MIAMI UNIVERSITY The Graduate School

CERTIFICATE FOR APPROVING THE DISSERTATION

We hereby approve the Dissertation

of

Francis Schortgen

Candidate for the Degree:

Doctor of Philosophy

______Director (Dr. Ryan J. Barilleaux)

______Reader (Dr. Walter Arnold)

______Reader (Dr. Venelin I. Ganev)

______Graduate School Representative (Dr. Chi Chung David Yen)

Abstract

Chinese Enterprise Internationalization – The Case for Contextual Analysis

By Francis Schortgen

Internationalization of ’s economy is nothing new. In fact it goes back to the late 1970s when the country’s undertook a course correction that set it on the path of economic reform and opened the door to China. What is new is the comparative change in directionality. While inward internationalization is still proceeding (China is still considering itself a developing country), the outward dimension has been garnering more attention of late. Indeed, the focus has been on various aspects of China’s overseas investments, where they are going, why and in what form? While these are important questions and relevant issues to look at, an equally important dimension gets overlooked – important because the misperceptions derived from this oversight always find their way into analysis, discussion and assessment over the appeal and implications of Chinese investments abroad. The dimension in question involves the institutional and interactional patterns of China’s evolving domestic political economy. The aim of this study, then, is to inject a long overdue contextual look at the evolutionary nature of China’s political economy. Specifically, it will focus on how the political economy space has changed since the late 1970s in the aftermath of reform (from centralization of authority to decentralization of decision-making) – thus debunking the central government-centric perception that still slips into many analyses. At the same time, it will show that ownership and control of enterprises going abroad is not limited to the state, but we also see different structures engaging in outward internationalization, ranging from enterprises with absolute, relative, or no state control. Finally, it will look at the implications of such internationalization, specifically how it has already and will continue to affect the institutional and interactional space of China’s political economy. Particular attention will be devoted to the effect of nascent VC and overseas listing trends. The aim, as such, then is to offer a contextualized assessment of where these internationalizing enterprises are coming from, so as to avoid having their ambitions curtailed by faulty, outdated misperceptions. There is more to China’s internationalizing enterprises than their simplistic depiction as “corporate entities of a Communist dictatorship.”

CHINESE ENTERPRISE INTERNATIONALIZATION: THE CASE FOR CONTEXTUAL ANALYSIS

A DISSERTATION

Submitted to the Faculty of Miami University in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Political Science

by

Francis Schortgen Miami University Oxford, Ohio 2008

Dissertation Director: Dr. Ryan J. Barilleaux

© Francis Schortgen 2008

Table of Contents

List of Tables vi

List of Figures vii

List of Abbreviations viii

Dedication x

Acknowledgments

Chapter One: Introduction

Chapter Overview 1 1.1. Chinese Enterprises Go Global 4 1.1.1. A Brief Illustration 4 1.1.2. Is China’s Internationalization Push Unusual? 7 1.1.3. Chinese Internationalization – Opportunity or Threat? 8 1.2. Assessing China’s Enterprise Internationalization – A Question of Relevance? 11 1.2.1. Relevance of Chinese Enterprise Internationalization Study 12 1.2.2. A Comparative Starting Point 16 1.3. Brief Dissertation Outline 17

Chapter Two: A Conceptual Framework for Assessing China’s Enterprise Internationalization

Chapter Overview 20 2.1. Brief Definitional Note 23 2.2. Chinese Enterprise Internationalization – A Literature Review 25 2.3. Towards a More Analytically Contextual Analysis 30 2.3.1. Shortcomings of Current Studies 31 2.3.2. “Contextual” Path Dependence 34 2.3.3. Research Design 36 2.3.4. Research Focus 37 2.3.5. Research Methodology 39 2.4. Conclusion 40

Chapter Three: The Complexities of China’s Domestic Political Economy

Chapter Overview 42 3.1. The Developmental State Model 44

iii

3.1.1. Origins and Defining Features of a Developmental State 46 3.2. Temporal, Institutional and Interactional Spaces of the Japanese and South Korean Developmental States 50 3.2.1. The Japanese and South Korean Developmental States 51 3.3. China’s Developmental Path 54 3.3.1. The Eclipse of China’s Leninist Party-State Structure? 54 3.3.2. A Developmental State with Chinese Characteristics? 57 3.4. Institutional Complexity of China’s Political Economy Space 58 3.4.1. Decentralization and the Rise of Local State Corporatism 59 3.4.2. State and Enterprise Actors in China’s Political Economy 64 3.5. Conclusion 68

Chapter 4: Internationalization Process – A Macro-Economic Perspective

Chapter Overview 69 4.1. China’s Internationalization – Situational Context 72 4.1.1. A “Great Transformation”? 72 4.1.2. Critical Junctures and the Evolution of Internationalization 76 a. From Inward Internationalization … 77 b. …To Outward Internationalization 80 4.2. Enabling Conditions of China’s Internationalization 85 4.2.1. Political Rationale 85 4.2.2. Policy Support & Regulatory Framework Governing Overseas Investments 87 4.2.3. Economic Globalization & Business Competitiveness Dynamics 91 4.3. Conclusion 94

Chapter 5: Perceptions and Realities of Chinese Enterprise Internationalization – A Descriptive Illustration

Chapter Overview 95 5.1. Internationalization and the Myth of State Control 96 5.1.1. Institutional Look at the Historic and Contemporary Role of the State 97 5.1.2. From Ideological Zeal to Business Rationale 98 5.2. Chinese Enterprise Internationalization: Descriptive Illustrations & Emerging Trends 100 5.2.1.China’s Internationalizing Enterprises: Perceptions vs. Contextual Realities 102

iv

5.2.2. State-Owned Enterprises 108 A Note on SOE Classification 109 China National Offshore Oil Corporation 110 The Group 113 China Investment Corporation 115 Major State Banks 117 5.2.3. Non-State Enterprises 119 China Minsheng Banking Corporation, Ltd. 121 Huawei Technologies Co., Ltd. 122 5.3. Emerging Trends 124 5.3.1. The Transformative Power of Venture Capital Financing 125 5.3.2. The Lure of Overseas IPOs 127 5.3.3. Xiahai or ‘Jumping into the Sea’ 129 5.4. Conclusion 130

Chapter 6: ‘Same Bed, Different Dreams’ – Causes, Manifestations, Implications

Chapter Overview 132 6.1. Study Summary 133 6.1.1. Capitalist Communists – In Need of a New Analytical Framework 133 6.1.2. From Past to Present – A Set of Propositions 134 6.2. Study Limitations 138 6.3. Areas for Further Research 139 6.4. Conclusion – No context, no right to assess 140

Bibliography 141

v

List of Tables

Table 1.1. Chinese M&A Fortunes & Misfortunes (2000-2006) 4

Table 1.2. China’s Cross-Border M&A Purchases 6

Table 1.3. China FDI Flows 7

Table 3.1. Major Enterprise Categories 65

Table 3.2. Description of Major Chinese Enterprise Structures 67

Table 4.1. Overseas Investment Approval for the Non-Financial Sector 91

Table 5.1. A Snapshot of CNOOC’s Overseas Activities 111

Table 5.2. Chinese Overseas Investment Activities 115

Table 5.3. Chinese Banks Rise to the Top 117

Table 5.4. Distribution of VC-Backed Enterprises (1991-2001) 126

Table 5.5. Chinese Enterprises – Overseas IPO Trend (2005-2007) 127

vi

List of Figures

Figure 1.1. Number of Chinese Companies in the Fortune Global 500 List (1994-2005) 5

Figure 1.2. Patterns of Cross-Border M&A Purchases, by Region/Economy of Purchaser (1989-2005) 6

Figure 3.1. Taxonomy of State and Enterprise Actors in China 65

Figure 3.2. The Rise and Fall of Enterprise Actors in China 66

Figure 4.1. The Geographical Focus of China’s Enterprise Internationalization 82

Figure 4.2. Changing Government Policy on Outward Investments (1979-present) 88

Figure 5.1. SOE Sector vs. Private Sector in China 126

vii

List of Abbreviations

CBD China Development Bank CBRC China Banking Regulatory Commission CCB China Construction Bank CCP CFIUS Committee on Foreign Investment in the United States Chinalco China Aluminum Corporation CIC China Investment Corporation CIRC China Insurance Regulatory Commission CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation CSRC China Securities Regulatory Commission EIBC Export- Import Bank of China FAW First Auto Works FDI Foreign direct investment FOREX Foreign exchange GDP Gross domestic product ICBC Industrial and Commercial Bank of China IPO Initial public offering JV Joint venture M&A Mergers & acquisitions METI Ministry of Economy, Trade and Industry () MITI Ministry of International Trade and Industry (Japan) MNC Multinational Company MOFCOM Ministry of Commerce (People’s Republic of China) NBS National Bureau of Statistics NDRC National Development and Reform Commission NOC National oil company NSSF National Social Security Fund PBOC People’s Bank of China PLA People’s Liberation Army PRC People’s Republic of China (the official name of China) ROI Return on investment SAIC Shanghai Automotive Industry Corporation SASAC State-Owned Asset Supervision and Administration Commission SDRC State Development and Reform Commission SEZ Special economic zone SME Small-and-medium enterprise SOE State-owned enterprise SWF Sovereign wealth fund

viii TNC Transnational company UNCTAD United Nations Conference on Trade and Development USCESRC U.S.-China Economic and Security Review Commission VC Venture capital WFOE Wholly foreign-owned enterprise WTO WWII World War Two

ix

To my parents Roger and Jeanny Schortgen for their unconditional love and support in all my endeavors

&

In loving memory of my grandparents Emile & Lily Fournelle and Maisy Frantz-Frieseisen who would have taken great pride in the completion of this dissertation

x

Acknowledgments

A dissertation, like any major publication, ultimately is the fruit of hard work and long hours of reflection, research, analysis and frustration that the author has poured into it. And yet, the successful completion of such an undertaking owes much to a number of individuals who graciously donated their time, advice, and constructive criticisms throughout the writing process. As such, I owe a great deal of thanks to my dissertation committee. I would like to thank Dr. Ryan J. Barilleaux, chair of the Political Science Department, for graciously taking time out of his very busy schedule and serving as my dissertation director. A great debt of gratitude also to Dr. Walter Arnold and Dr. Venelin I. Ganev, for serving as readers of my dissertation, and to Dr. Chi Chung David Yen of the Farmer School of Business, who kindly agreed to serve as the graduate school representative on my committee. I would also like to acknowledge the valuable funding support provided by Dr. Barilleaux and Dr. John Rothgeb, director of graduate studies in the Department of Political Science. Without their assistance, I may not have been able to conduct much of the field research in the People’s Republic of China nor benefit from insightful exchanges of ideas and constructive criticisms at a number of regional conferences where I floated various aspects and arguments of my dissertation. Thanks also to Dr. Venelin Ganev for allowing me to sit in on his “Post- communism and Social Theory” seminar as an unregistered graduate student. Had it not been for his gracious accommodation of my curiosity in learning a bit more about post-communism in Eastern Europe, I may not have become aware of a crucial work that incidentally proved instrumental as a methodological construct for my own research idea. My greatest debt of gratitude unquestionably goes to Dr. Walter Arnold. In more ways than one, Dr. Arnold has been instrumental in my intellectual and professional development, going back to the mid-1990s when I was an undergraduate student at Miami University. Dr. Arnold has become an invaluable mentor to me and I am deeply grateful for the support and guidance he has offered to me over the years. It is with fond memories and deep gratitude that I reflect on the numerous hours of consultation, advice, and encouragement he devoted to helping me expand my knowledge and understanding of Chinese political economy and refine my dissertation arguments. I would also like to express my deep appreciation to my former classmate and now colleague, Dr. Tony Frye, for the many stimulating and intellectual discussions we have had on East Asia and China during the course of my studies, both while in residence at Miami University and over two summers doing field research in China.

xi Throughout the dissertation writing process, I also benefited greatly from the support and encouragement of my girlfriend, Ms. Deok-im Jean. She never tired of lending an ear in times of frustration and kept me steadfastly on track. For that, and so much more, I thank her from the bottom of my heart. Finally, I would also like to thank my parents and the rest of my family. Their steadfast love and support over the years allowed me to embark on a fascinating journey, beginning in 1994, which took me from Luxembourg to the United States, Kong, , Seoul and finally back to the United States. They all surely would rejoice in having me complete the world journey and find my way home again, yet they never tired of showing their support for my dreams and ambitions. Thank you for everything!

xii

It doesn’t matter if a cat is black or white, as long as it catches mice.

Sichuan proverb (Often attributed to )

The Chinese Communists are just such great capitalists. They're just unbelievable capitalists masquerading as Communists

Jim Cramer 25 December 2006

This simply is not a market-based transaction. China is not a market economy – that’s a legal fact and an interpretation that China agreed to as part of its accession to the World Trade Organization.

C. Richard D’Amato 13 July 2005

We handed China the money they are using to try to buy Unocal…And now we’re telling the Chinese, please keep investing in our bonds but you can’t invest what amounts to a sliver of their surplus in an oil company.

Clyde Prestowitz 24 July 2005

xiii

1. Introduction

Internationalization is not an end in itself; it is a means to help you grow and develop

Yang Yuanqing Chairman of the Board, Group China Business Summit 2006

CHAPTER OVERVIEW

This chapter serves as a general introduction to the emerging phenomenon of Chinese enterprise internationalization. Starting with an overview of pertinent manifestations of the rising prominence and international aspirations of Chinese enterprises, it then paints a broad opportunity-threat assessment of China’s enterprise internationalization process. The possibility of a socialist/communist system possibly having turned into an incubator for capitalist dynamics rivaling those of established free market economies is among the uncomfortable realities that have partially fanned the fires of resistance and protectionism greeting Chinese enterprise expansion into advanced industrial economies. The analytical relevance of studying Chinese enterprise internationalization is also discussed from a variety of angles, and the particular research focus of this study – how the institutional and interactional aspects of China’s political economy space are likely to evolve over time as a result of internationalization (further elaborated in Chapter 2) – is briefly introduced here. The chapter concludes with a general outline of subsequent chapters.

*************************************

Napoleon reportedly once counseled to “let China sleep, for when she wakes, she will shake the world.” The end of the Maoist era in the People’s Republic of China (PRC), and the subsequent economic policy reversal and gradual opening up of the economic sphere to the outside world have given renewed credence to this statement. Major developments and policy reversals launched after 1978 set in motion the process that would arouse the sleeping dragon and lead its economic stirrings to eventually send ripple effects around the world.

1 With Deng Xiaoping, once branded the “number two capitalist roader” by during the Great Proletarian (1966-1976)1 assuming the reins of political power, the country embarked on a journey that would put it on a re-integration course with the world economy. Up to that point, Chinese foreign economic policymaking had been punctuated by several crisis cycles – periods during which economic policy debates oscillated largely between semi- autarky and import substitution strategies (Reardon 2002).2 The cycles of China’s pre-1979 economic policies saw the political leadership engaged in serious debates over the nature of the inward-oriented development paradigm. As Reardon notes, the cycling of import substitution and autarky strategies undeniably hampered what may well have resulted in an earlier adoption of a more outward-oriented development regime. However, it did by no means “condemn China to an unchanging loop of history. Elites incrementally learned from their policy successes and failures and implemented these changes when they had the opportunity” (Reardon 2002: 11). Deng Xiaoping’s “Open Door” policy was revolutionary to the extent that it represented the first concerted attempt at overcoming Maoist-era policies aimed at establishing a largely autarkic economic structure. The debilitating effect and consequences of these policies had only been exacerbated by the disastrous (1958-1960) and the large-scale political, economic and social upheaval triggered by excesses of the Great Proletarian Cultural Revolution (1966-1976). Yet, even under Deng Xiaoping’s stewardship, the early years of the opening policy were still characterized by a “more flexible approach to import substitution strategy” (Reardon 2002: 212) rather than an immediate and complete conversion to large-scale outward-oriented development strategies.3 The level of economic growth that resulted from the post-Mao era process of re-integration into the global economy put China on the radar screen of leading multinational companies

1. For a comprehensive and detailed overview of the politics, intrigues and brutal excesses of the Cultural Revolution, see Roderick MacFarquhar and Michael Schoenhals, Mao’s Last Revolution (Cambridge, MA: Harvard University Press, 2006). By 1966, both Liu Shaoqi and Deng Xiaoping were branded ‘capitalist roaders’ (走资派), the former as “the biggest capitalist roader in the Party” and the latter as “number two capitalist roader.” 2. In compelling detail, Lawrence Reardon illustrates the development path and gradual learning that Chinese elites underwent over a long period (1959-1978) of oscillation between semiautarky and import substitution strategies, prior to Deng Xiaoping’s ‘Open Door’ policy. Five ‘crisis cycles,’ according to Reardon, define China’s pre-1979 economic policies – 1959- 66 (initiated by the Great Leap Forward (GLF); readjustment of GLF policies); 1966-71 (initiated by the Cultural Revolution; focus on semiautarkic strategies); 1971-75 (initiated by Zhou Enlai’s readjustment of previous development strategies); 1975-76 (initiated by opposition to Zhou Enlai’s post-1971 “normalization” policies; policy readjustment, culminating in Deng Xiaoping’s purge); and 1976-78 (initiated by the downfall of the “” and Hua Guofeng’s accession to power) 3. The “Open Door Policy” laid the foundation for the set-up of special economic zones (SEZs) in China’s coastal areas beginning in the early 1980s. Yet, the decision to set up such zones, as James Kung argues, did not receive immediate and uniform approval by Chinese authorities. See James Kai-sing Kung, “The Origins and Performance of China’s Special Economic Zones,” Asian Journal of Public Administration 7, no. 2 (December 1985): 198- 215.

2 eager to establish a presence in emerging markets. Over the past 30 years, the Chinese authorities succeeded in attracting waves of unprecedented amounts of foreign direct investment (FDI) into the country.4 With China seemingly emerging as the destination of choice for FDI in East Asia, fears began to emerge that China’s success would come at the expense of other regional economies.5 Between 1990 and 2002, FDI flows to China quadrupled to reach USD 14 billion, while FDI flows into dropped from USD 53 billion to less than USD 15 billion over the same time period.6 China was soon to be compared to a “giant sucking vacuum cleaner” for global inward FDI flows (Wu, 2005: 27).7 If the rising trend of inward FDI could be indicative of significant weaknesses in the Chinese economy (see Huang, 2003), then the gradual rise to prominence of China’s internationalizing enterprises and their growing proclivity for overseas expansion, mostly through merger and acquisition (M&A) deals, is an unmistakable testament to the efficacy of large-scale reform efforts that had been spearheaded in the 1990s by China’s economic tsar, then-Prime Minister Zhu Rongji.8 Of course, significant weaknesses still remain to be addressed in the economic sphere. Wolf et al. (2003) highlight institutional/structural, sectoral, and financial fault lines which, if unaddressed, could call into question the

4. Fueling this trend was China’s desire to accumulate much-needed capital, as well as the pull- effect of the proverbial “one billion consumer” market for multinational companies. See Yasheng Huang, Selling China: Foreign Direct Investment During the Reform Era (Cambridge, UK: Cambridge University Press, 2003); and Tom Doctoroff, Billions: Selling to the New Chinese Consumer (New York, NY: Palgrave Macmillan, 2005). 5. The trend of FDI flows into China has been extensively documented and analyzed in both academic and professional studies. For an overview of policies and laws governing FDI flows into China, see Huaqun Zeng, Chinese Foreign Investment Laws: Recent Developments Towards a Market Economy (Singapore: Singapore University Press, 1999); Wei Jia, Chinese Foreign Investment Laws and Policies: Evolution and Transformation (Westport, CT: Quorum Books, 1994). Yingqi Wei, Foreign Direct Investment in China: Determinants and Impact (Northampton, MA: Edward Elgar, 2001); and Xiaoyuan Jiang, FDI in China: Contributions to Growth, Restructuring, and Competitiveness (New York, NY: Nova Science Publishers, 2004) analyze trends and effects of FDI on China’s overall economic development. Yasheng Huang, FDI in China: An Asian Perspective (: Chinese University Press, 1998) offers a comparative approach to FDI flows in Asia, highlighting the role of policy and institutional factors in attracting massive flows to China. In “Why is China so attractive for FDI? The role of exchange rates?” China Economic Review 17, no. 2 (2006), Yuqing Xing analyzes FDI flows into China from a different perspective, effectively linking them to the country’s exchange rate policy. 6. The United Nations Conference on Trade and Development (UNCTAD) defines Southeast Asia as including the Province of China, , Republic of Korea, , the , Singapore and (UNCTAD, World Investment Report 1990; 2002). 7. See Yuping Zhou and Sanjaya Lall, “The impact of China’s FDI surge on FDI in South-East Asia: Panel Data Analysis for 1986-2001,” Transnational Corporations 14, no. 1 (April 2005): 41-65 for a refutation of the argument that China’s FDI surge came at the expense of Southeast Asia. 8. Shahid Yusuf, Kaoru Nabeshima and Dwight H. Perkins, Under New Ownership: Privatizing China’s State-Owned Enterprises (Palo Alto, CA: Stanford University Press, 2006) offer a comprehensive overview of the economic reform and restructuring efforts since the mid- 1990s. The extent of institutional transformation of the Chinese economy is compellingly documented by Ross Garnaut and Ligang Song (eds.), China’s Third Economic Transformation: The Rise of the Private Economy (New York, NY: RoutledgeCurzon, 2004).

3 sustainability of China’s current economic health and vitality. Nevertheless, the fact remains that internationalization of Chinese enterprises, however discretely the first instances may have been, will come to represent a new milestone in China’s rise to prominence on the world stage.

