and sectoral experimentation along with partial reforms or what has been referred to as a dual-track approach (Gregory, Tenev, & Wagle, 2000). The Chinese economy was organized regionally (as opposed to centrally like the Soviet Union) since about 1958. Due to the regional nature of China’s political system and reforms, institutional change and economic development has not been uniform across China (Nee, 1996). Since 1980, promotions and tax revenue were tied to local economic development (“eating from separate kitchens”, or fenzao chifan), government officials at the local level had strong incentives to bend the rules and become creative with local policy towards private firms. Thus, a reform may be tried out in one province and years later be copied in other provinces or adopted centrally. Certain geographic areas, such as Zhejiang and Jiangsu provinces have a long history of private enterprise and as discussed below, certain areas were targeted for early experiments in market reforms. The details varied by province, but one example of a revenue sharing agreement with the central government that provided incentives for experimentation in local policy was that after Guangdong province paid a fixed amount (perhaps 1 billion yuan) to the central government, it could keep the rest, making local governments residual claimants on any local economic development. Contracts of this form became widespread after 1988 and were expanded to sub-provincial governments as well (Qian, 1999). While this set-up led to incentives for local government officials to experiment and to bend the rules, it also fragmented the Chinese market for firms by largely preventing trade and economic ties between regions
Local governments had apparent incentives to keep all business and suppliers local rather than cooperating with other regions. The dual-track approach began inn the rural reas with wo-tier priinIt has since been extended to other sectors through various forms as a reflection of the early belief that private business served as a complement to state-ownership as a way to deal with unemployment.The dual-track policies also satisfied the central government's concern that development proceed in a way so that protests would not endanger its political survival.The view of politicians was to develop in a way that would"leave no one worse off than before"(Shirk 1993,pp.130,137,334;Laffont and Qian 1999;Lau, Qian,and Roland 1997).However,this approach may have also stunted the growth and development of the private sector by continuing to protect the interests of state-owned enterprises.Thus,the transition from a planned economy to a more open market economy has been gradual with certain punctuated periods of significant progress Deng Xiaoping issued a reform report in 1975.In 1978,Deng launched the Four Modernizations'reform program to deal with the economic crisis after the Cultural Revolution by stimulating economic growth.Market oriented reforms in China began in earnest in December of 1978 with the Third Plenum of the Chinese Communist Party's 11Central Committee(Gregory,Tenev,&Wagle,2000).In July of 1979,commune and brigade enterprises were allowed to enter non-agricultural industries.The State Council permitted these activities under the"Regulation on Some Questions Concerning the Development of Enterprises Run by People's Communes and Production Brigades," which also granted provinces the right to give 2-3 year tax holidays for new commune
Local governments had apparent incentives to keep all business and suppliers local rather than cooperating with other regions. The dual-track approach began in 1979 in the rural areas with two-tier pricing. It has since been extended to other sectors through various forms as a reflection of the early belief that private business served as a complement to state-ownership as a way to deal with unemployment. The dual-track policies also satisfied the central government’s concern that development proceed in a way so that protests would not endanger its political survival. The view of politicians was to develop in a way that would “leave no one worse off than before” (Shirk 1993, pp. 130, 137, 334; Laffont and Qian 1999; Lau, Qian, and Roland 1997). However, this approach may have also stunted the growth and development of the private sector by continuing to protect the interests of state-owned enterprises. Thus, the transition from a planned economy to a more open market economy has been gradual with certain punctuated periods of significant progress. Deng Xiaoping issued a reform report in 1975. In 1978, Deng launched the ‘Four Modernizations’ reform program to deal with the economic crisis after the Cultural Revolution by stimulating economic growth.1 Market oriented reforms in China began in earnest in December of 1978 with the Third Plenum of the Chinese Communist Party’s 11th Central Committee (Gregory, Tenev, & Wagle, 2000). In July of 1979, commune and brigade enterprises were allowed to enter non-agricultural industries. The State Council permitted these activities under the “Regulation on Some Questions Concerning the Development of Enterprises Run by People’s Communes and Production Brigades,” which also granted provinces the right to give 2-3 year tax holidays for new commune 1 See Young (Young, 1995) for a comprehensive background on private business and economic reform in China from 1978 to the mid-1990s
and brigade enterprises.As a result,light industry grew extremely rapidly from 1979 up through 1984(Wong,1988).Private entrepreneurship began to re-emerge in China with the legitimation of township and village enterprises(TVEs)to de-collectivize agriculture. The vast majority of TVEs were completely private.2 These enterprises were sometimes collectively owned by local governments but primarily had entrepreneurial incentives for their managers who were free to react to prices and choose product lines.Commune and brigade enterprises had long existed prior to this time period in the rural areas and were renamed in March of 1984 as TVEs.By 1988,total rural enterprise output had increased by five times compared to 1983.By 1990,TVEs accounted for 20 percent of China's gross output(Liao and Sohman,2001). From 1978 to 1988,the Chinese government began to allow the entry of foreign invested firms along with opening to foreign trade and investment.One stream of literature has examined the institutional drivers of FDI and some of its unintended economic consequences within China(Huang.2003;Huang,2004a;Huang.2004b; Huang.2006).Some scholars argue that financial integration and particularly foreign direct investment(FDI)is another mechanism that contributes to economic growth in developing countries(Alfaro&Charlton,2007).Investment by "co-ethnic networks" appear to have been particularly large over the years,with 59%of the entire stock of FDI between 1978 and 1999 being supplied by three ethnically Chinese economies-Hong Kong,Macao,and Taiwan(Huang,Jin,Qian,2008).Besides providing capital,these ethnic ties can also perform institutional functions which would otherwise be performed by a government in a more developed country,but are typically lacking in developing Confusion has arisen since the Chinese definition of TVEs is as rural firms,whereas Western academics assume the term refers to ownership(Huang,2008)
and brigade enterprises. As a result, light industry grew extremely rapidly from 1979 up through 1984 (Wong, 1988). Private entrepreneurship began to re-emerge in China with the legitimation of township and village enterprises (TVEs) to de-collectivize agriculture. The vast majority of TVEs were completely private.2 These enterprises were sometimes collectively owned by local governments but primarily had entrepreneurial incentives for their managers who were free to react to prices and choose product lines. Commune and brigade enterprises had long existed prior to this time period in the rural areas and were renamed in March of 1984 as TVEs. By 1988, total rural enterprise output had increased by five times compared to 1983. By 1990, TVEs accounted for 20 percent of China’s gross output (Liao and Sohman, 2001). From 1978 to 1988, the Chinese government began to allow the entry of foreign invested firms along with opening to foreign trade and investment. One stream of literature has examined the institutional drivers of FDI and some of its unintended economic consequences within China (Huang, 2003; Huang, 2004a; Huang, 2004b; Huang, 2006). Some scholars argue that financial integration and particularly foreign direct investment (FDI) is another mechanism that contributes to economic growth in developing countries (Alfaro & Charlton, 2007). Investment by “co-ethnic networks” appear to have been particularly large over the years, with 59% of the entire stock of FDI between 1978 and 1999 being supplied by three ethnically Chinese economies – Hong Kong, Macao, and Taiwan (Huang, Jin, Qian, 2008). Besides providing capital, these ethnic ties can also perform institutional functions which would otherwise be performed by a government in a more developed country, but are typically lacking in developing 2 Confusion has arisen since the Chinese definition of TVEs is as rural firms, whereas Western academics assume the term refers to ownership (Huang, 2008)