economies.These institutional functions include contract enforcement and dispute resolution(Huang.200;Tong,2005). Despite this opening of the economy to foreign trade and investment,domestic private enterprises were still subject to ideological biases which largely limited them to rural areas only(Qian,2000).For many years that focus on FDI led to a consequent discrimination against domestic private firms.which increasingly were allowed to exist but whose growth was stifled by various practices.Initially,the private sector in China almost solely consisted of individual businesses,employing seven people or fewer(the same as in the European Communist countries).referred to in Chinese as gerihu,which were unregulated.On April 12,1988,entrepreneurship became legal again in China. The First Plenary of the Seventh People's Congress approved Article 11 of the 1988 amendment to the Constitution of the People's Republic of China,which"permits the private sector of the economy to exist and develop within the limits prescribed by law." Three additional regulations were issued by the State Council providing protection for the private sector and specifying rights and obligations(Zhang and Ming,2000).In June of 1988,the government issued the Tentative Stipulations on Private Enterprise(TSPE) stating that a unit with privately owned assets that hired more than eight employees was regarded as a private enterprise (saving qiye).This document officially permitted entrepreneurs to hire more than eight employees.The cutoff of eight employees is said to have come from Marx who theorized that a business at that size could support an owner who can begin to exploit labor(Whiting,2001 Power and Wealth in Rural China).Large private firms had existed as early as 1981,however it was impossible for the party leadership to officially recognize them at that time(Young.1995).After June of 1988
economies. These institutional functions include contract enforcement and dispute resolution (Huang, 2008; Tong, 2005). Despite this opening of the economy to foreign trade and investment, domestic private enterprises were still subject to ideological biases which largely limited them to rural areas only (Qian, 2000). For many years that focus on FDI led to a consequent discrimination against domestic private firms, which increasingly were allowed to exist, but whose growth was stifled by various practices. Initially, the private sector in China almost solely consisted of individual businesses, employing seven people or fewer (the same as in the European Communist countries), referred to in Chinese as getihu, which were unregulated. On April 12, 1988, entrepreneurship became legal again in China. The First Plenary of the Seventh People’s Congress approved Article 11 of the 1988 amendment to the Constitution of the People’s Republic of China, which “permits the private sector of the economy to exist and develop within the limits prescribed by law.” Three additional regulations were issued by the State Council providing protection for the private sector and specifying rights and obligations (Zhang and Ming, 2000). In June of 1988, the government issued the Tentative Stipulations on Private Enterprise (TSPE) stating that a unit with privately owned assets that hired more than eight employees was regarded as a private enterprise (saying qiye). This document officially permitted entrepreneurs to hire more than eight employees. The cutoff of eight employees is said to have come from Marx who theorized that a business at that size could support an owner who can begin to exploit labor (Whiting, 2001 Power and Wealth in Rural China). Large private firms had existed as early as 1981, however it was impossible for the party leadership to officially recognize them at that time (Young, 1995). After June of 1988
firms could either register as getil,and be given permission to employ more than eight people,or they could pay an administration fee and obtain a collective license to a state or collective unit.The latter category were called"red hat"firms since to avoid harassment,they put on a hat of collective ownership,even though they were essentially privately owned(Gregory,Tenev,&Wagle,2000).Red hat firms continue to exist to this day in China,making interpretation of government issued statistics difficult.Using a sample of300 villages surveyed,it's estimated that there were 500.000 gerh,or private firms at the end of 1988(Zhang&Liu,1995) Economic reform was put on hold in 1989,however.Inflation and corruption as well as the political uproar from the Tiananmen Square incident allowed conservatives to gain more power and to implement from 1989-1990 an"austerity program"throughout much of the country.Credit was sharply cut to rural enterprises and total employment in TVEs fell by 3 million between 1988 and 1990(People's Daily,March 23,1990).There was relicensing of private operators and a major tax collection drive among private enterprises.There was even discussion of recollectivizing agriculture and recentralizing financial power and investment away from the provinces and local governments.Debate within the country grew as jealousy and outrage emerged over the high incomes of business owners and the exploitation of workers(Young,1995).The new boom period of private sector development in China began after Deng Xiaoping's"South Touring Talk"in early 1992.Motivated by the economic slowdown(4.4%and 3.9%GDP growth in 1989 and 1990)and the gridlock within the central government,Deng Xiaoping made stops in several special economic zones,which would be sympathetic to his views in the Southern part of the country,to give speeches about further economic reforms.It worked