1.1. CHINESE ENTERPRISES GO GLOBAL

1.1.1. A Brief Illustration

On 23 June 2005, China National Offshore Oil Corporation, Limited (CNOOC), in a high-profile manifestation of China’s demonstrably outward-oriented oil economy, announced an unsolicited takeover bid for Unocal Corporation, based in El Segundo, California. The proposed merger came on the heels of a string of other notable overseas acquisition attempts by Chinese companies. These included the announcement of the Lenovo Group’s US$1.75 billion purchase of IBM’s PC division in December 2004 (completed on 1 May 2005), Haier Group’s failed bid for Maytag Corporation in June 2005, and TCL International Holdings’ acquisition of both TV and DVD businesses of France’s Thomson SA, announced in November 2003. These are but some of the more prominent endeavors of China’s “Go-Out” (zou chu qu) strategy in recent years (see Table 1.1).

Table 1.1: Chinese M&A Fortunes and Misfortunes (2000-2006)

Announcement Chinese Target Company Target Bid Bid Value Date Bidder Country Status (USD m)

Jan. 2007 China Mobile Paktel Completed 460

Oct. 2006 CITIC Group Nations Energy (Kazakh oil assets) Canada Completed 1,910

May 2006 China Mobile Millicom International Cellular Luxembourg Aborted 5,300

Jan. 2006 CNOOC Apko offshore oil and gas fields Nigeria Completed 2,270

Aug. 2005 PetroChina PetroKazakhstan Canada Completed 2,735

Jul. 2005 Nanjing Auto MG Rover UK Completed 87

Jun. 2005 Haier Maytag USA Aborted 1,300

May 2005 CNOOC Unocal USA Aborted 18,500

Dec. 2004 Lenovo IBM (Personal Computer Business) USA Completed 1,750

Jul. 2004 SAIC Ssangyong Motors South Korea Completed 509

May 2004 Sinochem Inchon Oil Refinery South Korea Aborted 560

Nov. 2003 TCL Thomson SA (TV unit) France Completed 599

Oct. 2003 CNOOC Gorgon liquefied natural gas fields Aborted 22,000

Jan. 2002 CNOOC Repsol-YPF (Indonesian assets) Spain Completed 585

Source: Deutsche Bank Research (2006); BusinessWeek (2004); and various news reports.

4 Figure 1.1: Number of Chinese Companies in the Fortune Global 500 List (1994-2005)

25 CAGR (17.13%) 20 20

16 15 15

11 11 10 10

Number of Companies 6 5 4 3 3 2

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Various editions of Fortune Magazine (1995-2006); 2001 data not available.

The rising trend of outward investment by Chinese enterprises is an unmistakable testament to Chinese economic prowess and to the rising international ambitions of its major corporate groups (Beal, 2005; Balfour, 2005; Deng, 2004).9 The Chinese government has publicly stated its hope to see 50 mainland companies break into the ranks of Fortune Global 500 companies by 2010. According to the 2006 “Fortune Global 500” list, twenty Chinese companies have already achieved that goal, up from 3 companies in 1994, the first year for which this listing is available. Whereas the number of Japanese business firms, according to that same listing, has dropped by 53% between 1994 and 2005, and South Korea has added only four companies to secure 12 listings by 2005, the number of Chinese firms has risen over 17% CAGR over that same time period (see Figure 1.1) Judging from the current growth trend, the stated 2010 goal is not altogether unrealistic. Further attesting to the unmistakable rise to prominence of Chinese enterprises in world rankings is the solid growth of Chinese outward FDI flows. Cross-border M&A activities have in recent years become a prominent manifestation of Chinese overseas investment activities. The number of Chinese cross-border M&A purchases over the 1987-2005 period peaked in 2003 with a total of 73 confirmed activities. By 2005, that number stood at 58 purchases, with a combined value of nearly US$5.3 billion (Table 1.2). Compared to the combined value of M&A purchases in 2003, the trend suggests a growing focus on the pursuit of value-adding targets rather than simply expansion for the sake of expansion.

9. Throughout this study, “Chinese multinational company” and “Chinese overseas direct investment” refer exclusively to (excluding Taiwan, Hong Kong, and Macao) companies or overseas direct investment, unless specified otherwise. In addition, the terms “company,” “enterprise,” and “firm” may be used interchangeably throughout this study.

5 Table 1.2: China’s Cross-Border M&A Purchases

1990 1995 2000 2001 2002 2003 2004 2005

Number of deals 3 13 35 22 35 73 59 58

Combined Value 60 249 470 452 1,047 1,647 1,125 5,279 (US$ millions)

Source: UNCTAD, World Investment Report 2006

Figure 1.2: Pattern of Cross-Border M&A Purchases, by Region/Economy of Purchaser (1989-2005)

3000

2500

2000

1500

1000

500 Index of Cross-BorderPurchases M&A 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 China Kore a Japan Source: UNCTAD, World Investment Report 2006. Note: For the purposes of illustration, the data have been transformed, with the 1989 Cross-Border M&A Purchases (expressed in US$ millions) for each country corresponding to an index of 100.

The above-noted illustrations of Chinese enterprises’ overseas investment activities, by all accounts, are but a sampling of things to come over the next few years, in light of steadfast commitment and determination of Chinese executives to see their companies extend their reach, marketing and managerial experience (Sappenfield, 2004). Figure 1.2, detailing the sharply upward trend of Chinese companies’ cross-border M&A purchases, offers confirmation of the rapidly accelerating dynamic of Chinese enterprise internationalization. China’s internationalization drive has spawned surprise, incredulity, and reservation in numerous circles. Particular sticking points in the ensuing debates have been its timing, nature, and likely implications. Two sets of questions are especially deserving of brief commentary at this point. First, does China’s internationalization follow conventional patterns, or is there something highly unusual about it? Second, what are the likely intended and unintended implications and repercussions? More specifically, does the internationalization of China’s enterprises embody a multitude of new opportunities for business development and cooperation in a globalizing world, or will the perception of a competitive threat weigh heavily on the international fortunes of Chinese enterprises?

6 1.1.2. Is China’s Internationalization Push Unusual?

From the vantage point of timing and competitiveness criteria, China’s unfolding enterprise internationalization appears to contradict conventional FDI theories.10 For the better part of three decades, the FDI trend has appeared to be highly unidirectional. By 2003, China had emerged as the world’s most prominent destination for FDI, attracting US$ 53.5 billion and surpassing the United States in the process (UNCTAD 2004). Since then, the FDI inflows have risen to US$ 72.4 billion in 2005 (UNCTAD 2006), a more than 20% increase over 2004.11 In the wake of the “Open Door” Policy promulgated by Deng Xiaoping in the early 1980s, China has attracted a steadily rising stream of foreign multinationals, lured by the potential of the proverbial one billion consumer base, and low production and labor costs. The trend accelerated further as more and more foreign business recognized that they stood to ignore the Chinese market at their own costs. In recent years, however, while continuing to be the world magnet for FDI flows, China is also beginning to establish itself as a credible source of FDI in its own right (Table 1.3).12 Whereas economic development and catch-up in the post-Mao era centered around gradual experimentation with new forms of economic organization and institutional arrangements, as evidenced by the pragmatism behind “crossing the river by feeling the stones” (mozhe shitou guo he), a peculiar combination of domestic and international conditions have shaped the scope, ambitions, and commitment of China’s contemporary internationalization (see Tables 1.1., 1.2. and Figure 1.2.).

Table 1.3: China FDI Flows (US$ million; % of gross fixed capital formation in parentheses)

1990-2000 FDI Flows 2002 2003 2004 2005 (annual average)

30,104 52,743 53,505 60,630 72,406 Inward (11.3) (n/a) (8.6) (8.0) (9.2)

2,195 2,518 -152 1,805 11,306 Outward (1.0) (n/a) (n/a) (0.2) (1.4)

FDI Stocks 1980 1990 2000 2004 2005

Inward 1,074 20,691 193,348 245,467 317,873 (n/a) (5.4) (17.9) (14.9) (14.3)

Outward n/a 4,455 27,768 35,005 46,311 (n/a) (1.2) (2.6) (2.1) (2.1)

Source: UNCTAD, World Investment Report 2006. n/a = not available

10. See for example, Krishna Kumar and Maxwell G. McLeod, Multinationals from Developing Countries (Lexington, MA: Lexington Books, 1981), and John Dunning, “The Investment Development Cycle and Third World Multinationals,” in Multinationals of the South: New Actors in the International Economy, ed. Kushi M. Khan, 15-47 (New York, NY: St. Martin’s Press, 1986). 11. According to UNCTAD, this growth rate takes into account the addition of financial services sector FDI inflows into the general methodology for compiling FDI statistics. However, even if financial services sector inflows were added to the 2004 data, then totaling US$ 63.8 billion, the increase would still be a solid 13% (UNCTAD Investment Brief 2-2007). 12. In aggregate terms, however, China’s outward FDI flows remain minuscule compared to the world total.

7 McKinsey & Co., a global consultancy, noted in a study that recent M&A activities of Chinese companies may increasingly be driven not only by global aspirations, but are likely an obvious adaptation to rising competition in the domestic market and a calculated move to reduce what appears to be a widening gap in capability vis-à-vis foreign competitors. The strategic motivations behind internationalization have also evolved from simply addressing the demand for natural resources to also reflecting deeper desires of seeking out new markets, gaining access to new technology and diversifying business risks (Hong and Sun 2006: 615-16). Similarly, Zeng and Williamson (2007: 16-17) attribute the comparatively earlier shift of Chinese enterprises towards outward internationalization13 to the globalization of the world economy, the opening up to the world at an early stage of national economic development, and the overall effect of inward internationalization, including knowledge and technology transfer, cooperative ventures with foreign multinational companies, and rising competitive pressures resulting from foreign companies penetrating the domestic market of their Chinese counterparts.

1.1.3. Chinese Internationalization – Opportunity or Threat?

The possibility of the determined and aggressive expansion of Chinese enterprises into international markets triggering a ‘Sinophobia’ eerily reminiscent of the Japan-bashing that ensued in the aftermath of the Japan Challenge of the 1980s is certainly not as distant as one might hope.14 In fact, the vitriolic reaction that the unsolicited CNOOC bid for Unocal triggered in political circles within the United States in mid-2005 looked distinctly like a sneak preview of a potential sequel to the backlash against the international expansion of Japan, Inc. in the 1980s. Moreover, the reaction to the expanding international ambitions of Chinese companies may grow increasingly visceral, due in no small part to the fact that the China challenge is emanating from a nominally socialist/communist base. C. Richard D’Amato, former chairman of the U.S.-China Economic and Security Review Commission (USCESRC), painted a very bleak picture for the future of Chinese investment activities in the United States when he objected to the CNOOC bid on the grounds that “it simply is not a market-based transaction.”

13. This study will differentiate between both inward and outward internationalization, with the former certainly already a defining element of the economic reform process under Deng Xiaoping (e.g. setting up of special economic zones to woe foreign investors; promoting the creation of joint-ventures, etc.). See Chapter 4 for details. 14. A range of publications are already trying to predict and warn about the future impact of China on the global economy and individual lives. See: Randall P. Peerenboom, China Modernizes: Threat to the West or Model for the Rest? (Oxford, UK: Oxford University Press, 2007); James Kynge, China Shakes the World: A Titan’s Rise and Troubled Future – and the Challenge for America (Boston, MA: Houghton Mifflin, 2006); C. Fred Bergsten, Bates Gill, Nicholas R. Lardy, and Derek Mitchell, China: The Balance Sheet – What the World Needs to Know about the Emerging Superpower (New York, NY: Public Affairs, 2006); Oded Shenkar, The Chinese Century: The Rising Chinese Economy and Its Impact on the Global Economy, the Balance of Power, and Your Job (Upper Saddle River, NJ: Wharton School Publishing, 2006); and Ted C. Fishman, China, Inc.: How the Rise of the Next Superpower Challenges America and the World (New York, NY: Scribner, 2005).

8 CNOOC eventually withdrew its bid in the face of concerted efforts of a determined anti-China political phalanx in Washington, D.C. In the end, however, it was rather ironic that the Chinese side would be remembered more for their capitalist leanings, whereas the United States did not hesitate to discard free market rhetoric for protectionist impulses.15 The lessons of the 1980s Japan Challenge seem to be largely forgotten in the United States. If not in corporate boardrooms, then certainly in the maze of what is political Washington. Forgotten indeed, or at the very least not internalized, but for one obvious exception. Nothing helped galvanize opposition to perceived economic eclipsing of U.S. corporates by their Japanese counterparts than the stoking of irrational fears and nurturing of Japan-bashing phenomenon. Amid the cacophony of protectionist tendencies, however, some moderate voices called for a more objective analysis of the factors that led to Japan surging ahead in the 1980s. Among them was Clyde Prestowitz who seemed to profess a veiled admiration for the Japanese success, much of which he attributed to U.S. economic and corporate complacency, near-unconditional embrace of liberal economic ideology and belief in unquestioned maintenance of technological and productive leadership (Prestowitz 1988). How long before predictions of “China as Number One” will grab headlines? The emergence of China-inspired versions of Trading Places (Prestowitz 1988), Head to Head (Thurow 1992), is not a question of if but merely of when. Indeed, the literature is already beginning to accumulate, although it has thus far managed to avoid overt China-bashing undertones. Shenkar (2005) sees in the magnitude of China’s economic challenge a potential to trigger a significant backlash in the U.S., driven by “geopolitics, animosity perceptions, and other ‘nonrational’ considerations.” He further argues that commonly accepted views on the nature of national and firm competitiveness, the value of geographic proximity, and the cost of market entry and exit will be questioned by the sheer extent of the Chinese business challenge. Though fears of Chinese competitive challenges with the potential of shaking up the pedestal of enterprise competitiveness in the near future are misplaced, ignoring the latent potential would admittedly not be a prudent and advisable course of action. The competitive challenge is no longer exclusively concentrated in labor-intensive manufacturing alone – areas in which the Chinese companies benefit handily from the so-called China price16 – but has begun to spill over into

15. For a discussion of the futility and unhelpfulness of protectionist tendencies to ward off the China challenge, see: David Wall, “China as a Trade Partner: Threat or Opportunity for the OECD?” International Affairs 72, no. 2 (April 1996): 329-344. 16. Ming Zeng and Peter Williamson argue that the China price advantage is not simply based on low labor cost. In effect, they posit that Chinese companies’ cost innovation derives from their ability to offer an impressive line-up of products, incorporate high technology at low cost, and produce specialty products at volume prices. The combination of these features leads to a highly competitive cost innovation structure. For details, see Ming Zeng and Peter J. Williamson. Dragons at Your Door: How Chinese Cost Innovation is Disrupting Global Competition (Boston, MA: Harvard Business School Press, 2007). For an assessment of the hidden costs of China’s economic competitiveness, see Alexandra Harney, The China Price: The True Costs of Chinese Competitive Advantage (Penguin Press, 2008).

9 advanced technology as well, albeit hardly recognized at this point. Preeg (2005) outlines the potential seriousness of the current Chinese challenge to U.S. advanced technology leadership. In particular, he notes that the coming challenge from China in advanced technology industries is compounded by a glaring “lack of official interest in Chinese advanced technology innovation.” At the same time, however, it is also helpful to view the competitive challenge of China in a broader context. In recent years, the distribution of wealth and power in the international system has seen a very real and accelerating shift from the Western to Eastern hemisphere (Mahbubani 2008, Prestowitz 2005; Zakaria 2008). In more ways than one, the reality of a globalizing world is providing new opportunities for emerging markets to catch up with developed economies, unlock their potential and emerge as credible challengers of the established economic and/or political status quo (Agtmael 2007; Amsden 2001). One way this is currently playing out in the global economic and commercial space is in the ability of emerging-market multinationals to lower cost structures with creative product differentiation, resulting in a rapidly-expanding “cost innovation”-driven challenge (Zeng and Williamson 2007) and reshaping the competitive landscape.17 Judging from the slogan adopted by China’s leading white-goods manufacturer – Go Abroad, Go Localized, Go Higher-Globalized Haier – and considering that Haier’s internationalization model of first difficult, then easy (building brand image in developed markets first before expanding into developing markets) is being adopted by numerous other aspiring Chinese firms, it is fair to assume that the wave of enterprise internationalization from China will only garner further momentum in the years ahead. As Chinese enterprises continue to expand overseas, their activities have been greeted with consternation, , and at time blatant economic nationalism and protectionism. This is partly resulting from some of the more obviously uncomfortable consequences of economic globalization, including industrial hollowing-out prompted by off-shoring and outsourcing of activities to developing economies. At the same time, the reality of an increasingly interdependent and connected or “flat” (Friedman 2007) world, now also presents new opportunities for emerging economies to nurture their own multinational companies (Agtmael 2007), which in turn harbor ambitions to gain access to developed economy markets. Over time, increasing levels of inward FDI flows are going to generate alarm in political circles, as well as among the public, not least because of the perceived threat from foreign competition in domestic markets. In an effort to insulate the domestic economy from foreign competition, domestic vested interests oftentimes trigger calls for highly regulated FDI inflows (Kang 1997) in order to limit foreign company influence over the domestic political environment (Mitchell

17. Elucidating the effect of emerging peer competitors on a country’s domestic economy and its companies are Thornton F. Bradshaw et al. (eds.), America's New Competitors: The Challenge of the Newly Industrializing Countries (Cambridge, MA: Ballinger Pub. Co., 1988); Norman J. Glickman and Douglas P. Woodward, The New Competitors: How Foreign Investors Are Changing the U.S. Economy (New York, NY: Basic Books, 1989).

10 1995; 1991). Additionally, fueling the fires of protectionism and economic nationalism are concerns over national economic autonomy (Gordon and Lees 1986), national security (Tolchin and Tolchin 1992; 1988), and even overall economic prosperity and security (Glickman and Woodward 1989).18 One of the most pervasive criticisms fielded in an effort to stymie Chinese enterprise internationalization is the argument, that Chinese companies, by virtue of the country’s socialist/communist base, are inevitably and unalterably under the immediate control and/or influence of the Chinese central government.19 Further complicating attempts to objectively analyze Chinese enterprise internationalization is the geo-political and geo-strategic challenge China presents to other great powers, notably the United States at the broad international system level. In this context, Chinese enterprises are primarily considered corporate vehicles tasked with implementing the broad strategic and political objectives of the Chinese government. Fueling such perceptions is also a veritable cottage industry of alarmist publications warning about the impending “China Threat.” Meanwhile, publications that strive for a more even-handed assessment of China remain decidedly in the minority of contemporary studies that aim to influence the debate over China’s growing weight in the international system.20

1.2. ASSESSING CHINA’S ENTERPRISE INTERNATINALIZATION –A QUESTION OF RELEVANCE?

China’s political economy has been in a sustained and evolving process of transition since 1978. Some scholars characterize this process as a “revolution” (Cook and Murray 2001; Harding 1987; Lardy 1998; Wang 1994) or a “transformation” (Chow 2007; Garnaut and Song 2004; Guthrie 2006), or even as “globalization” (Guthrie 2006; Wei et al 2002). The impact of this development

18. The link between FDI and globalization, on the one hand, and protectionism and economic nationalism has been extensively covered. Jonathan Crystal, “A New Kind of Competition: How American Producers Respond to Incoming Foreign Direct Investment,” International Studies Quarterly 42, no. 3. (September 1998): 513-543; Tore Ellingsen and Karl Wärneryd, “Foreign Direct Investment and the Political Economy of Protection,” International Economic Review 40, no. 2 (May 1999): 357-379; Goodman, John B. Goodman, Debora Spar and David B. Yoffie, “Foreign Direct Investment and the Demand for Protection in the United States,” International Organization 50, no. 4 (Autumn 1996): 565-591); Kenneth Scheve and Matthew J. Slaughter, “Economic Insecurity and the Globalization of Production,” American Journal of Political Science 48, no. 4 (October 2004): 662-674. 19. After all, the enterprise internationalization of Japan and South Korea had largely been directed by their respective powerful bureaucracies, namely the Ministries of International Trade and Industry. China, with a deeply rooted prior experience with central planning, surely displays similar characteristics, so the argument goes. We will address this issue in detail in Chapter 3. 20. See, for example, Paul Monk, Thunder from the Silent Zone: Rethinking China (Carlton North, Australia: Scribe Publications Pty Ltd, 2007). Will Hutton, The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy (New York, NY: Free Press, 2006), meanwhile, calls for the application of economic pragmatism and a willingness to engage rather than confront China. If adopted, a mutually beneficial outcome at a time when China’s rise is threatening to shake up the international status quo ante, becomes a distinct possibility.

11 has even been captured through the perspective of economic actors (Liu 2005; Zhang 2004). Woven into all of these accounts is the recognition that since 1978 the Chinese economy has been on a committed course towards global economic re-integration and has assumed a rapidly accelerating degree of importance therein. In light of the growing attention devoted to China’s rise in the global economy21, the comparative dearth of scholarship on Chinese enterprise internationalization is both unmistakable and inexplicable, considering the documented growth of China’s outward investment, the gradual rise to prominence of Chinese multinational companies, and the evolution of China’s policy regimes and regulatory framework (Zhang 2003: 2-3).

1.2.1. Relevance of Chinese Enterprise Internationalization Study

Before outlining the conceptual and analytical framework of the study (presented in Chapter 2), it is appropriate to briefly reflect on two obvious questions. Why is this study relevant? What is the novel contribution this study is likely to make to the current scholarship on Chinese internationalization? To date, perhaps the most intellectually compelling answer to the first question is that the process of Chinese enterprise internationalization offers an opportunity for extending mainstream theories of business internationalization by reflecting on the economic backwardness, latecomer, or catch-up dynamics (Amsden 2001; Gerschenkron 1962; Tan 2005), the nature of institutional dependence or relational framework between state and enterprises (Callon 1995; Evans 1995; Johnson 1982; Maxfield and Schneider 1997; Putterman and Rueschemeyer 1992), and the “liability of foreignness” and brand power weakness. I shall briefly speak to the relevance of the study by commenting on each of these proposed opportunities for theoretical extension prior to adding two additional arguments. Latecomer Development and Catch-Up: China’s post-1978 race for economic catch-up and development has often been discussed in terms of a “dual-track transition” (Fan 1994; Lau et al. 2000). In much the same way, the enterprise internationalization process features a dual-track – inward and outward internationalization. The late-development and economic catch-up dynamics in China have been reflected in inward internationalization through the pursuit of a partnership route, defined by original equipment manufacturing (OEM) or joint venture processes. Following extensive periods of experimentation, acquisition and transfer of technology, managerial skills and modern business practices, the inward focus may in turn give rise to a gradual outward commitment through acquisition or organic expansion (Child and Rodrigues 2005: 389-398). State Role and State-Enterprise Relations: An interesting line of inquiry is whether and to what extent state agents play a role in the internationalization of Chinese enterprises. It is easy to understand the general tendency of interpreting China’s economic development success through the “East Asian Model” prism

21. For an early comprehensive review of the economic dimension of China’s rise, see William H. Overholt, The Rise of China: How Economic Reform Is Creating a New Superpower (New York, NY: W. W. Norton, 1993).

