Chinese Business and Management

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?

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

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