firms could either register as getihu, and be given permission to employ more than eight people, or they could pay an administration fee and obtain a collective license to a state or collective unit. The latter category were called “red hat” firms since to avoid harassment, they put on a hat of collective ownership, even though they were essentially privately owned (Gregory, Tenev, & Wagle, 2000). Red hat firms continue to exist to this day in China, making interpretation of government issued statistics difficult. Using a sample of 300 villages surveyed, it’s estimated that there were 500,000 getihu, or private firms at the end of 1988 (Zhang & Liu, 1995). Economic reform was put on hold in 1989, however. Inflation and corruption as well as the political uproar from the Tiananmen Square incident allowed conservatives to gain more power and to implement from 1989-1990 an “austerity program” throughout much of the country. Credit was sharply cut to rural enterprises and total employment in TVEs fell by 3 million between 1988 and 1990 (People’s Daily, March 23, 1990). There was relicensing of private operators and a major tax collection drive among private enterprises. There was even discussion of recollectivizing agriculture and recentralizing financial power and investment away from the provinces and local governments. Debate within the country grew as jealousy and outrage emerged over the high incomes of business owners and the exploitation of workers (Young, 1995). The new boom period of private sector development in China began after Deng Xiaoping’s “South Touring Talk” in early 1992. Motivated by the economic slowdown (4.4% and 3.9% GDP growth in 1989 and 1990) and the gridlock within the central government, Deng Xiaoping made stops in several special economic zones, which would be sympathetic to his views in the Southern part of the country, to give speeches about further economic reforms. It worked
and economic reforms were re-started beginning with the removal of price caps on the Shanghai Stock Exchange in May of 1992.Interviews suggested that many were inspired after these talks that as Deng reportedly said,"it is glorious to be rich"and decided to try to get rich quick through entrepreneurship.Other sources deny that the"glorious to be rich"part of the speech was ever actually made.Up to this time,economic activity between businesses and with the government was done primarily by"particularistic contracting"on a one-off fashion.The government had largely failed to establish a rule based market system,and up to now had not addressed ownership and property rights issues(Qian,1999). After Deng Xiaoping's speeches,the Fourteenth Party Congress in September of 1992 indicated that the goal of economic reforms in China was a socialist market economy.While to Westerners,this may sound insignificant,for China it was a bold statement about the relationship between the state and private sectors.Next,the Third Plenum of the Fourteenth Central Committee issued the"Decision of Issues Concerning the Establishment of a Socialist Market Economic Structure"in November of 1993.The state and privately owned businesses.It also showed the intention to turn large state enterprises into more independently run companies and to sell off the smaller ones, known as grasping the large and releasing the small(zhuada fangxiao)(Young,1995). Finally,this decision emphasized the importance of coordination among reforms to create more of a rule-based system and less particularistic contracting(Qian,1999).Following this important decision,a series of reforms were passed covering foreign exchange,taxes
and economic reforms were re-started beginning with the removal of price caps on the Shanghai Stock Exchange in May of 1992. Interviews suggested that many were inspired after these talks that as Deng reportedly said, “it is glorious to be rich” and decided to try to get rich quick through entrepreneurship. Other sources deny that the “glorious to be rich” part of the speech was ever actually made. Up to this time, economic activity between businesses and with the government was done primarily by “particularistic contracting” on a one-off fashion. The government had largely failed to establish a rulebased market system, and up to now had not addressed ownership and property rights issues (Qian, 1999). After Deng Xiaoping’s speeches, the Fourteenth Party Congress in September of 1992 indicated that the goal of economic reforms in China was a socialist market economy. While to Westerners, this may sound insignificant, for China it was a bold statement about the relationship between the state and private sectors. Next, the Third Plenum of the Fourteenth Central Committee issued the “Decision of Issues Concerning the Establishment of a Socialist Market Economic Structure” in November of 1993. The decision moved the country towards a reduction in ownership discrimination between state and privately owned businesses. It also showed the intention to turn large state enterprises into more independently run companies and to sell off the smaller ones, known as grasping the large and releasing the small (zhuada fangxiao) (Young, 1995). Finally, this decision emphasized the importance of coordination among reforms to create more of a rule-based system and less particularistic contracting (Qian, 1999). Following this important decision, a series of reforms were passed covering foreign exchange, taxes
the monetary system,the financial system more broadly,and a streamlining of government bureaucracy (Qian,1999). While the intention was announced much earlier,the privatization of state-owned enterprises began on a large scale in 1995.3 By the end of 1996,11.5 million workers were laid off and 50-70 percent of SOEs had been privatized(Qian,1999).In September of 1997,the Fifteenth Party Congress made a large rhetoric shift in referring to private ownership as an important component of the economy and state ownership as a pillar of the economy.They also indicated that public ownership could be realized through joint stock corporations with many owners investing.Through a twist of careful wording.they were essentially condoning the private ownership of corporations The Chinese Academy of Sciences(CAS),like the U.S.National Academy of Science,is the country's most prestigious research institution.The objective of the Knowledge Innovation Program(KIP)program was to re-create the CAS by redirecting resources towards creating 30 internationally recognized research institutes by 2010.The long term goal was to have five of those research institutes become recognized as world leaders.The Knowledge Innovation Program was passed in 1998 and in order to re. direct resources to create a handful of world-class institutes,between 1998 and 2005 the number of Chinese Academy of Sciences research institutes was scaled back from 120 to 89(Ma,Dali 2006).While the research institutes were being reformed,changes were also occurring to build venture capital as a financial intermediary.Much of this occurred due to the influential role of Deng Nan,the daughter of Deng Xiaoping,who was the number two official in the CAS.Her visits to the U.S.and to MIT in particular,exposed Transformation of ownership()or"restructuring of ownership"()are used in China in place of the term"privatization"(Qian,1999)