12 and, correspondingly, to depict the trend as a “déja-vu all over again” (Peerenboom 2007: 26-81). From a macro-economic perspective, the Chinese trend indeed shows striking similarities to the earlier Japanese and South Korean economic development processes. However, I contend that from a more institutional and interactional perspective, the role of state agents in the Chinese process differs markedly from the Japanese and South Korean cases. In other words, it begets the question as to what extent the Chinese experience can be explained with the classical developmental state model. Related to the previous point, any analysis of the emergence of internationalizing enterprises in China has to come to terms with, and carefully evaluate, the view that “administrative intervention and intrusion into corporate decision-making and management with regard to both domestic operations and international business is ubiquitous” (Zhang 2003: 44). Zhang is to be commended for taking the first step towards explaining the internationalization dynamic in the context of the politics and economics of transition. Unfortunately, he stopped short of dealing more directly with what Ekiert and Hanson have termed “contextually embedded processes” when he notes,

The particular features of China’s transitional politics and changing economic governance make it inescapable that government policies become the most significant explanatory variable for the transnationalisation of Chinese firms. The key to grappling with the intriguing question of the emergence of China’s aspiring global businesses is therefore to examine the political economy of the evolution of critical government policies that either foster and encourage or restrict and regulate the transnational operations of Chinese enterprises (Zhang 2003: 44).

Attempts in the Soviet bloc economies to incorporate market-conforming processes into centrally-planned economies appeared to provide proof that “in a partially reformed command economy market forces were unlikely to outgrow and redefine the institutional parameters set by the communist state, much less become the primary driver of sustained economic growth” (Lin 2001: 1, emphasis added). Yet, China’s post-1978 experience did not validate the argument of purportedly inherent dilemmas and contradictions related to market and state structure in partially reformed transition economies (see Kornai 1990). Rather, the economic reform efforts launched after 1978 in China created fertile ground for market forces to outgrow and redefine the very institutional parameters set by the Chinese Communist Party-State. Additionally, the commitment to economic reform and development also prompted a re-appraisal of central-local relations (Cheung, Chung and Lin 1998; Herrmann-Pillath and Feng 2004; Jia and Lin 1994; Liu 1992; Oi 1992, 1995; Xia 2000) and, correspondingly, has affected and will continue to impact relations between enterprises and state agents at various levels of China’s political economy space. These emerging realities need to be factored into any comprehensive analysis of the politics, economics, and overall processes of enterprise internationalization. Liability of Foreignness: Expanding overseas and breaking into new markets entails challenges and strategic as well as commercial considerations for any

13 business enterprise. This may be due to prevailing business practices in the domestic market and overall social environment, and involve questions of brand development and recognition.22 An effective branding product strategy has been shown to positively affect performance satisfaction (Brouthers and Xu 2002) and to overcome product stereotypes and overall quality perceptions, which easily translate into consumer aversion to foreign goods (Klein 2002). The political relevance of these liabilities is two-fold. On the one hand, in attempting to overcome these liabilities, Chinese enterprises follow a trend, established in international business literature, of setting up overseas subsidiaries, with the intent to develop overseas market knowledge and brand power through the acquisition of foreign assets (Barboza 2005; Child and Rodrigues 2005; Johanson and Vahlne 1977). This emerging reality, as previously discussed, has the distinct potential of stirring the fires of economic nationalism and protectionism. The accelerating trend of Chinese enterprise internationalization and of an aggressive uptake in Chinese outward FDI flows only helps to add more fuel to these fires. Two additional arguments in support of the inherent relevance of this study draw on the proposition that China’s rapid, dramatic and far-reaching international economic expansion has not been, is not, and likely will not be, greeted with the same sense of positive acceptance as the country’s re-integration into the world economy. I ground this proposition in two main arguments. First, the timing of the Chinese businesses’ rise to prominence on the international stage is not overtly propitious, given that it takes place at a time when the ill-effects of globalization are, for better or worse, beginning to take center-stage in many countries’ domestic politics. The second is the realization that Chinese enterprises are beginning to constitute a significant and non-negligible competitive and business challenge that relies increasingly on market-conforming, quasi-capitalist methods and strategies. Timing: The Chinese wave of enterprise internationalization is gathering momentum at a time when the effects and consequences of ever-stronger international integration and interdependence draw increasingly skeptical, if not hostile reactions from a growing range of actors on the world stage. In large measure, this is a reaction to unbridled liberal globalism, under which nation- states are progressively relinquishing a significant degree of state autonomy (both politically and economically), lest they find themselves on the periphery of an increasingly globalized world of international finance and trade. In other words, becoming, and maintaining the status of, a full-fledged member of the globalization-driven economic world order forces nation-states to cede some, if not all, of their cherished state autonomy in specific issue-areas.

22. This necessitates the creation of effective synergy between image (customer experience), profile (public perception), and identity (actual product/service). See Judith Gloppen, “Brand Development and Credibility,” DMI (Design Management Institute) eBulletin (March 2005). http://www.dmi.org/dmi/html/publications/news/ebulletin/march05ebulletin.htm#viewpoint. For an Asia-specific focus, see Paul Temporal, Branding in Asia: The Creation, Development, and Management of Asian Brands for the Global Market (New York, NY: Wiley, 2000).

14 The breadth and depth of international economic integration and interdependence at the beginning of the 21st century is rapidly (re-)shaping and impacting international competitiveness on an unprecedented scale (e.g. Zeng and Williamson, 2007). In an increasingly borderless world, the world’s multinational companies are competing in a multi-layered market structure.23 Not only are they competing on a global level for access to markets, talent and resources, but the presence and expansion of multinational companies in host countries is giving rise to a significant degree of globalization backlash – a backlash that is manifesting itself in both the economic and political realms. This backlash is most evident in the context of the dominant buzzwords surrounding contemporary debates on globalization – off-shoring, hollowing-out, outsourcing, etc. Moreover, the contemporary context has proved highly conducive to a disturbing resurgence of protectionism and economic nationalism, as previously mentioned. Capitalist Communists? Without any doubt, economic reforms have changed and revitalized China in substantive ways ever since the Maoist era. It should not be all too surprising that, following China’s process of re-integration into the global economy, culminating in its accession to the World Trade Organization (WTO) in 2001, Chinese business practices are gradually converging towards internationally accepted norms and standards of economic interaction and more market-oriented business strategies.24 Notwithstanding this seemingly logical evolution, the reticence, if not open hostility, greeting Chinese aggressive investment forays into the global marketplace (the CNOOC is but the most prominent example to date) is not only due to the timing of expansion, but also to the fact that the latest capitalist challenge is emanating from arguably the most unlikely of sources – a socialist economy headed by a Communist Party leadership. The puzzling question seems to be how a socialist/communist system could possibly have turned into an incubator for capitalist dynamics that seem to rival those of established free market economies (e.g. Hong & Sun 2006: 633). Exceedingly concerted opposition to, and a rapidly strengthening inclination towards active China- bashing (reminiscent of the Japan-bashing of the 1980s) have merely laid bare a rapidly spreading institutionalization of ill-informed, biased and unfounded assessments of the true nature of the rising Chinese economic challenge. Unless addressed in a timely manner, these assessments may well lead to further ossification and perpetuation of misperceptions, with the result of translating

23. Kenichi Ohmae offers a vivid account of the economic and business implications of globalization. See: Kenichi Ohmae, The Next Global Stage: Challenges and Opportunities in Our Borderless World (Upper Saddle River, NJ: Wharton School Publishing, 2005); The End of the Nation-State: The Rise of Regional Economies (New York, NY: Free Press, 1995); The Borderless World: Power and Strategy in the Interlinked Economy (New York, NY: HarperBusiness, 1990). 24. This interpretation draws heavily on Walt W. Rostow, The Stages of Economic Growth: A Non-Communist Manifesto (Cambridge, UK: Cambridge University Press, 1960), and Jan Tinbergen, “Kommt es zu einer Annäherung zwischen den kommunistischen und den freiheitlichen Wirtschaftsordnungen?” Hamburger Jahrbuch fir Wirtschafis- und Gesellschaftspolitik 8 (1963): 11-20. See also Jacob Park, “Unbundling Globalization: Agent of Policy Convergence?” International Studies Review 4, no. 1 (Spring 2002): 230-233.

15 perceived strategic and security challenges into real ones, all the while remaining oblivious to the very real and critical economic and business challenges emanating from China.25 It has also become an obvious and undeniable manifestation that many, if not most, of China’s recent business forays into international markets are driven exceedingly by market-economy and capitalist fundamentals. Whether or not it finds acceptance in certain circles, the reality is that many developing economies, even if their political structures as of yet prove to be to varying degrees incompatible with Western democratic ideals, nevertheless harbor a manifest eagerness to energetically and enthusiastically embrace Western market-economy institutional and commercial practices.

1.2.2. A Comparative Starting Point

This study is likely to contribute meaningfully to the current literature on Chinese enterprise internationalization by putting the question of the role of the state in economic development as well as the state-business nexus in a broader perspective. The comparison of the rise of China Inc. in the 21st century with that of Japan, Inc. in the 1970s-1980s and Korea, Inc. in the 1990s seems at first glance an obvious one. China’s rise to prominence in international business represents what could be termed the “third wave” of Asian business internationalization. Beyond that, however, do the Chinese, Japanese, and South Korean enterprise internationalization processes share inherent similarities in terms of motivation and enabling factors, including most notably the role of the state in encouraging outward business orientation, and state-business relationships? Moreover, are the dynamics that gave rise to China’s enterprise internationalization necessarily the ones that will sustain it over time? And if they are not, how is this likely to affect the nature of institutional and interactional spaces in China’s political economy? Could it be that potential evolution in the institutional and interactional spaces is a function of the degree of success of internationalization? These are all questions that will be addressed in this study. The primary benefit of striving for the degree of analytical clarity implied by this research lies in elucidating the domestic political-economy-driven motivations, concerns, and processes that influence Chinese enterprise internationalization. In the process, such an analysis will also prove invaluable in arguing the need for objective, contextual interpretation and explanation in a comparative context. Indeed, confronted by the challenge and urgency of making sense of this latest Asian wave of enterprise internationalization, the majority of studies have focused too extensively on its visible outward manifestations, at the

25. Arguably, the excessive and near-exclusive focus on geo-political, geo-strategic and military dimensions of the rise of China only reinforce these stereotypes. At the present time, the China debates are imbued to an overarching degree with the “China Threat” notion. Prominent contemporary examples of this scholarship include Constantine C. Menges, China: The Gathering Threat (Nashville, TN: Nelson Current, 2005); Bill Gertz, The China Threat: How the People’s Republic Targets America (Washington, DC: Regnery Publishing, 2002); Richard Bernstein and Ross H. Munro, The Coming Conflict with China (New York, NY: A. A. Knopf, 1997).

16 expense of a more complex and integrative analysis that also assesses the causes and consequences for China’s domestic political economy. In other words, lifting the fog of misperception surrounding Chinese enterprise internationalization, induced by decontextualized analysis and a single-minded determination to view it as a zero-sum proposition, as well as dispelling other myths possibly derived from it, will be at the heart of this study. In fact, its underlying premise is the unequivocal need for bringing contextualization back into the analysis of the causes and implications surrounding China’s enterprise internationalization. Special emphasis will be given to the implications this trend will have on China’s overall political economy space. Ideally, this realization will then reduce the number of instances where the analysis and evaluation of Chinese enterprise internationalization becomes an exercise in politicization of commercial dynamics.

1.3. BRIEF DISSERTATION OUTLINE

In an attempt to bridge the contextual gap between reality and analysis of enterprise internationalization, a range of specific myths and misperceptions influencing the contemporary understanding of China’s political economy structure will need to be critically re-appraised. This study identifies three particularly pervasive myths. One, the legacy of a centrally-planned economic structure, the continuing emphasis of five-year economic plans and the persistence of Communist Party rule have helped to reinforce the notion of ubiquitous and strong central government control of, and influence over, the country’s governance structure. In a related manner, these legacy effects also propagate the perception that all Chinese enterprises are invariably state-owned and/or state-controlled. Third, the Chinese government’s active promotion and encouragement (directly as well as indirectly) of Chinese enterprise expansion into overseas markets, has triggered suspicions as to the broader strategic and geopolitical motivations and goals; concerns that are further reinforced by China’s emergence as a critical player on the global economic, political, and security stage. The subsequent chapters will address these perceptions, with the aim of contributing to an enhanced understanding of the emerging political economy of enterprise internationalization in China and to a contextually embedded appreciation of the dynamics and consequences of what the eminent Japanese business strategist Kenichi Ohmae (2005) has termed “the next global stage.”26

26. For all the talk, favorable towards as well as critical of, globalization and the prediction of an emerging “borderless world” (see Ohmae 1990), the reality, when viewed through the prism of enterprise internationalization, suggests a continued dichotomy between advanced industrial economies, and developing/emerging economies. A string of recent overseas expansion and investment activities (both successful and failed ones) emanating from emerging/developing economy business enterprises have given rise to heated debates and sometimes outright opposition in advanced industrial economies. Indicative examples of such a resurgence of economic nationalism and protectionism were reactions to India’s Mittal Steel’s bid for Luxembourg-based Arcelor Steel in January 2006 and China’s China National Offshore Oil Corporation’s (CNOOC) unsolicited bid for Unocal in June 2005.

17 Moreover, a contextual understanding and evaluation of China’s expanding enterprise internationalization process will also prove invaluable in re-assessing international competitiveness (Berger 2006) and focus on challenges and opportunities raised by the emergence and internationalization of emerging- market enterprises (Agtmael 2007; Preeg 2005).

Chapter 2 – Outlining the Conceptual Approach

This chapter takes stock of the contemporary literature of Chinese enterprise internationalization. In addition to providing a general review of the major arguments and focal issues of the existing analyses, analytical shortcomings – of both conceptual and empirical nature – will also be noted. Second, we will elaborate on the dominant myths and misperceptions governing current interpretation of and reaction to Chinese enterprise internationalization; issues that inform the insistence on a more contextually-grounded analysis. These issues include: (1) the myth of near-absolute state control over economic affairs in China; (2) the image of all Chinese enterprises being state-owned; and (3) a refusal to entertain the possibility that the institutional and interactional arrangements of China’s political economy space have not only undergone significant evolution over 30 years of economic reform, but that the country’s internationalization push is likely to prompt further changes.

Chapter 3 – A Comparative Starting Point

Chapter 3 opens with a review of the developmental state literature, which will serve as a crucial reference point for my analysis of Chinese enterprise internationalization and how it relates to institutional and interactional space (and evolution thereof) in China. At the same time, this leads directly into a meaningful, and I would surmise, crucial, contextualized comparative analysis of the dynamics and drivers of Japanese and South Korean business internationalization. In what ways do these antecedent waves of Asian business internationalization display similarities and/or differences? How might we account for them? What particular political economy considerations do the antecedent waves of internationalization point towards, and are those same considerations applicable to the Chinese case? The insights generated from such a juxtaposition will prove highly valuable.

Chapter 4 – A Macro-View of Internationalization

The chapter begins with a broad situational grounding of the enterprise internationalization debate, highlighting critical junctures in China’s economic development and drawing a clear differentiation between the inward and outward stages of internationalization. The aim here is to shed some light on whether the Chinese internationalization process is but the inevitable manifestation of the “great transformation” that the Chinese economy has begun in 1978, or whether it should first and foremost be viewed through the lens of particularistic policies and vested interests? Or, perhaps, is the process best explained as a hybrid of both variables?

18 We will then assess and evaluate the general enabling conditions and motivations driving the current commitment to outward internationalization, with the aim of elucidating the gap between the perceived and actual motivations behind this new trend as well as the contemporary institutional and interactional reality of China’s political economy.

Chapter 5 – Perceptions vs. Realities

In this chapter, the overarching proposition that current analysis of enterprise internationalization – particularly evaluation of the purported motivations and goals – fails to consider the far-reaching changes in China’s political economy structure over the course of thirty years of economic reform and gradual transition from plan to market will be revisited with a range of illustrative examples drawn from the state and non-state sectors of China’s economy. Additionally, three emerging political economy trends with the distinct potential to induce even more far-reaching changes and evolutions in terms of interactions and interdependence of state and economic actors in China’s domestic political economy space will be discussed.

Chapter 6 – Conclusion

This chapter begins by reviewing the context for the study before offering a concise and comprehensive summary of the major arguments presented. In addition to acknowledging specific limitations of the study, I will also identify a range of fruitful and promising avenues for further research on Chinese enterprise internationalization. These avenues will be instrumental in further extending the understanding of Chinese enterprise internationalization beyond the conceptual scope stressed in this study.

19 Chapter 2

2. A Conceptual Framework for Assessing China’s Enterprise Internationalization

CHAPTER OVERVIEW

International business and political economy literatures are beginning to devote increasing attention to the emerging phenomenon of Chinese enterprise internationalization. The focus of these studies, however, is limited primarily to outward orientation of enterprise internationalization, i.e. exports, foreign direct investment (including the establishment of subsidiary operations), and M&A activities. Meanwhile, the inward aspect of internationalization, including the effect of economic opening-up and the establishment of joint venture operations, is marginalized. Moreover, the scope of research on China’s internationalization process is limited to particular economic and business aspects, while the political causes, motivations, and by inference the effects and implications of broader institutional and interactional changes on China’s domestic political economy space, are issue-areas receiving little to no attention.1 This chapter begins with a review of contemporary, China-focused enterprise internationalization studies and highlights empirical and contextual shortcomings. The conceptual approach introduced in this chapter is designed to elucidate the institutional and interactional aspects of enterprise internationalization. Of particular analytical interest will be the effect of internationalization on the institutional and interactional spaces of China’s political economy environment over time. This has been a line of inquiry that has, as of yet, not been pursued in any systematic fashion.

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Since 1978, the trajectory of China’s economic rise has been the focus of sustained intellectual research and debate. Studies of China’s political economy not only extend across a broad and growing range of issue-areas but have also contributed to a rich and diverse body of explanations, speculations and predictions, owing to differing analytical, ideological and/or theroretical reference

1. David Zweig, Internationalizing China: Domestic Interests and Global Linkages (Ithaca, NY: Cornell University Press, 2002) is one of the few more comprehensive perspectives on the internationalization of China to date. He not only deals with important issues such as development zones, foreign investment and education, but ties all these aspects into a broader evaluation of their influence and impact on state power.

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points and frameworks.2 Of late, an emerging and growing research interest is the pronounced international aspirations of Chinese enterprises. Partly fueling this interest is the fact that the nature, time and reach of China’s internationalization appear to contravene conventional wisdom of internationalization.3 China is emerging as a source of FDI at the same time that it remains the world’s leading recipient of FDI inflows. It is an unfolding reality that bestows a distinguishing feature on the dynamics of economic development and reform of China’s political economy as well as on international business competition in the 21st century. The phenomenal economic growth record of post-Maoist China has over the years nurtured the rising expectation of China inevitably coming to exert a powerful influence effect on the world economy, possibly even significantly reshaping the economic and political rules of global business competition. China’s manifest commitment to a dynamic outward orientation is the result of push-pull effects in the economic and political realms. The process of enterprise internationalization in China, however, is not only the beneficiary of a conducive environment fostered by concerted efforts at economic reform and restructuring since 1978, including substantial policy liberalization with regard to outward FDI and a gradual discarding of ideological reservations towards multinational enterprises.4 Rather, the outward orientation of Chinese enterprises derives as much from domestic developments (see Keohane and Milner 1996) as it does from the concrete challenges and competitive pressures posed by FDI inflows, which have resulted in a set of intended as well as unintended consequences. On the one hand, the economic opening up of China in the 1980s allowed Chinese firms to begin a process of overcoming competitive disadvantages through inward internationalization, which would over time spill over into an outward commitment (Child and Rodrigues 2005). On the other hand, economic reform and liberalization also saw enterprises gradually facing rising competitive pressures in a rapidly diminishing domestic market, owing to

2. See Hongyi Lai, Reform and the Non-State Economy in China: The Political Economy of Liberalization Strategies (New York, NY: Palgrave Macmillan, 2006); Hans Hendrischke and Feng Chongyi (eds.), The Political ’s Provinces: Comparative and Competitive Advantage (New York, NY: Routledge, 1999); Shaoguang Wang and Angang Hu, The Political Economy of Uneven Development: The Case of China (Armonk, NY: M.E. Sharpe, 1999); Julia Kwong, The Political Economy of (Armonk, NY: M.E. Sharpe, 1997); Susumu Yabuki, China's New Political Economy: The Giant Awakes (Boulder, CA: Westview Press, 1995); George T. Crane, The Political Economy of China’s Special Economic Zones (Armonk, NY: M.E. Sharpe, 1990). 3. John Dunning identified ownership, location and internalization (OLI) advantages as key motivating factors for internationalization. See John H. Dunning, International Production and the Multinational Enterprise (London, UK: Allen and Unwin, 1981). 4. The analysis of China’s re-integration into the world economy after 1978, and the policy formulation and implementation problems that have accompanied that period, is not complete with an appreciation and requisite contextualization of the pre-1978 economic policy environment. Lawrence C. Reardon’s Reluctant Dragon: Crisis Cycles in Chinese Foreign Economic Policy (Seattle, WA: University of Washington Press, 2002), presents a comprehensive overview of economic policy debates, spanning the 1959-78 time period – a indispensable reference point for any analysis of the subsequent evolution of outward-directed economic policy of the Chinese government.

