INB 315 Chinese Business and Management Lieberthal, Managing the China Challenge
How do we understand how the Chinese system works?
Using western or American assumptions about politics and economics won’t work
All people want to be free and eliminate government restraints
All people hate the government and want it to go away
Government leaders only want to make more money for themselves
What kinds of ideas have Chinese developed to direct their efforts to respond to the West after the 1840s?
Develop uniquely Chinese ideas and reject the West
Adopt western technology but reject western ideas
Adopt western ideas and technology completely – nothing Chinese is sacred
What are Chinese attitudes toward the West today?
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What are the major themes and directions of Chinese policy today?
Achieve wealth and power, security and prominence for the nation
Pragmatism, trial and error, experimentation
1) Preservation of Communist Party rule at all costs 2) Expand and deepen the social safety net 3) Existing economic strategy – labor intensive, light manufacturing based on FDI – must be changed to continue Chinese growth 4) Develop global technological leadership in through indigenous innovation such as green technologies 5) Expand modern urban areas inward
What are the specific actions China is taking?
Technology fast follower as path to indigenous development Encourage and support urbanization inland
Size of rural population is unchanged
Reduce and eliminate the hukou system
Expand middle class
Expand consumer system
Layers of the Chinese state
Center Province Municipality County Township
Party and Government at all levels – the party-state
CCP
75 million
Leninist in origin and operation
Nomenklatura system – appointment of top leaders at next lower level
Important national policies
Policy and implementation
Centralized? Flexible? Totalitarian? Authoritarian?
The “DEAL” that defines the relationships of the levels of the party-state
Fundamentally hierarchical – above directs below but allows considerable latitude to interpret specifics
Support initiative and even entrepreneurialism to achieve broad policy goals Leaders of the party-state at all levels have a direct stake in the success of policy and economy
Advancement increases the benefits of the system to leaders
Local leaders make most appointments at their level
Local leaders control local banks, courts and administrative agencies
Wide latitude to act entrepreneurially to achieve economic growth
Large role for market forces that provide incentives, information and constraints to entrepreneurs
Deep and complex party-state relations to firms at a micro and local level: land, licenses, capital, regulations, purchasing decisions, ownership
All business in China – foreign and domestic - is deeply connected to the party-state
Success within the party-state is a result of developing leaders who can creatively and effectively promote economic growth at a micro- level
Demonstrated entrepreneurial talent is the criteria for achievement and advancement in the party-state
Local official are deeply connected to the business enterprises in their area, high significant autonomy and operate as active and important partners in promoting business success
The CCP and the party-state is a dynamic, flexible, decentralized and internally competitive organization
The party-state is organized to promote economic growth
Problems with the party-state system
Local protectionism Fragments markets Undermines achievement of economies of scale
Poor intellectual property protectionism Long tradition of copying the best model Knockoffs Owners of best model want protection and profits Dangers from fake drugs, milk
Corruption Can corruption support economic growth?
Investment and infrastructure bias – local officials love new roads, buildings, fancy bridges
Misallocates investment
Lack of central government control
Environmental protection
Lack of an effective social safety net Retirement Health care
Major challenges to the Chinese system
Political coherence – Bo Xilai
Managing the effects of rapid change
Resource shortages and environmental destruction Water – 38, 40
The United States as supporter of or opponent of China’s growth?
China must manage its relationship to the US and Europe to preserve a favorable international environment.
is a wild card in this process – prone to reckless and counterproductive actions.
Economic outcomes in China are a result of a relationship among the party state, state and private (domestic and foreign) firms and domestic and global market forces.
Structure and Operation of the Party-State System
The basic arrangement of General Secretary as most powerful actor combined with a top governmental official as chief executive (premier, governor, mayor, county head) operates throughout the nation at all levels. A system of ranks defines the power relationships among the various units of the party-state – including party, government, SOE, media organization, publishing company, school, research institute, hospital, museum. These ranks are not published but are not secret.
Units cannot issue orders to another unit at the same or higher rank.
There are unusual ranks that affect power relationships: Provinces have the same rank as ministries in Beijing, which means ministers cannot issue order to provinces.
Only the Communist Party – which stands above the highest governmental body, the State Council - can command the military. The Minister of Defense does not command the military.
Many large SOEs have the same rank as ministries and many others have a higher rank than the government of their city
In addition to the system of ranks, the effect of reforms has been to empower territorial governments to control their own specialized agencies. Occasionally, the central government has altered this relationship when excessive localism has developed.
It is very important to ascertain the nature of the power relationship: leadership relationship (lingdao quanxi) versus professional relationship (yewu guanxi).
The outcomes of the system are a product of the relationships among the division of labor system, the ranking system and the leadership/professional system.
Not all decision at the national level have the same operational implications:
o Orders – must be implemented precisely o Instructions – develop a plan that considers local considerations o Circulars – the issue is of concern but do not require operational decisions o Opinions – suggest thinking at the top but without decision
The consequence of the system of ranks, in combination with the various layers of government and party, results in a substantial distribution and even fragmentation of power in China. The system of power in China is far less centralized than most westerners realize. Local officials have considerable leeway an many issues of national policy as along as they do not directly contradict this policy. Policy is stated and defined in general terms and can be implemented based on local conditions.
This means decisions on substantial business operations require a consensus across different jurisdictions and no one person can command such a consensus. Higher- level official typically expect lower levels to work out a decision. This can frequently mean a determined opponent can veto a decision.
Laws and regulations can vary considerably across different jurisdictions. Decision latitude for one level is a negotiated arrangement with the next highest level. There is a lot of play in the system.
Lieberthal provides advice to TNCs operating in China.
Government relations are a strategic issue in China.
Governments at all levels must be seen as differentiated and complex
Understand the complex network of government-business relations - 107
Products that qualify for indigenous innovation: mean and effect of the catalogue
How Chinese reach conclusions about dealings with foreigners – 64
Understand the policy directions of the nation and make proposals that conform to these directions
Develop plans to take advantage of the urbanization of 2nd and 3rd tier cities
Local market research Chinese market is highly segmented Expect much lower price points for products Good enough products Decentralize product development to local units
What are the political risks associated with China?
Will the CCP be overthrown?
What is the nature of political unrest in China?
How does the Chinese government affect the choices on FDI? Can foreign firms participate in the creation of regulations that affect their operations?
Disputes in China are negotiated and are not settled in a rules-based or laws-based setting. 85-86 Resolve versus win Costs of going to court to enforce contracts against firms with important political supporters
What are the political risks associated with making corrupt payments?
Milkmaids
Foreign corrupts practices
Reputation for operating without corruption
Effects of US-China relations
Tiananmen Square consequences
Trade conflict on solar power panels
Managing issues of product safety and quality across supply chains
Ethical choices – 93-95
Cyber risks
Taxis in Shanghai – microphones
Large and sophisticated systems of penetrating corporate information systems