the monetary system, the financial system more broadly, and a streamlining of government bureaucracy (Qian, 1999). While the intention was announced much earlier, the privatization of state-owned enterprises began on a large scale in 1995.3 By the end of 1996, 11.5 million workers were laid off and 50-70 percent of SOEs had been privatized (Qian, 1999). In September of 1997, the Fifteenth Party Congress made a large rhetoric shift in referring to private ownership as an important component of the economy and state ownership as a pillar of the economy. They also indicated that public ownership could be realized through joint stock corporations with many owners investing. Through a twist of careful wording, they were essentially condoning the private ownership of corporations. The Chinese Academy of Sciences (CAS), like the U.S. National Academy of Science, is the country’s most prestigious research institution. The objective of the Knowledge Innovation Program (KIP) program was to re-create the CAS by redirecting resources towards creating 30 internationally recognized research institutes by 2010. The long term goal was to have five of those research institutes become recognized as world leaders. The Knowledge Innovation Program was passed in 1998 and in order to redirect resources to create a handful of world-class institutes, between 1998 and 2005 the number of Chinese Academy of Sciences research institutes was scaled back from 120 to 89 (Ma, Dali 2006). While the research institutes were being reformed, changes were also occurring to build venture capital as a financial intermediary. Much of this occurred due to the influential role of Deng Nan, the daughter of Deng Xiaoping, who was the number two official in the CAS. Her visits to the U.S. and to MIT in particular, exposed 3 Transformation of ownership (zhuanzhi) or “restructuring of ownership” (suoyouzhi gaizao) are used in China in place of the term “privatization” (Qian, 1999)
her to high levels of institutionally encouraged technological entrepreneurship,which she hoped to emulate in China(Roberts,2009). The development of venture capital in China is discussed in further detail in the section on reforms in the financial system.Without repeating that section,it isworth noting that also in1998 reforms were passed promoting venture capital and private equity investment.The State Council approved a government document,Several Opinions on Establishing a Venture Investment Mechanism,released November 16,1999 jointly by the Ministry of Science and Technology and the State Development and Planning Commission.The document offers guidelines for venture capital regulation in China and states that:"A healthy venture capital investment system is important to propel the establishment of a country's technology innovation system,promote national economy and comprehensive national capacity,and realize leapfrog development for China." Since 1998,the Chinese government has invested more than$16 billion of its funds in state-owned venture capital funds.The local governments in Shenzhen and Guangzhou,have passed regulations granting favorable conditions for venture capita The Ministry of Foreign Trade and Economic Cooperation has also eased the entry of international venture capital firms. Building on the statements issued in 1997 redefining the relationship between the state sector and the private sector,on March 15,1999,the Second Plenary of the Ninth People's Congress approved an amendment to the Constitution.The Amendment put the private sector on the same legal footing as the public sector for the first time.It was In February of Sohu.com launched the first interet search company in China.It is also n.wik A n for ted in several of my interviews
her to high levels of institutionally encouraged technological entrepreneurship, which she hoped to emulate in China (Roberts, 2009). The development of venture capital in China is discussed in further detail in the section on reforms in the financial system. Without repeating that section, it is worth noting that also in 1998 reforms were passed promoting venture capital and private equity investment. The State Council approved a government document, Several Opinions on Establishing a Venture Investment Mechanism, released November 16, 1999 jointly by the Ministry of Science and Technology and the State Development and Planning Commission. The document offers guidelines for venture capital regulation in China and states that: “A healthy venture capital investment system is important to propel the establishment of a country’s technology innovation system, promote national economy and comprehensive national capacity, and realize leapfrog development for China.” Since 1998, the Chinese government has invested more than $16 billion of its funds in state-owned venture capital funds. The local governments in Shenzhen and Guangzhou, have passed regulations granting favorable conditions for venture capital. The Ministry of Foreign Trade and Economic Cooperation has also eased the entry of international venture capital firms.4 Building on the statements issued in 1997 redefining the relationship between the state sector and the private sector, on March 15, 1999, the Second Plenary of the Ninth People’s Congress approved an amendment to the Constitution. The Amendment put the private sector on the same legal footing as the public sector for the first time. It was 4 In February of 1996, Sohu.com launched the first internet search company in China. It is also reported to have been the first internet company funded by venture capital (http://en.wikipedia.org/wiki/Charles_Zhang accessed 4/17/2009). The rise of Sohu and its listing on the NASDAQ along with the U.S. dotcom boom was noted in several of my interviews with entrepreneurs as a source of inspiration for their own ventures