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the many inroads by foreign enterprises. Global economic integration also spawned concerns about the competitiveness of Chinese enterprises, especially state-owned enterprises (SOEs), following China’s entry to the WTO (Holbig and Ash 2002: 41-154; Mai 2000). The unfolding process of outward internationalization is partly an adaptive response to the changing competitive dynamics facing Chinese firms in their own domestic marketplace. In other words, the internationalization of Chinese business firms has occurred in response to the confluence of concrete opportunities and challenges resulting from economic reforms and re-integration with the global economy. Exclusive focus on economic and business competition rationale, however, diverts attention from another, equally compelling, driver of enterprise internationalization – political necessity. Beginning with the ‘Open Door’ policy of Deng Xiaoping in the late 1970s-early 1980s, economic reforms have charted a development course that has witnessed the incremental but steady transition from plan to market (Naughton 1995). Concurrently, their relative success has also engendered a straight-jacketing of policymaking and further exacerbated the challenge of political legitimacy of a party burdened with ideological bankruptcy (Wang 2002). Considering that the maintenance of political legitimacy is directly related to economic development and performance, it seems inconceivable that the leadership would even entertain the possibility of constricting contemporary international aspirations of business enterprises, much less engaging in political and policy machinations to reverse the social and economic gains already accrued by economic liberalization and internationalization. China’s “revolutionized economy” (Woetzel 2003) will be defined by further expansion of reforms and adoption of market-based mechanisms to confer a last remaining semblance of legitimacy on the Chinese Communist Party’s (CCP) hold on political power. Aware that political survival hinges on the ability to sustain efforts at continuously improving people’s economic livelihood, the Party, in a characteristically pragmatic fashion, has not just begun to openly champion deep reform (shenhua gaige) but has also lent credible support to extending marketization, including openly encouraging enterprise internationalization through its “Go-Out” (zou chu qu) strategy.5 Meanwhile, gradual deregulation and decentralization of economic decision- making have been evidentiary byproducts of economic reform, resulting in an expansion of marketization beyond the economic realm and into the political realm as authority relations have rapidly been subsumed by exchange relations (Lin 2001). What this reality further suggests is that while the outward orientation of the Chinese economy and its leading enterprises is based on a significant economic and political rationale, it has also begun, and likely will continue, to redefine the operative institutional and interactional arrangements that constitute the bedrock of China’s political economy structure. It is not difficult to frame the debate surrounding Chinese enterprise internationalization in simplistic terms. However, considering the intricate nature

5. See Lowell Dittmer and Guoli Liu (eds.), China’s Deep Reform: Domestic Politics in Transition (Lanham: Rowman & Littlefield, 2006).

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and far-reaching implications of this emerging trend, a more sensitive analytical approach is not only relevant but also necessary. Relevant because it will paint a more comprehensive picture of the underlying complexities and motives fueling this trend; necessary because it will prove critical in dispelling common myths and misperceptions concerning the context of and rationale behind internationalization. Put differently, it will ensure a more balanced, fact-based rather than perception-driven assessment of what by all accounts is going to be one of the distinguishing trends in international politics and the global economy in the 21st century. Following a brief definitional note on internationalization, the remainder of the chapter features two major sections. Section One takes measure of the emerging literature on the current state, trends, manifestations and hypothesized (and unfolding) implications of Chinese enterprise internationalization. Of particular interest will be the scope, depth and breadth of coverage and analysis provided by the studies published to-date. In other words, to what extent do these studies apply a critical and analytical framework, generating insights that not only could be usefully applied to a possible extension of prevailing theoretical models of internationalization (Child and Rodrigues 2005) but also contribute to a more focused assessment of Chinese enterprise internationalization from a conceptual point of view? In light of the fact that the internationalization debate is heavily influenced by theoretical models and propositions from the international business literature, relevant references – particularly with regard to the so-called process or stage models of internationalization – will also be made in due course. Section Two builds on the weaknesses and shortcomings of China-specific internationalization studies and internationalization theories. Here we develop a conceptual approach, influenced by “contextual path dependence” arguments (Ekiert and Hanson 2003) to better account for the complexities surrounding Chinese enterprise internationalization, notably the intricate institutional and interactional dynamics driving the process. The operative rationalization for this approach is that any balanced interpretation and analysis of Chinese enterprise internationalization needs to take into account transformative nature of economic reforms and restructuring on the country’s domestic political economy arrangement.6

2.1. A BRIEF DEFINITIONAL NOTE

The process leading to the rising prominence of Chinese business firms has already been described in the context of “globalization” (Yeung and Olds 2000; Nolan and Zhang 2002; Matsuno and Lin 2003; Wu 2005a) as well as “internationalization” (Low and Jiang 2003; Child and Rodrigues 2005). In some

6. Since the late 1970s, China’s policymakers have been contending with critical challenges on the road to economic transformation. Each of these challenges – “development”, “transition” and “globalization” challenges – has induced varying degrees of alteration to the structure China’s political economy. For a focused analysis of these various challenges, see Peter Nolan, Transforming China: Globalization, Transition and Development (London: Anthem, 2004).

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instances, these terms have been used interchangeably within studies to portray this emerging Chinese enterprise trend.7 It is not my intention to challenge the appropriateness of either term, as employed in the various studies. In fact, as far as the choice of terminology is concerned, it might certainly be appropriate to adopt either qualifier, especially considering that most studies focus exclusively on the outward orientation of enterprises. For the purpose of this study, I have chosen not only to use the term “internationalization” but furthermore to adopt a differentiation between inward and outward internationalization. Indeed, this distinction will prove particularly useful in discussing the domestic political dynamics and changes that have given rise to the process of Chinese enterprise internationalization, rather than simply looking at it as a “process of increasing involvement in international operations” (Welch and Luostarinen 1988: 36). Indeed, this clarification is all the more appropriate, given that the underlying focus of the research is to elucidate the effect and impact of the internationalization process on the institutional and interactional spaces in China and the need to factor these developments into the evaluation of Chinese enterprises’ overseas expansions, rather than simply assessing particular expansion strategies of Chinese enterprises. There is also a growing tendency in the literature to depict the emerging Chinese enterprise internationalization as a manifestation of the inevitable rise of China, Inc. Framed in that context, the unfolding debate invariably seems to invoke a comparison to the rise to prominence of Japan, Inc. in the 1980s and, to a somewhat lesser degree, of Korea, Inc. in the 1990s. The challenge posed by Japanese companies in the 1980s not only resulted in political backlashes and spreading of Japanophobia (Emmot 1993). It also gave rise to concerns of erosion of competitiveness of Western multinationals and loss of national assets to the appetite of “foreign raiders” (Tolchin and Tolchin 1992). It is furthermore worthwhile to point out that I have in fact consciously opted to reject the China, Inc. label in favor of a less deterministic and more value-free “enterprise internationalization” description. This decision not only grew out of the belief that “internationalization” more accurately captures the essence and importance of the events and developments playing out in contemporary China, but it also reflects a more judicious and careful use of political economy vocabulary. While the China, Inc. label is finding ever-expanding use in the literature (Fishman 2005; Wu 2005b; Sappenfield 2004), it in effect embodies in stark form what Giovanni Sartori (1970) has labeled “conceptual stretching” or conceptual straining. This is particularly obvious if the term is meant to imply degrees of similarity between the Japanese and South Korean cases on the one hand, and the Chinese case on the other. In the case of both Japan and South Korea, the Inc. designation referred primarily to a particular domestic political economy arrangement commonly described as an “Iron Triangle” – strong and

7. The French version of a study, conducted by the HEC Eurasia Institute in partnership with the French Foreign Trade Advisors (CCE), is entitled “L’internationalisation des enterprises chinoises”, whereas the English translation reads “The Globalization of Chinese Firms.”

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binding ties between big business, bureaucrats and ruling elites.8 Moreover, the promotion and active encouragement of internationalization by political leaders in China draw on motivations, vested interests and institutional dynamics that differ greatly from the arrangements that fueled the rise of Japan, Inc. and Korea, Inc., respectively. Chapter 3 will speak in greater length to the specific motivators as well as institutional and interactional specificities behind China’s internationalization drive.

2.2. CHINESE ENTERPRISE INTERNATIONALIZATION – A LITERATURE REVIEW

The studies of Chinese enterprise internationalization, spurred in recent years by a string of high-profile forays on the international business stage, are increasing in number, though the actual volume remains comparatively low. The following literature review is limited to studies on Mainland China enterprises.9 China is no longer just the world’s leading destination for but also establishing itself as a significant source of foreign direct investment flows. A study by Hong and Sun (2006) looks at the aggregate dynamics of, as well as the role of government policy and corporate entrepreneurship in, China’s growing overseas investments. Adopting a comparative approach, Hong and Sun posit that while Chinese outward FDI is similar in character to that of other Third World multinationals, it differs significantly if viewed from the perspective of “internationalization mode.” They allude to the dual-track internationalization – inward and outward internationalization, with the former generally preceding the latter. Moreover, the unfolding overseas investment activities of Chinese companies appear to be in many ways a combination of “evolving dynamics of government policies towards them, and the initiations and innovations at the company level” (Hong and Sun 2006: 612). Contrary to other studies, Hong and Sun’s analysis offers a fresh insight by pointing out the rising importance of transnational M&A activities (among the preferred overseas investment modes of Chinese firms in recent years) and by focusing on the previously ignored, though inherently important, aspect of raising financial capital through overseas listings.10 In reviewing the overall shift in the strategies of overseas direct investment, the authors highlight the evolution of general policies and the role of particularistic policies. In fact, Chinese outward FDI since the late 1970s has seen substantive changes not only in terms of objectives (from politically motivated to

8. See Chalmers Johnson, Japan, Who Governs? The Rise of the Developmental State (New York: Norton, 1995); Harold R. Kerbo, and John A. McKinstry, Who Rules Japan? The Inner Circles of Economic and Political Power (Westport: Praeger, 1995); and Richard Colignon, and Chikako Usui, “The Resilience of Japan’s Iron Triangle: Amakudari,” Asian Survey 41, no. 5 (September 2001): 865-895. 9. It is important to note that a number of studies discussing the internationalization of Chinese business firms use the designation “Chinese” in an overarching context, and fail to draw a clear distinction between Mainland Chinese enterprises and a broad range of (family) business firms (e.g. Yeung 2004; Yeung and Olds 2000). 10. See Joanna Chung, “A Capital Idea for Emerging Economies,” , Corporate Finance Special Report, May 30, 2007, p. 2

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commercially motivated), but also in terms of key actors (from central government to local government, enterprises) and strategic orientations (from simply natural resource-seeking to natural resource-seeking, market-seeking, technology-seeking, risk diversification, etc). From initial ideological opposition, focus on FDI inflow, and a pragmatic and experimental mindset in the early years of reform, the government position, influenced in large measure by the unfolding decentralization of the economic system, has tilted over the years towards greater liberalization and finally open encouragement of outward FDI through the “Go Out” strategy adopted by the Tenth Five-Year Plan, announced in 2001. Another line of argument in the literature links Chinese enterprise internationalization to informal privatization and the rise of “nomenklatura ” (Ding 2000). The primary rationale for a large number of overseas Chinese investment projects, according to the author, is “to serve the purpose of informally transferring property from state ownership to de facto or de jure private possession; a process defined as “informal privatization” (Ding 2000: 122). From the perspective of conceptual utility, such a description captures not only the peculiar context of Chinese economic transition, but has been replicated in different variations in numerous post-communist economies.11 Meanwhile, institutional heterogeneity of Chinese transnational companies (TNCs) precludes any easy generalization of motives, objectives, and overall behavioral dynamics. The pool of Chinese TNCs, according to the author’s typology, includes central state bodies, state financial institutions and industry- wide corporations, provincial governments and large municipalities, special economic zones (SEZs), giant state enterprises, and institutions controlled by the army and/or police (Ding 2000: 128). While these public bodies have largely received central government approval for transnational operations, the gradual decentralization of economic decision-making and steady but slow liberalization of outward FDI regimes has seen the number and types of public-sector investors pursuing overseas projects far exceed those approved by the central government. This trend has been nurtured, to some degree, by an accelerating inability of the central government to effectively monitor all aspects of transnationalization. As Ding notes, “[T]he failure of central control over this arena is inevitable as state firm managers and public officials are strongly self-interested…and operate in a vast country that has evolved economically into a para-federalist arrangement granting localities substantial autonomy” (Ding 2000: 129)12

11. In Divergent Paths in Post-Communist Transformation: Capitalism for All or Capitalism for the Few? (New York, NY: Palgrave Macmillan, 2006) Oleh Havrylyshyn studies the effect of post-communist transformation on East Central European countries and the Commonwealth of Independent States. See also, Andrew G. Walder, “Elite Opportunity in Transitional Economies,” American Sociological Review 68, No. 6. (December 2003): 899-916. 12. This theme has also been extensively discussed by Yi-min Lin, Between Politics and Markets: Firms, Competition, and Institutional Change in Post-Mao China (Cambridge, UK: Cambridge University Press, 2001). See also Yongnian Zheng, De Facto Federalism in China: Reforms and Dynamics of Central-Local Relations (Hackensack, NJ: World Scientific, 2007).

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Consequently, China’s integration into the global and regional economy through expanding outward FDI flows proceeds along a dual track. The legal outflows of capital are complemented to a significant extent by illegal outflows of capital, or capital flight, each of which are based on differential motivations and are redefining not just the roles played by different institutional actors, but also their influence and leverage over businesses. In China’s Emerging Global Businesses, Zhang (2003) sets out to explain the rapid rise of China’s outward FDI and the transnationalization of Chinese firms. The incentive behind this inquiry is the inexplicable and unmistakable puzzle as to

…why and how such a distinctive and sustained outward orientation of the transitional Chinese economy and such a creative response to economic globalisation by China have received so little attention. It is particularly surprising when other aspects of China’s foreign economic relations – China’s bid for WTO membership, the impact of its accession and FDI in China in particular – have received, and continue to attract, unremitting attention in the study of China’s economic transformation. China’s outward FDI is therefore a ‘novel dimension’ of China’s integration into the global economy …only in so far as it has been just recently and belatedly brought to our attention. (Zhang 2003: 222)

Having set a theoretical and conceptual groundwork for his inquiry, the author sheds light on the political economy dynamics driving the internationalization of China’s enterprises. Over the course of two chapters, he extensively discusses policies and debates related to internationalization, arguing that “[T]he particular features of China’s transitional politics and changing economic governance make it inescapable that government policies become the most significant explanatory variable for the transnationalization of Chinese firms” (Zhang 2003: 44). Outward investment and transnationalization of Chinese firms have not been a reality that has been accepted uniformly after 1978, but rather have given rise to extensive policy debates. In a first instance, the author elucidates how the image of transnational corporations has undergone a change from revolutionary China’s aversion and ideological opposition, through changing perceptions, to eventual political acceptance where “transnationals are no longer viewed as tools of capitalist exploitation but as agents and resources that can serve the purposes of Chinese development” (Zhang 2003: 52). The gradual transnationalization of Chinese firms unfolded as a result of policy evolution, beginning in 1979. As identified by the author, the particular policy innovations in 1978-1979 that paved the way for transnational operations of Chinese firms include the sanctioning (by the Chinese government) of firms with specific transnational business operations, the granting of approval for (and active encouragement of) national trading corporations to set up offices overseas, and an increasingly pro- outward investment orientation on the part of the Chinese government. In addition to the rapidly more conducive policy environment for transnational operations, prior accumulation of expertise and experience and leveraging of an extensive ‘relational network’ based on personal connections (), distinct advantages

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through government ownership, and creative firm-level initiatives proved to be firm-specific attributes that also contributed to internationalization. Drawing from firm-level case studies centered around identifying individual enterprises’ core strengths, advantages, competencies and incentives, the author concludes that market expansion, the desire to overcome tariff and trade barriers, the quest for scarce resources and acquisition of advanced technology appear to be the dominant motivating factors behind overseas investments. As for the preferred entry mode, there has been a noticeable embrace of M&A activities in recent years at the expense of Greenfield investments. Dexin Yang’s (2005) China’s Offshore Investments: A Network Approach, is one of the very few contemporary texts that approaches the study of China’s business internationalization with the application of a new theoretical model, derived from the notion of Asian business networks and guanxi.13 Focusing his analysis on outward FDI flows, the author seeks to contribute to the understanding of China’s business internationalization dynamics through the articulation of a “network approach.” He illustrates the nature of network relationships and how to apply those relationships to an analysis of FDI flows. Specifically, he distinguishes between “network-stretching,” “network expanding,” and “network-integrating” FDI.14 The network approach to FDI flows derives from what Yang perceives to be analytical and explanatory constraints of conventional theories of outward FDI. Whether focusing on developed or emerging economies, the general patterns of FDI flows deduced from the analytical frameworks of these theories are not, Yang contends, representative of China’s emerging outward FDI trends. Nor do they shed any clarifying light on the unique characteristics of China’s outward FDI flows, which have evolved through from an initial emergence (1979-84) period, through an early boom (1985-91) period, and into a steady development (1992- present) period. These unique characteristics include both timing and geographical concentration. China’s outward FDI trend has begun to materialize at a time when the country still enjoys record FDI inflows, thus challenging in substantial ways the conventional understanding of business internationalization and FDI dynamics, as proposed in the so-called stage models of internationalization and

13. The importance of networks, especially the extensive Overseas Chinese network ( huaxiao) and guanxi in furthering business interests has been widely studied. See, Murray Weidenbaum and Samuel Hughes, The Bamboo Network: How Expatriate Chinese Entrepreneurs are Creating a New Economic Superpower in Asia (New York, NY: Free Press, 1996); Max Boisot and John Child, “From Fiefs to Clans and Network Capitalism: Explaining China’s Emerging Economic Order,” Administrative Science Quarterly 41, no. 4 (December 1996): 600-628; Hans Hendrischke, “Networks as Business Networks,” in The Chinese Economy in the 21st Century: Enterprise and Business Behavior, ed. Barbara Krug and Hans Hendrischke, 202-222 (Northampton, MA: Edward Elgar, 2007). 14. Network-stretching FDI refers to the initial overseas direct investment of a firm whereas network-expanding FDI represents subsequent gradual additions to the initial investment level, with the goal of expanding and strengthening the position and importance of the network node established in a foreign country. Finally, network integrating FDI are investment flows designed to contribute to the enhancement and strengthening of a firm’s global business networks. For a more detailed description, see Yang (2005: 89-93).

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the investment development path (IDP) model, respectively.15 In addition, the geographical distribution of China’s outward FDI contradicts conventional theories of outward FDI flows from developing economies (particularly the role of proximity in economic development and geography between host and home countries) in that, at least in the early stages, it has largely avoided developing economies in favor of developed economies. Yang’s (2005), however, is not the only recent study to raise the specter of the emerging and rapidly unfolding process of internationalization of Chinese firms being marked by significant dissimilarities and deviations from the established and conventional framework of business internationalization, as generally observed in emerging economies. Not content with simply pointing out this characteristic, Child and Rodrigues (2005) undertake an analysis of the patterns and motivations behind recent Chinese business firm internationalization. The stated purpose of their study is to expand the theoretical propositions underlying mainstream business internationalization, with the aim of accommodating the Chinese trend into this larger theoretical construct. Contrary to mainstream assumptions, the authors argue, the primary motivational basis for enterprise internationalization lies in overcoming competitive disadvantages rather than leveraging competitive advantages. Incidentally, this approach shares distinctive similarities with the Kojima model of foreign direct investment. Named after Kyoshi Kojima, this model stipulates that a country’s comparatively disadvantaged industries should spearhead the overseas direct investment drive in order to complement comparative advantage patterns (see Kojima 1990). Considering that China’s re-integration with the world economy began to lay bare the comparative weaknesses and large-scale inefficiencies of the state-owned sector, the decision by SOEs to internationalize is bound to raise questions regarding their motivations and goals for doing so, thus further reinforcing many of the widely held perceptions surrounding Chinese political economy, spelled out in Chapter 1. What truly sets this study apart from other recent studies on Chinese enterprise internationalization, however, is the differentiation between inward (partnership route through OEM or joint venturing) and outward (acquisition, or organic expansion) internationalization. Indeed, this approach is largely missing from the limited (though increasing) number of contemporary studies on Chinese business internationalization.16 Perhaps most importantly, Child and Rodrigues, however

15. The “stage” theories of internationalization, most notably the Uppsala Model and the Innovation-related Internationalization Model (I-Model), have recently been subjected to greater scrutiny. Among the more notable critical reviews are Pedersen and Shaver’s (2000) rejection of the incremental process of internationalization in favor of a “big step” hypothesis, and Yuping Du’s proposition that empirical findings of China’s Haier Group’s successful internationalizing processes suggest a significant challenge to the traditional stage models of internationalization (Du, 2003). The most critical review thus far appears to be that of Lichtenstein, Levie and Hay (2007), which unequivocally states, “stage theory is dead!” 16. The majority of studies on internationalization in the international business literature similarly fail to consider this dichotomy. Notable exceptions are Welch and Luostarinen (1993), and Karlsen et al. (2003). These studies evaluate the effect of inward processes of internationalization on outward internationalization moves and manifestations.

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tentatively and indirectly, have also alluded to a possible influence effect a spreading internationalization dynamic may exert on the institutional and interactional spaces that define China’s political economy structure.17 Certainly, most studies, in an effort to make sense of the emerging trend of Chinese business internationalization, have generally tended to marginalize analysis and explanation of the domestic consequences (intended and unintended) internationalization is likely to visit on prior institutional and interactional arrangements. Indeed, in the institutional-interactional nexus and how the internationalization process may affect it may lie part of the call for theoretical extension raised by the authors. On the one hand, they dismiss the reality of the most successful internationalizing Chinese firms as being either non-state owned or being the beneficiaries of special arrangements that effectively shield from excessive bureaucratic interference as an unlikely coincidence; yet they also maintain that business-state connections enhance the promotion of internationalization. These observations beget two important questions that very few, if any, contemporary studies of China’s internationalization have convincingly answered. First, how do we define successful internationalization?18 And second, if successful promotion of internationalization indeed depends on business entrepreneurs maintaining their connections with the state, what is the possibility of successful or sustained internationalization over time weakening such business- state connections, or at least make them seem less valuable (possibly even a liability) from firm-level or individual business person perspectives? Additionally, how will this development affect the prospects of internationalization? In fact, will it? In applying a domestic perspective to Chinese enterprise internationalization, this study aims to shed more light on the second set of questions.

2.3. TOWARDS A MORE ANALYTICALLY CONTEXTUAL ANALYSIS

The purpose of this section is two-fold. First, I will discuss major shortcomings – contextual and empirical – plaguing present Chinese enterprise internationalization studies. Next, I will argue for the incorporation of context in the analysis of the Chinese trend, considering the critical transformations the Chinese economy has undergone since 1979. Lest these changes are accurately taken into account, assessing the motivations and implications of China’s internationalization wave will likely remain an exercise defined by pronounced concept misformation and misperception.

17. Economic transitions are indeed intricately linked to institutional transformations. See Gérard Roland, “The Political Economy of Transition,” The Journal of Economic Perspectives 16, no. 1 (Winter 2002): 29-50. 18. Low and Jiang (2003) propose a model for measuring the degree of internationalization of enterprises, using Chinese construction enterprises as an example. The question of degree and success of internationalization, however, is not a concern to our present study.

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2.3.1. Shortcomings of Current Studies

Notwithstanding its obvious importance and relevance, the current literature on Chinese enterprise internationalization, nonetheless retains significant contextual as well as empirical shortfalls and weaknesses. Contextual shortcomings: When combining the argument of the Chinese case of enterprise internationalization offering a possibility for theoretical extension of “institutional analysis with reference to the role of government…” (Child and Rodrigues 2005: 381) with the assertion that China has largely followed the East Asian model of economic development (Peerenboom 2007: 26-81), studying the internationalization process through the prism of the developmental state structure seems an interesting proposition. Yet, to date, no concerted effort at comparatively assessing the role and importance of the state in the internationalization of the Japanese, South Korean and Chinese economy has been undertaken.19 Such an endeavor, however, I posit is worthwhile for the purpose of delineating the specific institutional dynamics at play in the Chinese context. Moreover, as previously pointed out, a study of Chinese enterprise internationalization that effectively combines inward and outward dimensions and assesses their inter-relationship has yet to be completed. With the exception of Child and Rodrigues (2005), the dual-track nature of Chinese enterprise internationalization, has indeed hardly been discussed in the emerging literature.20 This is rather surprising, considering that the concept of dual-track economic transition has already been discussed (Fan 1994; Lau et al. 2000). Rather, most studies appear content with discussing the motivations and manifestations of outward internationalization, largely at the expense of a more extensive grounding in antecedent developments and trends as well as contextual factors. From a theoretical perspective, it appears that the near-exclusive focus on outward internationalization is guided by the broad challenge the emerging Chinese trend poses to the IDP and eclectic theory of international production and FDI (e.g. Yang 2005: 31-58). In my analysis of Chinese enterprise internationalization and its impact on institutional and interactional arrangements, I will embrace this rather more nuanced conceptualization of internationalization, going beyond the obvious outward dimension and the characteristic commitment on the part of enterprises to overseas investment and expansion activities, and factoring in importance and implication of inward internationalization. The transitional nature of the Chinese economy and the ongoing process of moving from “Mao to market” (Gittings 2005) appears to lend particular credence to this dichotomous approach. Not only does it helps to direct the focus to the changing institutional and interactional

19. Hong and Sun (2006: 614) merely offer a brief descriptive comparison of aggregate outward FDI between China, South Korea and Japan. 20. Even in the international business literature, the notion of inward and outward internationalization has only received scant attention. See, Tore Karlsen et al, “Knowledge, Internationalization of the Firm, and Inward-Outward Connections,” Industrial Marketing Management 32 (2003): 385-396; Lawrence S. Welch and Reijo K. Luostarinen, “Inward- Outward Connections in Internationalization,” Journal of International Marketing 1, no. 1 (1993): 44-56.

31 Chapter 2 patterns of state-business relations (and the implications thereof); it also raises awareness of the wide range of internationalization methods and related emerging trends, the choice or combination of all of which invariably impact China’s political economy structure through potential changes in institutional and interactional patterns. Empirical shortcomings: Recognizing the importance of differentiating between the inward and outward stages of enterprise internationalization, a related differentiation is also to be taken into conceptual consideration – enterprise typology. To date, there has been a pronounced lack of research on Chinese enterprise internationalization that attempts to distinguish between various enterprises structures in general, and even between enterprises in different industrial sectors. In China’s Emerging Global Businesses, Zhang (2003) restricts his analysis to an institutional view of outward-oriented state-owned enterprises (SOEs), at the expense of other enterprise structures.21 Whereas in the case of Japan and Korea, the internationalization push was spearheaded by the and , respectively, the pool is rather more variegated in the Chinese case.22 Yet, in many cases, Chinese companies operating overseas are invariably assumed to be associated with the Chinese government, without any attempt at more refined analytical clarification. The net result of such conceptual stretching and straining, as Giovanni Sartori (1970:1035) noted,

… is that our gains in extensional coverage tend to be matched by losses in connotative precision. It appears that we can cover more – in travelling terms – only by saying less, and by saying less in a far less precise manner.

Moreover, the level of state involvement in, or direct control over, decisions pertaining to general trade and investment activities of Chinese enterprises arguably remains an issue of contention and a likely source of resistance to an ever more ambitious outward orientation on the part of Chinese companies.23 The nature of government-business relations, and especially the role of the central government in the activities of individual enterprises, however, is not as all- encompassing as is generally assumed. The legacy of central government control and central economic planning may still be observable in some industrial sectors – especially strategic and national economic security-related sectors – but it would

21. One notable exception is X. L. Ding, “Informal Privatization Through Internationalization: The Rise of Nomenklatura Capitalism in China’s Offshore Businesses,” British Journal of Political Science 30, no. 1 (January 2000): 121-146. He correctly posits that “institutional heterogeneity presages a great diversity of motives.” 22. Japanese keiretsu and South Korean chaebol are large business conglomerates with numerous subsidiary companies, all centered around a parent company (in the case of chaebol) or a major bank (in the case of keiretsu), and usually defined by interlocking shareholding. See also Kae H. Chung, “Business Groups in Japan and Korea,” International Journal of Political Economy 34, no. 3 (Fall 2004): 67-98. 23. At the height of the controversy in the U.S. over China National Offshore Oil Corporation’s (CNOOC) unsolicited takeover bid for Unocal Corp., R. James Woolsey, director of the Central Intelligence Agency in the Clinton administration described CNOOC as the corporate vehicle of a “Communist dictatorship.” See Steve Lohr, “Who’s Afraid of China Inc.,” (July 24, 2005): Section 3: 1.

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be rather misleading to assume continued and unqualified central government control over all industrial activities in China. In this context, a comparison with Japan and South Korea also reveals significant differences. Whereas powerful central-government ministries charted the export-oriented industrialization course of Japan and South Korea, no single powerful “pilot agency” has assumed a similar role in China. Rather, the trend toward decentralization of economic decision-making to lower levels of China’s political economy space has given rise to numerous state actors, each with particular vested interests for pursuing enterprise internationalization.24 Hence, viewing Chinese enterprise internationalization through a prism that assumes path-dependent command economy institutional structuring is likely to result in highly de-contextualized analysis of China’s unfolding and accelerating enterprise internationalization. Indeed, failure to account for institutional heterogeneity effectively obfuscates the complexity of enterprise internationalization, promotes a rather skewed understanding of the politics and economics driving this process, and leads to an even starker misperception regarding the overall effect of expanding internationalization on the institutional and interactional patterns of China’s transitional political economy. Of course, an important caveat is also in order. Indeed, it is not unusual that analytical frameworks underlying assessments and discussions of a particular theme such as Chinese enterprise internationalization are primarily defined and constrained by the very lens of the discipline the author(s) may be affiliated with. In other words, issues and variables that are especially crucial for analysis from one perspective may only be marginally important for another. Thus, it is not altogether surprising that the majority of international business studies tend to focus predominantly on the manifestations, dynamics and strategies of internationalization, while neglecting or marginalizing variables that might be comparatively more critical to a political science or political economy perspective. Be that as it may, the contemporary scholarship on Chinese enterprise internationalization remains burdened by both contextual and empirical weaknesses. Henry Wai-Chung Yeung noted in Globalization of Chinese Business Firms (Yeung and Olds 2000: 75) that “[I]n explaining the globalization of Chinese business firms, we need to pay as much attention to the firm-specific strategies as to the changing contexts in which these business firms are embedded and their strategies are implemented” (emphasis in original). Yet, as the above review has shown, a common thread weaving through the majority of contemporary studies on Chinese internationalization is the continued lack of attention devoted to these changing contexts; contexts that undoubtedly will be critical in enabling a differentiation between the perceived and actual political, societal, economic, and firm-specific motivations behind the embrace of internationalization. A widespread focus on documenting the growing manifestations of enterprise internationalization has by and large marginalized inquiries as to the nature of the

24. See also Ronald Rogowski, Commerce and Coalitions: How Trade Affects Domestic Political Alignments (Princeton, NJ: Princeton University Press, 1989).

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nexus between internationalization and domestic political economy, notably the link between institutional and interactional spaces and internationalization, as well as the effect of the latter on the former. What is the political calculus behind enterprise internationalization? Who are the major political players? Are there specific ties that bind politics and business together? Under what circumstances, and why? Do such ties affect the speed, degree, depth and scope of enterprise internationalization? These are not just questions that are important from a purely intellectual perspective. Rather, clarifications of such lines of inquiry prove instrumental in enhancing understanding and explanation of the inherent complexity of the internationalization phenomenon. At the same time, incorporation of the political variable is also crucial in assessing the perceptions of, and reactions to, China’s outward internationalization. After all, it is not altogether uncommon for host countries, or at least particular factions within political and/or business circles in those host countries, to assess and evaluate the desirability and attractiveness of foreign direct investment decisions and practices based on particular vested interests. As such, economic matters are not only linked to political calculations, but decisions may at times suffer from undue ideological bias (as to country of origin or political system characteristics) or pronounced misunderstandings as to the actual institutional and/or interactional linkages and motivations prevailing in the contemporary Chinese context. The fundamental proposition put forward by this research, then, is that solid contextual grounding and appreciation of the institutional and interactional arrangements and dynamics behind enterprise internationalization are not only relevant but necessary preconditions to guarding against misguided and erroneous generalizations concerning the nature of Chinese enterprise internationalization.25

2.3.2. “Contextual” Path Dependence

The expanding complexity of institutional and interactional structures and dynamics in the Chinese economy not only justifies but, for analytical precision, also requires a rethinking of path-dependent explanations, lest analysis suffers from conceptual stretching and flawed comparison (Sartori 1970; 1991). This necessity is particularly called for in the context of institutional analysis and the role of state/governmental actors in the current process of Chinese enterprise internationalization, as suggested by the onset of “institutional entrepreneurship” (Child and Rodrigues 2005: 404), “local state corporatism” (Oi 1992, 1995; Unger and Chan 1995), and the “dual developmental state” (Xia 2000) concept. Replacing the communist moral order of the Maoist era (Wang 2002) is a process of transformation and transition towards the contemporary capitalist- driven, market-economy-oriented entrepreneurial spirit, prevailing in China today (Gittings 2005; Woetzel 2003; Guthrie, 2006, 1999). The regime is essentially aspiring to the creation of a capitalist society (with Chinese characteristics), all the while basing its hold on state power to a double identity, which includes an

25. Among the most egregious of such examples is the rationalization of enterprise internationalization in China as the inevitable illustration of a China, Inc., and the near- contemporaneous inference that all of China, Inc. is inevitably remote-controlled by the central government in .

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old communist aspect even as Marxist and leftist values have largely been discredited by, among others, manifestations of massive corruption and gross social injustice. The other aspect of this double identity entails the promotion of a profit- and consumption-oriented approach; a capitalist identity that “has struck a very responsive cord in a people who had become fed up with idealism, collectivism and asceticism” (Wang 2002: 13). The utility of thick contextual analysis, thus, appears obvious. As Ekiert and Hanson (2003: 29) argue:

The analytical advantage of studying such contextually embedded processes is the capacity to identify with great precision the initial events, relative sequences, and causal mechanisms producing institutional change. Analysts at the highest level of generality (looking at “problems of backwardness”) or even the medium level of generality (looking at specific “institutional legacies”) will often overlook the significance of contingent temporal sequences of this type.

In other words, the study of the process and consequences of Chinese enterprise internationalization requires proper contextualization. Yet, judging by the current framing of China’s expanding outward business orientation, the understanding of, and appreciation for, its domestic political economy dimensions continues to be burdened with a significant discrepancy between perception and reality. This is fueled in part by “the current zero-sum view of institutional innovation versus institutional reproduction”(Thelen 2003: 213). As will become apparent in this study, Thelen’s proposition to use “institutional layering” and “institutional conversion” are valuable tools in studying the domestic political economy dimensions of enterprise internationalization in China, and its implications for the institutional and interactional realms. It is worth quoting her concluding observation in full here:

The general point is that we need to develop a somewhat more differentiated set of conceptual tools to understand processes of institutional evolution and change… it may not be so useful to think of institutional development in terms of a sharp dichotomy between periods of institutional innovation and institutional statis. For these same reasons, it may also be unwise to draw too sharp distinctions in history between “settled” and “unsettled” times… Instead, to understand how institutions evolve, it may be more fruitful to aim for a more fine-grained analysis that seeks to identify what aspects of a specific institutional configuration are (or are not) renegotiable and under what circumstances…. Finally… understanding institutional evolution will require us to be on the lookout for modes of change that do not conform to a classic breakdown or replacement model (Thelen 2003: 232-3).

The contemporary relational framework between entrepreneurs and institutions in China has certainly escaped the rigidities of the command economy structure and become more dynamic and fluid, with institutional layering (i.e. various levels of state agents) affecting the dynamic and process of enterprise internationalization in different ways. The contextual path dependence approach to the study of Chinese enterprise internationalization, then, is ideally suited for drawing

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attention to change and evolution in institutional and interactional parameters, for it will resist the adoption of an otherwise uncharacteristically rigid “institutionally-imposed path dependency” (Child and Rodrigues 2005: 405).26

2.3.3. Research Design

The process of enterprise internationalization is a vital aspect of China’s economic transition. Yet, the current literature on Chinese enterprise internationalization does not accurately account for the growing diversity of economic actors (i.e. enterprise structures) as well as state actors (due to economic decentralization) that are involved in the country’s internationalization process. Analyses have not only largely ignored the complex institutional and interactional linkages between enterprises and state actors, but they also ignore the political and economic motivations behind internationalization, much less the equally relevant political and economic implications and reverberations of this process. Nor have current studies made a concerted attempt to discuss internationalization from both an inward and outward perspective. This study aims to offer a novel take on the explanation and understanding of Chinese enterprise internationalization in an effort to overcome prevailing analytical distortions and simplifications. For that purpose, I adopt Grzegorz Ekiert and Stephen E. Hanson’s (2003) contextual path dependence approach to provide a contextually comparative analysis of the unfolding and accelerating process by incorporating the motivations of the various economic and state actors and their relationships. As previously noted, only a handful of studies have acknowledged institutional heterogeneity of Chinese enterprises, changes in the composition and role of key actors, and inherent and specific motivations for government-initiated investments. The majority of emerging studies, however, have failed to leverage these insights into a comprehensive, integrated analysis of the changing nature of institutional and interactional patterns as Chinese enterprises internationalize and proceed along the inward-outward continuum. To the extent that China’s internationalization drive has attracted scrutiny, it has been limited to descriptions and documentations of outward investment flows. These include studies focusing on overall development and motivational drivers (Deng 2004; Wong and Chan 2003; Wu and Chen 2001; Wall 1997), geographical targeting (Cheng and Stough 2007; Yang 2005; Frost 2004; Wong and Chan 2003; Wall 1997), reasons for, timing of, as well as overall trends and implications (DB Research 2006; Wu 2005a, 2005b; Accenture 2005; Cai 1999),

26. The contextual path dependence formulation appears to be very similar to what Child and Rodrigues (2005) have called “co-evolutionary” analysis. As they state: “A co-evolutionary perspective would provide an appropriate analytical framework for such an extension because in eschewing institutionally-imposed path dependency it allows for entrepreneurial initiative in the negotiation of evolving policies that change both contexts and firms themselves” (Child and Rodrigues 2005: 405). See also: Suzana B. Rodrigues and John Child. “Co-evolution in an Institutionalized Environment.” Journal of Management Studies 40, no. 8 (2003): 2137-62.

36 Chapter 2 and detailed analyses of specific industry sectors and enterprises (Low and Jiang 2003; Du 2003).27 The aim of this research is to argue an unequivocal need for contextual analysis in assessing the nature, motivations, and implications of Chinese enterprise internationalization. Only through such a comprehensive outlook will it be possible to accurately ascertain the nature and motivations behind the internationalization push of Chinese enterprises. Particularly, it will be argued that a contextual approach will allow for an informed appreciation of the actual vs. the perceived challenges and opportunities (the latter having thus far been largely marginalized due to politicization of Chinese internationalization in target economies) presented by internationalization. More fundamentally, it will also compel a critical re-examination of long-held views and perceptions of China’s political economy, particularly its institutional and interactional arrangements. Thirty years of economic reform, restructuring and economic internationalization have undoubtedly reshaped these arrangements in ways that need to be reflected in evaluations of motivations driving contemporary enterprise internationalization. As Avner Greif notes, “[T]he challenge that institutions present to the traditional empirical methods of social science has two sources. First, although institutions are not random…they are inherently indeterminate, historically contingent, and context-specific… Second, we cannot generally study institutions by considering only their observable features.” As such, an analytical framework that “interactively combines theory, contextual knowledge of the situation and its history, and context-specific modeling” (Greif 2005: 350) emerges – or at least it should emerge – as an obvious and irrefutable necessity if the resulting analysis is to yield any objective relevance.

2.3.4. Research Focus

Few trends in international political economy and international business are as important and also persistently misrepresented and subjected to politicization as the rapidly expanding overseas aspirations of Chinese enterprises. It has already come to be expected that the opportunities and challenges accompanying Chinese internationalization will be redefining the rules of economic competitiveness in

27. A range of internationalization theories from the international business literature inform most of the contemporary analyses and explanations of China’s outward internationalization. Among the most prominently discussed theories are the so-called behavioral and industrial economics theories of internationalization. Behavioral theories of international business , which include studies by Aharoni (1966), Johanson and Wiedersheim-Paul (1975), Johanson and Vahlne (1977) and Cavusgil (1984) to name only a few of the more authoritative and widely cited works, view internationalization as a gradual and incremental stage process, which aims to minimize the uncertainly and risks associated with internationalization. Put differently, the increasing foreign market commitments of firms, to a large extent, are the result of a “gradual acquisition, integration and use of knowledge about foreign markets and operations” (Johanson and Vahlne 1977: 23). From an industrial economics perspective, on the other hand, internationalization is seen as driven by a desire for profit maximization, presenting an escape from excessive competition in home markets, or holding the key to efficiency improvements (Penrose 1959; Vernon 1966; Williamson 1975; Hymer 1976; Buckley 1983; Dunning 1988; Madhok 1997; Carroll and Teece 1999).

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the 21st century. In order to adjust to such a “tectonic shift,” the contextual approach emerges as a critical, indeed, indispensable tool in the analytical arsenal.28 In this study, three broad themes underlie the effort to move contextual analysis to center stage – state control, ownership and overall involvement in the internationalization process; the typology of Chinese enterprises and their respective motivations for overseas expansion; and the cause-effect dynamics of enterprise internationalization for China’s domestic political economy. State Control, Ownership and Involvement: In debating the role of the State in enterprise internationalization, it is certainly more appropriate to talk about a fragmented developmental state than to assume that the central government is uniformly in charge of economic decision-making. In fact, ever since the onset of economic reform and opening up to the outside world in the 1980s and the establishment of special economic zones (first in China’s coast regions and spreading later to other areas as well), economic decision-making power in China has grown increasingly decentralized. Chapter 3 will compare and contrast the level of State ownership and control in China, Japan, and South Korea at similar stages of economic development, using the developmental state model as a conceptual and analytical construct. In elucidating that the process of decentralization has given rise to significant institutional diversity, with government actors at the central, provincial and municipal levels playing varying roles in the internationalization process, the long-standing assumption of strong, monolithic, central-government driven state control and influence will also be debunked. Enterprise Structure & Motivational Dynamics: SOEs have generally dominated the industrial landscape of centrally-planned economies and China was no exception. However, over the course of three decades of economic reform and transition from a planned economy to a more broadly market-conforming economic environment, the state enterprise sector has been gradually downsized. While China’s “pillar” or “lifeblood” industries – automotive, electronics, machinery, iron and steel, oil and petrochemicals, aviation and aerospace, pharmaceuticals and construction sectors – still retain a sizeable SOE component, partial privatization and other restructuring efforts nonetheless compel a re- evaluation of SOEs in terms of absolute and relative state control (see Chapter 5 for details). Moreover, at a time when the private sector economy accounts for roughly 70% of the country’s GDP, it would be quite inconceivable to assume that non-state enterprises would not in due course gain major representation in the ranks of internationalizing enterprises. Meanwhile, the combination of (partial) privatization and the gradual shift from exclusively state-owned enterprises to joint-stock companies has created increasingly complex and opaque ownership and control structures that ought to caution against merely perceiving the real and/or purported motivations for internationalization through an ideological rather than a commercial lens. In fact, commercial considerations and strategic business calculations, rather than

28. For a discussion of “tectonic shift” in the global economy, see Jagdish N. Sheth and Rajendra S. Sisodia, Tectonic Shift: The Geoeconomic Realignment of Globalizing Markets (Thousand Oaks, CA: Response Books, 2006).

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ideology-influenced political concerns, constitute an increasingly critical motivating force behind internationalization. Both economic and state actors share this motivational force to varying degrees. Xiaoying Wang has described this (r)evolutionary trend as an “ideological shift from communist asceticism to late- capitalist consumerism” (Wang 2002: 8). This is not to suggest, however, that China’s internationalization wave lacks any degree of political motivation. Clearly, the manifest steps taken by the government to facilitate internationalization would make this a rather tenuous proposition. Rather, the broad political calculations that (in some industries more so than others) still influence internationalization, I posit, primarily reflect pressing domestic socio- economic and socio-political concerns.29 Evolving Domestic Political Economy Space: The ties that have possibly locked various government levels and enterprises together into an interdependent relationship in the early stages of outward internationalization may weaken over time, as the breadth and depth of internationalization deepens. This will have important implications for China’s political economy space, because such a development may translate into a gradual, yet significant, lessening of dependence of economic actors on various institutional actors. Similarly, it might also affect the interactional linkages between state and economic actors in ways that will accord enterprises a greater degree of institutional autonomy. The actuality and/or possibility of such developments will need to be included in any relevant analysis of the underlying causes, motivations and consequences of Chinese enterprise internationalization.

2.3.5. Research Methodology

From a methodological point of view, this study assumes a rather more conceptual and theoretical rather than highly empirical focus. Nevertheless, field observations and research – through factory visits, and company and government- level briefings – will still remain a part of the overall research approach. On the whole, however, the conceptual focus derives from three major conditions. First, the contemporary extent of enterprise internationalization is a rather recent phenomenon. Consequently, the amount of comprehensive information and data remains rather limited at the present time. Second, it is to be anticipated that as business competition increases in China, access to companies will become more and more restrictive, although there may still be differences depending on enterprise structures and industrial sectors. Third, any analytical exercise needs to be conceptually and theoretically grounded. The current level of rhetoric surrounding Chinese enterprise internationalization certainly seems to warrant a recalibration of the conceptual basis of the underlying analytical approach. Meanwhile, the actual research methodology rests on three major pillars, the combination of which will point to the stated objective of the research, i.e. bringing context back into the analysis. The research begins with a comparative exercise, looking at apparent similarities and striking differences between Chinese, Japanese, and South Korean developmentalism. The aim is to elucidate

29. This argument will be further developed in Chapters 4 and 5.

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both the overall complexity of China’s domestic political economy and the changes it has been undergoing since 1978, and to substantiate the general importance of contextual framing. Second, a taxonomy of state and enterprise actors will be advanced to further contextualize China’s political economy space. This will be further augmented by drawing on the concepts of “institutional space” and “interactional space” (Ekiert and Hanson 2003) to track how the dual-track internationalization, discussed in Chapter 4, is reshaping the very foundations of China’s political economy space. Finally, a combination of primary and secondary materials, – including relevant company publications, official government statements and publications as well as briefings at company and/or government levels – field observations, and illustrative instances of Chinese enterprises’ overseas activities are used to corroborate the case for theoretical extension of Chinese enterprise internationalization. It is important to note, however, that I do not intend enterprise examples highlighted in this study to be either a truly representative or a statistically meaningful sample so much as descriptive illustrations intended to support theoretical arguments presented.30 In short, I hope that combining these various methodological pillars will inject a greater degree of contextual clarity into, and lay the foundations for a theoretical extension of, Chinese enterprise internationalization, as well as induce a reappraisal of current perceptions of the institutional and interactional nature of Chinese political economy.

2.4. CONCLUSION

A striking commonality among the majority of recent studies devoted to Chinese business internationalization is a narrow focus on firm-level motivations; an approach that is conditioned largely by theories of internationalization drawn from the international business literature. No less striking, albeit rather puzzling and inexplicable, is a glaring omission of explanatory variables (institutional and interactional dimensions of the state-enterprise relationship) that have been extensively employed in the analysis of the Japanese and South Korean enterprise internationalization trends, antecedent waves China’s unfolding internationalization is often compared against. The conceptual framework outlined in this chapter draws peculiar attention to the institutional and interactional spaces in China’s domestic political economy and how they might evolve (or devolve) over the course of China’s dual-track internationalization. The combination of particularistic political and economic conditions, relationships, motivations and vested interests that defined the inward stage of internationalization may not necessarily be the ones that sustain the process, particularly as the outward stage assumes accelerating prominence. Prior

30. In other words, the various illustrative examples discussed in this study could be construed as “theory-confirming case studies.” For information on the nature of case studies in a comparative context, see Arend Lijphart, “Comparative Politics and the Comparative Method,” The American Political Science Review 65, no. 3. (September 1971): 682-693.

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to delving into a detailed exposition and argumentation of this proposition, China’s institutional arrangement is reviewed through a comparative lens in Chapter 3.

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3. The Complexities of China’s Domestic Political Economy

CHAPTER OVERVIEW

This chapter presents a succinct argument concerning the dangers of historical extrapolation. Contrary to intuitive logic and despite geographical proximity, the institutional and interactional features of the antecedent Japanese and South Korean developmental models and their subsequent waves of enterprise internationalization are not replicated in similar way, shape, or form in China. Rather, claiming geographical, institutional, socio-political, interactional and motivational uniformity is not only a blatant form of determinism and reductionism on a conceptual level, but it leads to erroneous and misplaced assumptions and explanations at a practical level. Having outlined the defining features of the traditional developmental state, the chapter offers a very brief look at the peculiar historical context, socio-political arrangements and developmental motivations in post-war Japan and South Korea, against which the institutional and interactional arrangements of China’s developmental dynamic will be assessed. Next, the discussion will turn to the process of decentralization, which not only contributes to the complexity of China’s political economy space but also, combined with the internationalization dynamic, defines the nature of the evolving relationship between economic and state actors in China.

*************************************

Having begun ever so tentatively in the early days of economic reforms in the 1980s, the rapidly accelerating scope of China’s enterprise internationalization in the late 1990s and into the early 21st century can aptly be described as the third wave of enterprise internationalization emanating from East Asia in recent decades.1 Japan, Inc. led the way in the late 1970s and into the 1980s, followed in due course by its South Korean counterpart in the 1990s under the guise of the country’s official commitment to globalization (seghyewa). On first thought, analyzing the momentum-gathering Chinese wave through the comparative prism of Japan and South Korea might appear to be both intuitively expedient and intellectually warranted. Yet, upon closer scrutiny, justification for such a comparative endeavor may be considerably more

1. Samuel P. Huntington originally used the term “third wave” to describe the expanding process of democratization. See Samuel P. Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman: University of Oklahoma Press, 1991).

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challenging to establish. It might not be, in effect, inconceivable for critics to question the a priori appropriateness and desirability of such a proposition in the first place. The shared structural space (i.e. geographic proximity) notwithstanding, the peculiarities of situational and contextual factors – particularly institutional and interactional variables – cannot (and certainly should not) be expected to be transferable indiscriminately and without qualification from Japan and South Korea to China.2 In this chapter, then, I will go beyond supporting the proposition that Chinese internationalization may offer a promising avenue for theoretical extension (Child and Rodrigues 2005) to outlining the obvious need for such conceptual expansion. A logical prerequisite for using the Japanese and South Korean waves of internationalization as a benchmark for analyzing the Chinese wave is to establish the reality of functional equivalence (Przeworski and Teune, 1970) between the two antecedent cases. As it happens, the developmental state model offers a most appealing and relevant construct to study institutional and interactional spaces of the Japanese and South Korean political economy at stages of development similar to present-day China. For the purpose of macro-analytical conceptualization, the debate raging between scholars espousing the traditional explanation of South Korean rapid growth and revisionist scholarship emphasizing the influence effect of colonialism does not negate the undeniable fact that both countries featured very similar institutional structures. However, as I will argue, the peculiar situational and contextual factors and dynamics that charcaterized the Japanese and South Korean developmental models are not borne out in similar fashion in China. This, in turn, will not only call into question whether China even conforms to the traditional image of a developmental state but will most certainly also cast doubt over the appropriateness of comparing the Chinese case to those of Japan and South Korea. And, if such a comparison is not warranted, it will also beget a more detailed contextual analysis of the specific institutional and interactional structures that constitute China’s political economy space. In the next few pages I shall briefly review the origins that have prompted the adoption of developmental state structures and discuss their defining features. Next, I will illustrate these elements through an overview of Japanese and South Korean developmentalism, giving particular focus to the motivations behind eventual outward orientation, before comparing and contrasting these cases to China. Ultimately, the aim is to ascertain if analyzing China through the traditional developmental state lens is conceptually justified. More specifically, does China share some defining similarities with the Japanese and South Korean models? Comparing and contrasting the Chinese commitment to internationalization with that of Japan and South Korea at similar stages of development will be an important first step in arguing that the institutional and interactional structures of China’s political economy, as well as the timing and motivations for enterprise internationalization, differ in critical ways from those

2. Implied is the distinct possibility of “conceptual stretching” and “miscomparison” (Sartori 1970; 1991) and of failing to appreciate the need for “functional equivalence” (Przeworski and Teune, 1970).

43 Chapter 3 of Japan and South Korea. In fact, beyond such a differentiation, the internationalization process as a whole will also trigger further changes and evolution in China’s political economy space, hence making contextual appreciation thereof all the more relevant and necessary prior to assessing this trend .

3.1. THE DEVELOPMENTAL STATE MODEL

The forces and manifestations of globalization, combined with a growing demand and push for cooperation, coordination, openness, transparency and liberalization are undoubtedy chipping away at the core of developmental state structures. For critics of the developmental state model, the onset of the Asian Financial Crisis in 1997-98 may just have proved to be the crucial proverbial nail in the coffin or at the very least may have ushered in “forces of new conditionality surrounding the developmental state.”3 A confluence of exogenous and endogenous factors is beginning to exert rising pressures on the post-WWII developmental model. Arguably, the challenges weighing increasingly heavily on the developmental state emanate from the end of the Cold War, blatant degeneration of cooperative state-business ties into unproductive, rent-seeking, and corruption-breeding relationships, the demographic shift accompanying economic modernization, an ever-expanding process of economic globalization, and an unmistakable progress toward democratic deepening (Evans 1997; Wong 2004). Notwithstanding the debate over its purported decline and fall and temporal specificity,4 the developmental state model, nonetheless, constitutes a crucial and

3. Irma Adelman and A. Erinç Yeldan, “The End of the Developmental State? A General Equilibrium Investigation on the Sources of the Asian Crisis within a Multi-Region, Inter- Temporal CGE Model.” Working Paper No. 888, Department of Agricultural and Resource Economics Policy, University of California, Berkeley (May 1999). 4. A list of major studies taking a critical look at the developmental state in recent years includes Mark Beeson, “The Rise and Fall (?) of the Developmental State: The Vicissitudes and Implications of East Asian Interventionism,” in Linda Low (ed.), Developmental States: Relevancy, Redundancy or Reconfiguration? (New York, NY: Nova Science Publishers, 2004): 29-40; “Politics and Markets in East Asia: Is the Developmental State Compatible with Globalisation?” in Richard Stubbs and Geoffrey R.D. Underhill (eds.), Political Economy and the Changing Global Order (New York, NY: Oxford University Press, 2006): 443-453; Richard Boyd and Tak-Wing Ngo (eds.), Asian States: Beyond the Developmental Perspective (London, UK: RoutledgeCurzon, 2005); Steve Chan, Cal Clark and Danny Lam (eds.), Beyond the Developmental State: East Asia’s Political Economies Reconsidered (New York, NY: St. Martin’s, 1998); Keiko Hirata, “Whither the Developmental State? The Growing Role of NGOs in Japanese Policy Making,” Journal of Comparative Policy Analysis 4, no. 2 (June 2002): 165-188. There is also substantial work detailing the extent to which the very success of developmental states is leading to their demise. See David C. Kang, “Bad Loans to Good Friends: Money Politics and the Developmental State in South Korea,” International Organization 56, no. 1 (January 2002): 177-207; Richard Katz, Japan, The System that Soured: The Rise and Fall of the Japanese Economic Miracle (Armonk, NY: M.E. Sharpe, 1998); Eun-mee Kim, “Contradictions and Limits of a Developmental State: With Illustrations from the South Korean Case,” Social Problems 40, no. 2 (May 1993): 228-249; John Minns, “Of Miracles and Models: The Rise and Decline of the Developmental State in South Korea,” Third World Quarterly 22, no. 6 (December 2001): 1025-1043; and Kurt

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indispensable analytical point of departure on at least two grounds. First, just as institutional and interactional space serve as a valuable analytical construct in this study, so too do successful traditional developmental states attach primary importance to specific manifestations of these concepts; manifestations which may be likened to a lake of similarities in a sea of differences. Second is the perception that centralized decision-making, as evidenced by the effective, efficient and largely autonomous bureaucratic structures and the leading role played by pilot agencies in Japan and South Korea during their respective rapid developmental stages, is similarly prevalent in China. This, in turn, combined with the legacy of command-economy governance and Communist Party rule,is giving rise to the impression that enterprise activities in China are invariably and unalterably remote-controlled by the center.5 In other words, we will ascertain in this chapter whether the perception of strong central government control and influence, and the assumed presence of critical pilot agencies governing China’s political economy space are in fact substantiated by reality. The developmental state model is defined by a range of institutional and interactional linkages, which only accentuate the relevance of this model as a conceptual starting point for comparing and contrasting Chinese enterprise internationalization to that of the Japanese and South Korean developmental states and for entertaining the idea of China as a developmental state in its own right. A general degree of similarity in the level of state management of the economy across developmental states may be assumed. Yet, it would be rather deterministic to assume unqualified similarities (or even uniformities) in the specific institutional and interactional arrangements of the Japanese, South Korean and Chinese political economy spaces at their respective periods of economic and enterprise internationalization. Indeed, as I will argue in this chapter, the conviction that the Chinese institutional and interactional environment behind enterprise internationalization is functionally equivalent to the traditional developmental state structure is inherently flawed and acontextual and merely reinforces misunderstanding of China’s political economy space and evolution. In particular, I contend that, geographical proximity notwithstanding, the assumption of structural uniformity is as misplaced as the belief in temporal, socio-political, and motivational uniformity. 6 Rather, China’s unique situational factors have

Weyland, “From Leviathan to Gulliver? The Decline of the Developmental State in Brazil,” Governance 11, no. 1 (January 1998): 51-75. 5. Chalmers Johnson provides an in-depth account of the role and importance of a pilot agency in the traditional developmental state in MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford, CA: Stanford University Press, 1982). 6. Highlighting the pitfalls of explanatory determinism applied to the Chinese case of enterprise internationalization can be likened to the debate that ensued in the wake of the economic determinism that, critics charged, was at the heart of Seymour Martin Lipset’s Modernization Theory. One of those critics, Dankwart Rustow, advocated the need for a “dynamic model” and a “genetic approach” to overcome what he saw as a deterministic fallacy of the “functional approach” adopted by Modernization Theory. For details, see Seymour Martin Lipset, “Some Social Requisites of Democracy: Economic Development and Political Legitimacy,” American Political Science Review 53 (March 1959): 69-105; Dankwart A. Rustow, “Transitions to Democracy: Toward a Dynamic Model,” Comparative Politics 2, no. 3 (April 1970): 337-363.

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influenced the initial set-up and dynamics of institutional and interactional spaces, which have evolved over time (and continue to do so) in ways, shapes and forms that prove highly dissimilar to the Japanese and South Korean cases.

3.1.1. Origins and Defining Features of a Developmental State

The roaring success of the Asian Tiger economies – South Korea, Taiwan, Hong Kong and Singapore – in the 1970s and 1980s, following on the heels of a stunning postwar Japanese economic take-off, triggered an avalanche of scholarly works on economic development trends, processes, and manifestations in East Asia. Standing out from the myriad of studies was the conceptualization of a new paradigm – the developmental state model. Chalmers Johnson’s MITI and the Japanese Miracle (1982) is widely considered as a pioneering work that subsequently spawned a veritable explosion of scholarship on developmental state theory and models as well as on the notion of industrial policy.7 In it, Johnson developed the notion of a “capitalist developmental state.” Applying an institutionalist framework, he eloquently and convincingly identifies an industrial policy crafted out of rationalization and restructuring as an indispensable cause of Japan’s postwar economic miracle. Arguing the “plan-rational” nature of Japan’s economic development and policy approaches, he suggests the reality of an organizational structure and dynamic that differs markedly from both the theories of socialist-type state direction (“plan- ideological”) and that of market capitalism (“market-rational”). Though he frames his industrial policy argument in an institutional, statist framework, Johnson recognizes the need to ground his proposition in a broader contextual environment. He does so in part by acknowledging the overall effect of important post-colonial continuities in various policy tools and in the general patterns of concentration, family prominence in large-scale enterprises, and the persistence of close business-state ties. Furthermore, the historical context of late development and economic nationalism provide crucial insights into the motivational and institutional dynamics that saw Japan’s Ministry of International Trade and Industry (MITI) emerge as the policy brain behind Japan’s economic development.8 The dominant clustering of the developmental state phenomenon in East Asia has raised the possibility of inherent socio-cultural explanations. In similar fashion to Max Weber and his Protestant Ethic and the Spirit of Capitalism, some pundits tried to tie the success of high-performing Asian economies to peculiar social values. In Japan, Who Governs? The Rise of the Development State, however, Johnson (1995) makes it a point to disentangle the developmental state

7. E.g. Chalmers Johnson, The Industrial Policy Debate (San Francisco, CA: ICS Press, 1984); John Zysman, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Ithaca, NY: Cornell University Press, 1983). 8. On January 6, 2001, in the wake of administrative restructuring, MITI has subsequently been renamed the Ministry of Economy, Trade and Industry (METI). Beyond the name change, this decision also suggests that the role and importance of this particular ministry has evolved from the days when it was widely seen as the ‘pilot agency’ behind Japan’s capitalist developmental state model.

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debate from the misguided perception of a social values–economic development link. Notwithstanding the fact that Weber’s seminal work has, for whatever self- serving purposes, been divorced from its original and intended context (i.e. a reaction to Karl Marx’s historical materialism), such an attempt appears driven by nothing more than “nationalistic, ideological or journalistic motives” (Johnson 1995: 41). It seems, thus, an especially tenuous proposition to conjure up a link between economic development success stories of Japan and the other high- performing (also referred to as newly industrializing) economies in East and Southeast Asia – South Korea, Taiwan, Hong Kong and Singapore – and Confucian traditions and ideals. Even if the reason for the disassociation of social values and economic development may not be intuitively appealing, the historical record of many of these economies, nevertheless, offers a most damning counterfactual to the socio- cultural argument. For, if the making of this East Asian miracle is to have irrefutable social values underpinnings, how do we explain that these socio- cultural norms, ideals and traditions did not ignite a flame of industrialization in these economies prior to the post-WWII era?

Origins of Developmental States: Although the developmental state concept has illustrated substantial traveling capacity and found growing application beyond the traditional East Asian origin, true developmental states have remained relatively far and few between.9 Throughout modern history, the commitment to economic modernization and the propensity for successfully completing this process have generally been contingent on distinctive historical, economic and political circumstances. Comparative studies of China and Japan, for example, have drawn attention to crucial historical, social and cultural antecedents as well as to continuities that were instrumental in shaping the proclivities of Japan and China towards industrialization and modernization or lack thereof, respectively (Levy 1962, 1954; Lockwood 1956). According to Levy (1954), the crucial differentiating factor between Japanese success and Chinese failure to modernize and industrialize was the continuation or institution in Japan of tight centralized controls, suggestive of a supervised and managed process, as early as the Meiji Restoration of 1868. 10

9. Examples of diverse geographical application of the developmental state model include David Levi-Faur, “The Developmental State: , South Korea and Taiwan Compared,” Studies in Comparative International Development 33, no. 1 (1998): 65-93; Ronald Herring, “Embedded Particularism: India’s Failed Developmental State,” in Meredith Woo-Cumings (ed.), The Developmental State (Ithaca: Cornell University Press, 1999): 306-334; Vibha Pinglé, Rethinking the Developmental State: India’s Industry in Comparative Perspective (New York, NY: St. Martin’s Press, 1999); Ian Taylor, “Can produce Developmental States?” CODESRIA Bulletin, nos 3-4 (2005): 51-52; Kurt Weyland, “From Leviathan to Gulliver? The Decline of the Developmental State in Brazil,” Governance 11, no. 1 (January 1998): 51- 75. 10. The idea of a managed process of development and modernization has also found expression in later literature devoted specifically to developmental states. Especially noteworthy here is the so-called governed market (GM) theory. See Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton, NJ: Princeton University Press, 1990).

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In many instances, the decision by a state to chart a developmental, as opposed to a growth-promoting, pathway derives from the reality of comparative economic backwardness or latecomer status to economic development, which consequently fuels a desire to bridge this divide through an accelerated industrialization and catch-up process.11 In Economic Backwardness in Historical Perspective, Alexander Gerschenkron (1962) succinctly elucidates the link between the level of economic backwardness and the nature and speed of industrialization, differentiating in the process between “early” and “late” industrializing countries. Ezra Vogel (1991) expands on the notion of economic backwardness with the idea of “late late developers” (of which he considers Japan to be a pioneer) and their stated desire to catch up to developed economies. In addition to the economic backwardness argument, scholars have also identified a broader set of explanations to buttress the historicity of state-led developmental efforts. Giving rise to these efforts, which were aimed at meeting (or even exceeding) specific national goals and priorities and laying the foundation for long-term growth dynamics, was the combination of national security concerns and a rather egalitarian socio-economic point of departure (Öniş 1991). Others have suggested a link between the perceived vulnerability of a state’s national economic goals and particular developmental orientations. According to this argument, the articulation of national economic interest based on expectations rather than historical conditions may serve as a powerful, economic-based legitimating function for the political leadership. However, if the fulfillment of specific national economic goals is to take place in the context of market dynamics, political legitimacy is also subject to degrees of uncertainty and vulnerability. In such instances, economic nationalism may emerge as a useful ideology that the state puts into practice through the active pursuit of developmentalism and governed market approaches (Grabowski 2002). A final line of explanations for the emergence of developmental states includes the combined effects of hard budget and resource constraints and national security considerations. This condition of “systemic vulnerability” is the result of three different challenges: (1) the possibility of large-scale popular upheaval in response to declining living standards; (2) widespread concerns over national security; and (3) pronounced resource and revenue constraints (Doner et al 2005).

Distinctive Features of Developmental States: Centralized control, suppression of local autonomy, a negligible role of the legislature, a professional, meritocratic and technocratic bureaucracy with a near-Weberian administrative style, and a highly independent power base reflect the degree and extent of state capacity in the Northeast Asian developmental states. This institutional set-up is made all the more relevant by the need to incorporate more complex industrial systems (due to technological advances), and the reality of significant constraints that compel political leaders to engineer a noticeable economic transformation (see Doner et al 2005). In a developmental state, then, the government not only has the ability to

11. See Li Tan, The Paradox of Catching Up: Rethinking State-Led Economic Development (New York, NY: Palgrave MacMillan 2005).

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coordinate and facilitate industrialization; it also assumes an activist, interventionist, and guiding role in economic development. Consequently, a high degree of state autonomy facilitates political prioritization of, and near-exclusive commitment to, economic development by shielding the commanding heights of the developmental state from distractive social forces and pressures. A caveat, however, is in order here, for the reality of state autonomy and the pursuit of a prioritized developmental agenda do not unequivocally suggest a complete disconnect between the political leadership and the broader socio-economic environment.12 According to Peter Evans, successful developmental states “must be immersed in a dense network of ties that bind them to groups or classes that can become allies in the pursuit of societal goals” (Evans 1995: 248). In other words, the emphasis on state autonomy alone does not guarantee the effectiveness of a developmental state. In fact, history provides ample evidence of significant levels of public-private sector cooperation. The resulting arrangement, which Evans has termed “embedded autonomy,” serves the dual function of ensuring effective information gathering and policy implementation while simultaneously shielding the state from a multitude of outside forces that, if allowed to freely put demands and pressures on the system, would only weaken the very cohesiveness successful developmental states thrive on.13 Before moving on to the comparative and contrasting aspect of this chapter, a qualification of the notion of state capacity appears to be in order. The observation that developmental states possess a great degree of state capacity and appear to be strong states to the extent that they exhibit a high degree of social control and developmental energy without being unduly weakened or distracted by independent social pressures and forces is hardly disputed. Linda Weiss (1998) discussed state capacity as variously manifested through social bargaining, coercion, policy instruments or embedded autonomy, depending on the state- society relations and specific internal and/or external factors and conditions in

12. In some cases, unfettered state autonomy has actually devolved into a predatory or neo- patrimonial state. See Atul Kohli, State-Directed Development: Political Power and Industrialization in the Global Periphery (Cambridge, UK: Cambridge University, 2004) and Peter Evans, Embedded Autonomy: State and Industrial Transformation (Princeton, NJ: Princeton University Press, 1995): esp. 43-47. 13. Evans’ (1995) notion of “embedded autonomy” has also found backing in other studies. Kent Calder eschews the statist notion of “administrative guidance” in favor of the growing role and clout of the private sector. See Kent E. Calder, Strategic Capitalism: Private Business and Public Purpose in Japanese Industrial Finance (Princeton, NJ: Princeton University Press, 1993). In a comparative study of automobile industrialization efforts in South Korea, Indonesia, Malaysia, the Philippines and Thailand, Richard F. Doner, “Limits of State Strength: Toward an Institutionalist View of Economic Development,” World Politics 44, no. 3 (April 1992): 398-431, argues the incompleteness of the statist view on economic development and industrialization. Rather, he posits, state strength and state autonomy arguments ought to be complemented by (1) incorporation of private and public sector arrangements; (2) appreciation of the coalitional bases of such arrangements; and (3) recognition of the utility of combining political support for local firms with applied pressure to conform to market forces.

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different countries.14 Specifically, with regard to core capacities of a strong state, she singles out three major traits: (1) ability to formulate policy goals and evolve strategies for implementing them independent of social pressure; (2) ability to alter behavior of important domestic groups in order to further its policies; and (3) ability to restructure the domestic environment in pursuit of its goals Why ought the notion of state capacity and/or strong state be particularly relevant for this study? While these arguments find general resonance in the developmental state stages of Japan and South Korea, the next section will show that an unqualified belief in the existence of a strong state in China is far from being as sound a proposition as the Communist Party system may suggest.15 Indeed, the relevance of contextually path dependent analysis (discussed in Chapter 2) will become particularly apparent when assessing overall state capacity in China.

3.2. TEMPORAL, INSTITUTIONAL AND INTERACTIONAL SPACES OF THE JAPANESE AND SOUTH KOREAN DEVELOPMENTAL STATES

Following the brief overview of the developmental state literature, and prior to tackling the question as to whether or not China meets the general criteria of a developmental state, let me shed a more probing light on the peculiarities of temporal, institutional and interactional spaces in the Japanese and South Korean cases. Indeed, the argument that that the Japanese and South Korean developmental models are ill-suited for comparison with the Chinese case is hardly conclusive without a solid appreciation of the complexities, conditionalities, situational factors and motivational bases of these antecedent cases. As Peter Evans argues, the very combination of autonomy and embeddedness differs between countries. Consequently, the institutional and interactional features that existed in Japan and South Korea are likely to differ markedly from contemporary China’s political economy structure. Thus, shedding some light on the temporal context, institutional arrangement, and interactional dynamics of the Japanese and South Korean developmental state structures, in turn, will help to put the peculiarities of China’s institutional and interactional spaces in a better contrast and to anticipate the continuing impact that the internationalization process is going to exert on China’s domestic political economy space, as it expands from the inward to the outward phase.

14. For an authoritative study on state-society relations and state capabilities, see Joel S. Migdal, Strong Societies and Weak States: State-Society Relations and State Capabilities in the Third World (Princeton, NJ: Princeton University Press, 1988). 15. I do, of course, acknowledge, that there also remain significant differences between the Japanese and South Korean cases. Most notably, the developmental state structures in South Korea under General Park Chung-hee were embedded in a highly authoritarian environment of political governance where they found fruition amid significant ‘democratic’ structures in Japan. Moreover, the specific institutional space and degrees of interaction in the Japanese case also ensured the evolution of what Roger Bowen has termed “dysfunctional democracy”. See Roger W. Bowen, Japan’s Dysfunctional Democracy: The Liberal Democratic Party and Structural Corruption (Armonk, NY: M. E. Sharpe, 2003).

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3.2.1. The Japanese and South Korean Developmental States

There currently exists a rather extensive literature on the rise of the developmental state in Japan and South Korea.16 In the late 1940s-early 1950s, Japan and South Korea were faced with ‘situational imperatives’ that compelled the political prioritzation of economic development. National survival, lack of natural resources, “situational nationalism,” and relative economic backwardness are generally identified as being among the most pressing situational factors behind such prioritization. Johns Hopkins University’s Hiromi Murakami has recently argued that the historical synthesis for the post-WWII Japanese development and economic management practices can be found in the economic imperatives of the late 1920 and early 1930s, especially in the combination of industrial rationalization and nationalism, as it unfolded in Manchukuo.17 Japan had emerged from WWII with its economic and industrial infrastructures in near-complete ruin. By 1953, the ravages of the South Korean War (1950- 1953) had led to a similarly devastating socio-economic effect on the South Korean peninsula. Developmentalism in Japan was able to take root on the back of continuities of policy tools, administrative and organizational structures, and people. As Johnson (1982: 309) notes, “[T]he continuities between MCI and MITI are not only historical and organizational but also biographical.” Meanwhile, peculair administrative and organizational structures resulting from post-colonial continuities would also facilitate in due course the adoption of the Japanese developmental model in South Korea under the authoritarian rule of General Park Chung-hee (1961-1979).18 Moreover, the aftermath of the Korean War (1950-53) raised inherent national security concerns. The response of the

16. See Alice H. Amsden, Asia’s Next Giant: South Korea and Late Industrialization (New York, NY: Oxford University Press, 1989); Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975 (Stanford, CA: Stanford University Press, 1982); Japan, Who Governs? The Rise of the Developmental State (New York, NY: Norton, 1995); Eun-mee Kim, Big Business, Strong State: Collusion and Conflict in South Korean Development (Albany, NY: State University of New York Press, 1997); Meredith Woo- Cumings (ed.), The Developmental State (Ithaca, NY: Cornell University Press, 1999). 17. See Hiromi Murakami, “The Emergence of the Japanese Developmental State: The Manchukuo Experience.” Paper presented at the 2005 Association of Asian Studies (AAS) Annual Meeting, Chicago, IL, 31 March-3 April, 2005. 18. According to Atul Kohli, “…it is difficult to imagine South Korea adopting a growth path that it did without a deeply influential Japanese colonial past…Japanese colonialism in Korea helped establish some basic state-society patterns that many now readily associate as integral to the later South Korean ‘model’ of high-growth political economy; Atul Kohli, “Where Do High-Growth Political Economies Come From? The Japanese Lineage of Korea’s ‘Developmental State’,” in Meredith Woo-Cumings (ed.), The Developmental State (Ithaca, NY: Cornell University Press, 1999): 93-136. See also Robert Castley, Korea’s Economic Miracle: The Crucial Role of Japan (New York, NY: St. Martin’s Press, 1997). This viewpoint largely contradicts the traditional argument that South Korea’s rapid growth and development is primarily the result of policy reforms in the 1960s under Park Chung-hee; Stephan Haggard, David Kang and Chung-in Moon, “Japanese Colonialism and Korean Development: A Critique,” World Development 25, no. 6 (June 1997): 867-881. For a comprehensive study, see Anne E. Booth, Colonial Legacies: Economic and Social Development in East and Southeast Asia (Honolulu, HI: University of Hawai’i Press, 2007).

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South Korean leadership under Park Chung-hee (1961-1979) was to channel all available energy and inputs into the pursuit of fast, visible and quantitative growth, beginning in the 1960s. This combination of administrative and organizational continuities and situational imperatives (including perceptions of “systemic vulnerability”) led the political actors (i.e. politicians and bureaucrats) and economic actors (i.e. big business) in both Japan and South Korea into an opaque and collusive institutional and interactional arrangement, informally known as the “Iron Triangle,” and provided a degree of autonomy that effectively shielded economic planning and the pursuit of economic objectives from outside societal forces and pressures. Apart from the broad similarities of the Japanese and South Korean development models, two obvious administrative and organizational differences stand out. First, the South Korean developmental state was an inextricable byproduct of the authoritarian, military rule of Park Chung-hee. The level of active state intervention in South Korea was not just comparatively more visible but resulted from a clear need to secure political legitimacy through economic performance. In short, strong and authoritarian leadership became the hallmark of the South Korean developmental state. In the case of Japan, meanwhile, post-WWII developmentalism unfolded largely in a democratic political setting. Beyond this immediate façade, however, the decision-making and politicking took on a distinctly un-democratic air at times. The leadership style of political operatives like Prime Minister Nobosuke Kishi (1957-1960), the clout of the infamous shadow shoguns and the corresponding impact of Kakuei Tanaka’s political machine on Japanese politics (Schlesinger 1997), and the prevalence of structural corruption are only the most obvious signs suggesting a political reality in Japan with striking parallels to New York’s Tammany Hall rather than symbolizing genuine political democracy. A second major difference concerns the organizational structure of the defining economic actors of Japan and South Korea’s developmental state period. Spearheading the process of industrialization in both countries were large enterprise groups known as keiretsu and chaebol in Japan and South Korea, respectively.19 An important organziational difference – one that also relates to differences in the degree of power and influence wielded by the central government in the economic sphere – concerns banking affiliates. An integral part of the Japanese enterprise structure, the South Korean government under Park Chung-hee nationalized the banking sector, thus making asset allocation and granting of subsidized loans (“policy loans”) the purview of the central government, rather than allowing for the embedding of banking affiliates into chaebol structures (Woo 1991). For the purpose of this study, these (and likely more intricate) differences do not discredit the general argument of compelling and broad-based similarities between the Japanese and South Korean models in terms of concentration of power and influence over the developmental trajectory. In both instances, the

19. For an overview of the interactional dynamics between government and industry in Japan, see Daniel I. Okimoto, Between MITI and the Market: Japanese Industrial Policy for High Technology (Stanford, CA: Stanford University Press, 1989).

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political dimension featured a highly centralized administrative structure that enjoyed a substantial degree of autonomy in decision-making. Additionally, large enterprise groups or conglomerates spearheaded the industrialization and internationalization drives in both countries. Over time, the relationship between state and economic actors began to change.20 In the case of Japan, the declining influence of MITI began ever so slightly in the early 1970s, following the switch to a floating exchange rate. Its influence and status weakened further when it began to tentatively succumb to foreign pressure (gaiatsu) and push through a host of trade laws that were instrumental in facilitating the access of foreign companies to the Japanese market. In the end, rising conflict and competition in Japanese policy-making circles sealed the fate of MITI, which ultimately was incorporated into a larger bureaucracy before an institutional reorganization led to the creation of of the Ministry of Economy, Trade, and Industry (METI) in 2001. In South Korea, the rise and unfettered expansion of chaebol over the years also began to tilt the balance of government-business relationships increasingly in favor of these large business conglomerates. Over time, this led to the distorting reality of privatized gains and socialized lossses, and a steep rise in the number of bribery cases. Attesting to the shift in power relations between the government and the chaebol was the rather swift defeat of the Kim Dae-jung administration’s (1998-2003) anti-chaebol policy in the mid-1990s. The conglomerates had amassed economic power on a scale that would make active pursuit of anti- chaebol policy a dangerous proposition for national economic health and competitiveness. In sum, scrutinizing the political economy fabrics of Japan and South Korea through the developmental state lens has allowed for an identification of broadly similar institutional and interactional features, which inevitably exerted a significant influence over the internationalization process of these economies. Considering that the current Chinese wave of enterprise internationalization has already invited comparisons with Japan and South Korea (Hong and Sun 2006), assessing the degree to which China’s political economy conforms to the Northeast Asian devlopmental state model is a crucial starting point for a contextual analysis and for drawing attention to possibly flawed perceptions of the nature of China’s present political economy structure. The remainder of this chapter, then, is devoted to clarifying the appropriateness of comparing and contrasting China’s political economy structure to those of Japan and South Korea in their respective industrialization and internationalization stages. As such, the proposition of all-pervasive and visible state capacity (i.e. everything is remote-controlled from Beijing) concentrated in the hands of the Chinese Leninist Party-State draws immediate attention. As will be shown, the etiology and subsequent unfolding of China’s post-1978 developmental approach not only deviates in fundamental ways from the Japanese and South Korean experience, but also displays a more diverse range of

20. In Divided Sun: MITI and the Breakdown of Japanese High-Tech Industrial Policy, 1975- 1993 (Stanford, CA: Stanford University Press, 1995), Scott Callon documents the gradual weakening of this relationship in Japan.

53 Chapter 3 institutional actors. Commensurate with that reality, the economic reform era has also seen a significant expansion in the number of enterprise structures as gradual economic liberalization and marketization began to take hold. The proposition in this study is that the very fabric of Chinese political economy is witnessing ongoing evolution and substantive change. Fueling this trend have been three decades of economic reform and restructuring and rapidly unfolding enterprise internationalization over the last few years.

3.3. CHINA’S DEVELOPMENTAL PATH

Changes in domestic political economy do not occur in a vacuum. Rather, they suggest the presence and impact of specific sources of change – whether internal, external, or a combination of both. The depiction of China’s contemporary internationalization as the third wave of Asian enterprise internationalization provides ample justification for choosing the developmental state literature as a conceptual starting point of comparative political economy analysis. This paper is not so much concerned with comparing and contrasting specific factors of enterprise internationalization in China, Japan, and South Korea as with assessing the obvious and potential changes such developments are going to visit on China’s domestic political economy arrangement. For that purpose, the preceding section has been deliberately oversimplified and limited to a general elucidation of the specific historical and situational circumstances as well as the broad institutional structures and socio-economic linkages that have come to symbolize the “Iron Triangle” arrangement in the Japanese and South Korean developmental state models. From the perspective of comparative political economy, the above discussion prompts two questions of crucial import to the understanding and analysis of China’s internationalization process. First, does China’s developmental approach compare to those of traditional Northeast Asian developmental states? This comparative angle is especially relevant as an analytical starting point because it draws immediate attention to the actual versus assumed power and capacity of China’s Party-State structure and its role in the country’s developmental process. Second, if the Chinese model proves largely dissimilar from the Japanese and South Korean developmental structures, what are its defining features and how do they compel a re-examination of our understanding of Chinese political economy in general and the motivational basis behind enterprise internationalization more specifically? Clarification of these questions requires both a critical appraisal of the assumed centrality and ubiquity of a powerful Leninist Party-State in China as well as a detailed assessment of the specific Chinese developmental model, including the role of the State in economic development and the typology of enterprise actors.

3.3.1. The Eclipse of China’s Leninist Party-State Structure?

The traditional Leninist Party-State structure in China has generally undergirded the perception of a strong and established statist tradition in China’s political sphere. Under an ideal Party-State organizational structure, it is the Party itself that holds ultimate responsibility for, and control over, effective administration of

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the entire state apparatus by commanding voluntary compliance based on the general attractiveness and legitimacy of official Party ideology. Whereas Party and State may have been viewed as synonymous in the past, present circumstances have China’s political space burdened with an institutional dilemma in which the State and the Party are seen as “two different types of political organization, each with distinctive organizational logic” (Zheng 1997: 12). Underlying much of the contemporary tension between Party and State is the revolutionary history of the CCP and the Leninist ideology that, while largely instrumental to the CCP’s effective party-building, undermined the efforts at effective and strong state-building in post-1949 China. The transition from waging revolution to building a state coincided with a gradual but ultimately inevitable shift from legitimacy based on revolutionary tradition to legitimacy based on policy performance. By the early- to mid-1990s, tensions between the Party and the State had come to full fruition when, in light of the ever-expanding influence and effect of globalization, it became painfully obvious that many of the Party’s revolutionary strategies and tactics were woefully inappropriate for effective state-building (Zheng 2004). The decline of the Party-State appears intricately linked to economic liberalization pursued since the early 1980s. Arguably, the very success of China’s economic reforms, launched in response to obvious weaknesses and shortcomings in central planning, command economy structures and oscillation between import-substitution industrialization and semi-autarkic development policies (Reardon 2002), cemented the gradual weakening of Communist Party rule and legitimacy (Walder 1995). A combination of ideological bankruptcy, widespread corruption, and expanding decentralization of economic decision- making, resulting in changing institutional and interactional patterns, has merely compounded the weakening of the Leninist Party-State structure and is calling into question the notion of an all-powerful Chinese Party-State. Though comparatively less compelling for this study, the concurrent manifestations and implications of ideology bankruptcy and endemic and collusive corruption, engender institutional arrangements in their own right and breed particularistic networks and relationships in the domestic political economy. As such, a brief review is warranted.

Ideological bankruptcy: The ideological bankruptcy that has gradually befallen the Chinese Party-State as a result of economic reform and the combined demonstration effect of the collapse of the USSR and Eastern European communist regimes in the 1990s has ushered in an era of effective party-state dualism, with the Chinese State steadily chipping away at the power base of the CCP. According to Xiaoying Wang, the emergence of a moral gap following the demise of the communist moral order of the Maoist era during China’s transition to a more market-conforming economic and social order is clearly exacerbating already visible challenges to continued Party-State cohesion. The resulting “post- communist personality” has decidedly rejected Party propaganda and indoctrination and discarded all values and scruples in a seemingly free-for-all scramble to claim capitalist goods and aspire to individual wealth and consumerism. In the process, it has effectively severed, if not outright prevented

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the emergence of, a fundamental link with post-communist ideology. As Wang states, “the post-communist personality is not part of the Communist Party’s design” (Wang 2002: 11). The moral and ideological disjunction in post-Mao China has all the imprints of the confusion and chaos that define the contradictions within the CCP’s ‘proto-capitalist reform program.’ In a bid to shore up the political legitimacy of the CCP and pre-empt any potential challenges to its continued dominance, former Chinese President Jiang Zemin unveiled his “Three Represents” (san ge dai biao, 三个代表 ) theory at the 16th Party Congress in 2002. By declaring,

Reviewing the course of struggle and the basic experience over the past 80 years and looking ahead to the arduous tasks and bright future in the new century, our Party should continue to stand in the forefront of the times and lead the people in marching toward victory. In a word, the Party must always represent the requirements of the development of China's advanced productive forces, the orientation of the development of China's advanced culture, and the fundamental interests of the overwhelming majority of the people in China.

Jiang essentially invited these post-communist personalities (i.e. private entrepreneurs and business people) to join the ranks of the Party elite.

Corruption: Corruption has become an endemic feature of China’s economic reform and transition period. Some scholars have pointed to administrative monopoly (AM) as one of the most characteristic manifestations of corruption in China’s transitional economy (Guo and Hu 2004). Meanwhile, a pronounced tendency on the part of Party and government officials to collude with each other, as well as with outsiders on an unprecedented scale during the economic transition period is also contributing to an increasing incidence of corruption (Gong 2004). Finally, Andrew Wedeman argues that, although there is irrefutable evidence of a “worsening” of the corruption problem, it is more in the form of “intensification” or “qualitative change” rather than in the form of a simple quantitative rise (Wedeman 2004). The evolution and eventual disintegration of Communist Party-States provides ample documentation of the inherently destabilizing potential of ideological evanescence and the spread of structural and endemic corruption. In fact, scholars have for years pointed to three main trends that could be potential triggers of increasing levels of socio-political instability, and potentially even condemning the traditional Leninist structure of the Chinese Party-State to the dustbin of history. These trends include a visible rise of independent social forces; rising levels of inequality, corruption and inflation; and the clear weakening of the tight grip of political control over the population, and of the subordination of local governments to the center. In Party-States and Their Legacies in Post-Communist Transformation, Maria Csanádi advances the concept of the Interactive Party-State (IPS) model to analyze and explain the rise and demise of Party-States. According to her, such a demise is not simply associated with the breakdown of the Party but with the gradual erosion of “linkage principles” that had sustained the Party-State structure

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for a long time (Csanádi 1997). According to Csanádi and Lai (2003: 15), the transformation of the Chinese Party-State appears to be following a so-called self- withdrawing transformation and reproduction pattern, which may be attributed to five factors. These include: the fast growing share in employment, and production contribution of non-state enterprises; the large amount of infiltrating foreign and domestic private capital into the Party-State network and increasing the market field outside the network; the growing budgetary deficits; the decline in the number of economic units attached to the network; and the increasing number of village, township- and county-level free and semi-free elections for redistribution of responsibilities and enhanced willingness for collaboration and resource contribution.

3.3.2. A Developmental State with Chinese Characteristics?

Traditionally, the developmental state structure has assumed the presence of a strong and effective central state. Having drawn attention to China’s fleeting Party-State structure in the previous section, we still need to determine the extent to which the Chinese developmental model is (dis)similar to the Japanese and South Korean cases. Owing to its following in the economic development footsteps of “late late” developing economies – Japan, South Korea, Taiwan, Hong Kong and Singapore (Vogel 1991) – China had the benefit of actually assessing the intrinsic payoff and unintended consequences of the Northeast Asian capitalist developmental state model. Over the course of the post-1978 economic reform period, China has compared four development strategies – the classic Stalinist model; the Anglo- American liberal pattern; the East European market socialist structure; and the East Asian developmental state model (Xia 2000). Early on in China’s economic development and industrialization drive, Deng Xiaoping recognized the futility of keeping the classic Stalinist model on life support and instead opted for the gradual introduction of a more market- conforming mechanism of competition to overcome economic stagnation and to defuse the likelihood of socio-economic disintegration. The challenge lay in striking a delicate balance between minimizing irrationalities in the decision- making process and curbing crippling bureaucratism in policy implementation, all the while maintaining effective state authority and capability (Xia 2000: 47). Embracing East European market socialism was an attractive option given the shared ideological outlook. This “bird-in-a-cage” approach led to market socialism with Chinese characteristics. Yet, while the government was careful not to become overly attached to one formula, the Asian Tiger approach was greeted with deep reservation on the grounds that it may not work well in a country as large as China. True to its pragmatism, the CCP, nonetheless, did allow for some experimentation with the East Asian model in a number of special economic zones (SEZs) in China’s Southeastern coastal areas, beginning in 1984. It was certainly within the best interest of the CCP to devise a formula that would deliver economic prosperity while also solidifying Party legitimacy amid the gradual onset of a deep institutional crisis of the Chinese Party-State (Zheng 1997). Returning, then, to the question posed earlier: To what extent, if at all,

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does China conform to the image of the traditional East Asian developmental state model? Such an inquiry will help clarify whether a competing economic model that goes beyond the traditional developmental state structure may well have emerged in China. According to the classical developmental state model, the suppression of local autonomy and a negligible role of legislatures represent necessary, though not necessarily sufficient, institutional arrangements for a successful maintenance of state capacity. However, equating the Chinese developmental process without qualification to the classical developmental state model is by no means a foregone conclusion. For example, China clearly lacks a central, effective and efficient bureaucracy, nor does it have an instrumental pilot agency such as MITI. The country’s sheer geographical size, compared to Japan and South Korea, is but one of the factors that makes centralized administration and implementation of a developmental agenda by a strong bureaucracy and designated pilot agency rather unfeasible. Rather, as elaborated in the next section, China, owing to particular circumstances, has made far-reaching adaptations in terms of institutional arrangements that present a direct challenge to the classical developmental state formula.

3.4. INSTITUTIONAL COMPLEXITY OF CHINA’S POLITCAL ECONOMY SPACE

Beginning in 1979, under the aegis of Deng Xiaoping, China started a gradual but sustained transition to a market-driven economy. Concurrently, this process led to a similarly gradual relaxation of central government control over the commanding heights of economic decision-making. China’s experimentation with various development strategies grew out of the government’s determination to adopt a developmental approach that would allow for both flexibility and stability. The result has been a hybrid model of governance that left a “great deal of leeway to localities to experiment with a variety of innovations within a limited geographical area” (Xia 2000: 62). Any examination of the changing nature of China’s political economy and the evolving relationship between enterprise and state actors rests on a combined understanding of the scope and importance of decentralization and the nascent dynamic of enterprise internationalization, especially the transition from inward to outward internationalization. The complexities of China’s contemporary political economy clearly reinforce the need for contextual path dependence in assessing the breadth and depth of change in China’s institutional and interactional environments as enterprise internationalization transitions from an inward to an outward focus. To that effect, the institutional and economic environments need to be properly disaggregated rather than treated as monolithic blocks. 21

21. Adam Segal gives similar justification in a comparative study of high-technology enterprises in Beijing, Shanghai, Guangzhou and Xi’an, recognizing disaggregation of the Chinese national economy as a crucial step to making sense of the economic development process. See Adam Segal, Digital Dragon: High-Technology Enterprises in China (Ithaca, NY: Cornell University Press, 2003).

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3.4.1. Decentralization and the Rise of Local State Corporatism

Decentralization is not necessarily a feature commonly associated with a purportedly strong Party-State, nor has it been a consistently defining feature in modern Chinese economic history.22 From the perspective of stability and control, the co-existence of a decentralized political economy space and the domination of the commanding heights of politics by the CCP, which has thus far remained quite reticent about entertaining any semblance of substantive political liberalization, may appear rather incongruous. The reality, however, is that several centralization-decentralization cycles have punctuated the economic history of modern China.23

Maoist Era (1949–1976): The early formative years of Maoist China (1949 to the mid-1950s) constitute the first phase of centralization. The stated objective in those early years was the development of capital-intensive industries to bolster the newly established People’s Republic of China (PRC). However, large-scale scarcity of capital and concomitantly high cost structures of capital-intensive industry development, proved a significant challenge to the fulfillment of this objective. Mao Zedong, influenced by the development strategy adopted in the Soviet Union under Joseph Stalin, turned towards nationalization of the economic sphere and established a system of central planning, ushering in a period of economic and political “Stalinization” (Li 2006; 2001).24 Within a few years, however, the system began to illicit charges and concerns of excessive centralization, especially concerning the determination of revenue

22. Political economy literature generally differentiates between economic (or administrative) and fiscal decentralization. The former refers primarily to decentralized resource allocation mechanisms whereas the latter implies a greater degree of autonomy regarding revenue and expenditure decisions. In this study, unless otherwise specified, I employ the term in an all- encompassing nature. 23. Relevant studies on decentralization in China include: Justin Yifu Lin, Ran Tao and Mingxing Liu, “Decentralization and local governance in China's economic transition” in Pranab Bardhan and Dilip Mookherjee (eds.), Decentralization and Local Governance in Developing Countries: A Comparative Perspective (Cambridge, MA: MIT Press, 2006): 305-328; Andrew Feltenstein and Shigeru Iwata, “Decentralization and Macroeconomic Performance in China: Regional Autonomy Has Its Costs,” Journal of Development Economics 76, no. 2 (April 2005): 481-501; Joyce Kallgren, “The Concept of Decentralization in Document No. 1, 1984,” The China Quarterly, no. 101 (March 1985): 104-108; Dwight H. Perkins, “Centralization and Decentralization in Mainland China’s Agriculture, 1949-1962,” The Quarterly Journal of Economics 78, no. 2 (May 1964): 208-237; “Centralization versus Decentralization in Mainland China and the Soviet Union,” Annals of the American Academy of Political and Social Science 349 (September 1963): 70-80; and X. B. Zhao and L. Zhang, “Decentralization Reforms and Regionalism in China: A Review,” International Regional Science Review 22, no. 3 (December 1999): 251-281. 24. Justin Yifu Lin, Fang Cai, and Zhou Li talk about a “trinity of the traditional economic system.” The fundamental pillars of this approach were (1) a macro-policy environment for a heavy-industry-oriented development strategy; (2) a centrally-planned resource allocation system; and (3) micro-management institutions characterized by nationalization and the People’s Commune system. See Justin Yifu Lin, Fang Cai, and Zhou Li, Zhongguo Di Qi Ji (Hong Kong: Chinese University of Hong Kong Press, 1996): 19-58.

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and expenditure (tongshou tongzhi). In 1956, taking stock of China’s trajectory, Mao Zedong outlined a series of problems regarding the successful socialist construction and transformation. The “relationship between the central and the local authorities” was one of the problems he identified in a speech entitled “On the Ten Major Relationships.” The central authorities, he argued,

… want to develop industry, and so do the local authorities. Even industries directly under the central authorities need assistance from the local authorities. And all the more so for agriculture and commerce. In short, if we are to promote socialist construction, we must bring the initiative of the local authorities into lay. If we are to strengthen the central authorities, we must attend to the interest of the localities.

It is interesting to note that, though this speech helped to lay out the principles and rationale that came to inform the first wave of decentralization in modern China’s economic sphere between 1957 and 1959, it has received little scrutiny from that angle. Decentralization gradually de-emphasized the central planning feature of China’s economic organizational structure in favor of a “double-track system of economic planning,” characterized by substantial devolution of authority, resources and power. Designed in large measure to address the problems of motivations and incentives for actors at the provincial and local levels of China’s economic structure, the decentralization push also led to the creation of self- contained and self-sufficient People’s Communes, and paved the way for the ultimately disastrous Great Leap Forward (1958-1960).25 A concomitant consequence of decentralization was the weakening of control and monitoring functions, resulting in a critical loss of effective coordination and accuracy of information exchanged between the localities, provinces and the

25. For a discussion of China’s People’s Communes, see Byung-Joon Ahn, “The Political Economy of the People's Commune in China: Changes and Continuities,” The Journal of Asian Studies 34, no. 3 (May 1975): 631-658; Wen-shun Chi, “The Ideological Source of the People's Communes in Communist China,” Pacific Coast Philology 2 (April 1967): 62-78; Chu- Cheng, The People’s Communes (Hong Kong: Union Press, 1959); G. F. Hudson, A. V. Sherman and A. Zauberman, The Chinese Communes (London, UK: The Bodley Head, 1960); Audrey Donnithorne, “Background to the People’s Communes: Changes in China’s Economic Organization in 1958,” Pacific Affairs 32, no. 4 (December 1959): 339-353; Anna- Louise Strong, The Rise of the People’s Communes in China (New York, NY: Marzani and Munsell, 1960); and Peter S. H. Tang, The Commune System in Mainland China (Washington: Research Institute on the Sino-Soviet Bloc, 1961). Authoritative scholarship on the Great Leap Forward includes David Bachman, Bureaucracy, Economy, and Leadership in China: The Institutional Origins of the Great Leap Forward (Cambridge, UK: Cambridge University Press, 1991); Roderick MacFarquhar, The Great Leap Forward, 1958-1960 (New York, NY: Columbia University Press, 1983); Michael Schoenhals, Saltationist Socialism: Mao Zedong and the Great Leap Forward, 1958 (Stockholm, Sweden: Föreningen för Orientaliska Studier, 1987); and Frederick C. Teiwes, China's Road to Disaster: Mao, Central Politicians, and Provincial Leaders in the Unfolding of the Great Leap Forward, 1955-1959 (Armonk, NY: M.E. Sharpe, 1999).

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center. The peak failure of this early decentralization attempt was a widespread famine that claimed up to 30 million lives.26 In an attempt to reinstate effective control and coordination, the government reverted back to centralization during the 1959-63 period. The central bureaucracy assumed renewed importance and worked hard to overcome the problems of soft budget constraints, which had earlier led provincial and local governments down the path of excess investment and duplication of inefficient sources of production, thus only hastening the collapse of the early decentralization experiment (Lin, Tao and Liu 2006). Viewed from an economic perspective, the centralization-decentralization dynamic is a direct response to fears of economic overheating or economic stagnation/growth decline (Feltenstein and Iwata 2005). By the mid-1960s, the recentralization effort had not only brought most enterprise structures under the control, supervision and direction of central authorities. Rather, there were also renewed concerns that it merely impeded incentives for production, hampered local initiatives and stymied degrees of financial and administrative autonomy that were crucial to development, and severely restricted the mobility and distribution of much-needed factors of production. The resulting economic stagnation was only exacerbated by the chaos and violence of the Great Proletarian Cultural Revolution that engulfed Chinese society from 1966 to 1976.27 Following the Red Guard Phase (1966-69) of the Cultural Revolution, a second major decentralization cycle began to redefine China’s political economy space; a cycle that resulted as much from the commitment to reinvigorate socialist economic development as from the economic disagreements between Maoists and the factions led by Liu Shaoqi and Deng Xiaoping. Already by September 1968, the renewed decentralization effort had led to the set-up of revolutionary committees that created a semi-autonomous, multi-layered institutional structure resembling a “decentralized-planning or a decentralized-command economy” (Dernberger 1972: 1063).

Economic Reform Era (1978–present): If decentralization in a planned economic system had spurred economic growth, provided incentives and raised the overall motivational basis of producers, it became an indispensable feature of the post-1978 economic system where increasingly market-conforming reforms gradually began to eke out the remnants of a traditional socialist, centrally- planned economic system.

26. An authoritative account of the disastrous consequences of the Great Leap Forward is presented by Jasper Becker, Hungry Ghosts: Mao's Secret Famine (New York, NY: Free Press, 1996). 27. The most egregious excesses and levels of violence occurred during the Red Guard phase (1966-69). The history of the Cultural Revolution has been chronicled in extensive detail and complexity by Roderick MacFarquhar and Michael Schoenhals, Mao’s Last Revolution (Cambridge, MA: Belknap Press of Harvard University Press, 2006). For an explanation of the organizational antecedents of the Cultural Revolution, see Lynn T. White, Policies of Chaos: The Organizational Causes of China's Cultural Revolution (Princeton, NJ: Princeton University Press, 1988).

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Decentralization and gradual legislative empowerment became the hallmarks of economic reforms ushered in by Deng Xiaoping, eventually leading to the perception of a “dual developmental state” (Xia 2000). The nurturing of “local developmentalism” emerged as an appropriate formula to overcome obvious challenges related to policy coordination and bureaucratic supervision. If the resulting institutional arrangements and complexities of interactions were still a far cry from the laissez faire minimalist state model, they certainly put the Chinese political economy on a drastically new course, away from that charted by a traditional centrally-planned Leninist state. In other words, China’s reform experience, in the words of Jean Oi (1995: 1132) suggested a “path dependence altered by institutional change.” China may be a decentralized developmental state, but it still draws heavily on Maoist-era institutions. According to Jean Oi, the Maoist legacy “provided the political capacity for the local corporatist state” and it is merely the “ideology and the goals of state intervention” rather than “an inherent failing in the policy instruments” that prevented the Maoist state from laying the foundation for economic efficiency. Devaluing expertise in the absence of political loyalty or “redness” distorted incentives provided by the policy instruments of the time and thus prevented effective economic development (Oi 1995: 1134-1139). Having emerged out of Maoist legacy, the subsequent institutional changes that have been introduced at the hands of a local corporatist state ensured that the resulting system differs markedly from the original. Not only is the bureaucracy increasingly employed to facilitate market production, but local governments wield administrative power to fund corporate growth as well. In addition, local governments are being transformed from simple regulators into advocates of local enterprises, in line with the transformation from administrators into entrepreneurs. In other words, economic decentralization is encouraging local officials to “maximize local rather than national interests”, resulting in a tighter “relationship between banks, finance and tax offices, and county, township and village officials” (Oi 1995: 1145-46). Based on the Chinese experience of the role of local government in a transitional economy, Oi then concludes that broad assertions and generalizations about government intervention and markets are ill-advised; and that disaggregation of the state into its various component parts allows for a more accurate understanding of the underlying performance incentives and motivations at different levels of government. From a developmental state perspective (compared to Japan and South Korea), the development trajectory of the Chinese economy suggests a comparative weakness of state capacity. A most immediately obvious differentiating factor is the rather more pronounced prevalence of decentralization cycles in China’s political economy – a feature that, as shown above, finds its origins already before the onset of economic reform and transformation in the late 1970s and early 1980s. The intent of highlighting this differentiation is not so much to debate the actual scope, breadth and depth of China’s state capacity as to stress the inherent differences in organizational structuring and institutional layering of China’s

62 Chapter 3 political economy. 28 Rather more important is the contention that, over the course of economic reform and transition, the forces of economic and fiscal decentralization have sowed the early seeds of change in the relationship dynamics between enterprise and state actors in China’s political economy space. Making sense of the dynamics and unfolding of economic transition and reform in post-Mao China is best achieved by not only coming to terms with economic exchange relations but also by taking into account political exchange relations as well as the evolving nexus between the political and economic realms. A study of the transformational process of economic and political institutions in the reform era describes the dynamic of China’s transitional political economy as “dual marketization,” distinguishing between “an economic market where the exchange of goods, services, and resources takes place between economic actors, and a political market where exchange takes place between economic actors and state agents and among state agents themselves with regard to the use of state authority and assets” Lin (2001: 17). The combination of economic reform and rising marketization saw exchange relations marginalizing authority relations at a rapid rate, and fueled a drastic expansion of economic activities by new enterprise structures. A steady decline of central planning influence among state enterprises and urban collectives, coupled with significant expansion of transactions outside the state plan, in turn triggered an intensified competition for customers and resources, and a strong focus on profit making at the expense of political control and ideological indoctrination (Lin 2001: 33-36). A further consequence of decentralization has been the emergence of “individualized bases of power” and “backyard profit centers” of various state

28. Debating the extent and nature of state capacity in China is indeed beyond the scope oft his research. In fact, it would well constitute a research focus in its own right. As Maria Edin argues, the mere reality of decentralization and expanding marketization in China does not imply an automatic weakening of state authority in terms of local-central relations. See Maria Edin, “State Capacity and Local Agent Control in China: CCP Cadre Management from a Township Perspective,” The China Quarterly 173 (March 2003): 35-52. For views in support of and against the argument that central state capacity has been weakened in the era of reform, see Shaoguang Wang, “The Rise of the Regions: Fiscal Reform and the Decline of Central State Capacity in China,” in Andrew G. Walder (ed.), The Waning of the Communist State: Economic Origins of Political Decline in China and Hungary (Berkeley, CA: University of California Press, 1995); Hao Jia and Zhimin Lin, Changing Central-Local Relations in China: Reform and State Capacity (Boulder, CO: Westview Press, 1994); Yasheng Huang, “Central- Local Relations in China During the Reform Era: The Economic and Institutional Dimensions,” World Development 24, no. 4 (April 1996): 655-672; Yongnian Zheng, De Facto Federalism in China: Reforms and Dynamics of Central-Local Relations (Hackensack, NJ: World Scientific, 2007); “Institutional Economics and Central-Local Relations in China: Evolving Research,” China: An International Journal 3, no. 2 (September 2005): 240-269. Rather than simply buying into the notion of generalized state capacity, inherent unevenness of state capacity across policy areas (Skocpol 1985) should be acknowledged, as should the adaptability of state capacity, which Linda Weiss terms “transformative capacity.” See Theda Skocpol, “Bringing the State Back In: Strategies of Analysis in Current Research,” in Peter B. Evans, Dieter Reuschemeyer, and Theda Skocpol (eds.), Bringing the State Back In (New York, NY: Cambridge University Press, 1985); and Linda Weiss, The Myth of the Powerless State: Governing the Economy in a Global Era (Cambridge, MA: Polity Press, 1998).

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actors – all manifestations of local state corporatism and administrative monopoly.29 The existence of such profit centers is a testament to the interplay between the political and economic market in China’s transition. Enterprises that can successfully balance this relationship for maximum benefit are ideally positioned to secure a sustained competitive advantage in the new economic game. One particular window to gauge the dynamics of such interplay is the access to sources of credit. Informal financial mechanisms have become a distinct reality in China’s transitional economy. Their prominence is directly correlated with the fact that China’s private sector economy has largely been excluded from the formal financial mechanisms, which tend to allocate funds to SOEs in line with centrally-planned and/or provincially-defined industrial priorities as well as political pressures to maintain social stability. In her study of private entrepreneurs’ access to and use of informal finance, Kellee Tsai (2002), argues that the growing prevalence of informal finance derives from local initiative, relies on local political protection and social enforcement, and appears generally to attest to the financial capacity limits of the central government. This becomes a particularly relevant issue in the context of internationalization when the tapping into and ever tighter integration with international capital markets and the growing appeal and recognition of venture capital funding may allow enterprises to free themselves from a highly unbalanced dependency relationship with various state actors and their backyard profit centers.

3.4.2. State and Enterprise Actors in China’s Political Economy

The expanding institutional array and the evolving formal and informal interactions characterizing China’s transitional political economy space derive from two primary sources. First, the process of economic and fiscal decentralization effectively created a multilayered national political administrative hierarchy. Second, the economic reform process launched by Deng Xiaoping in the early- to mid-1980s, combined with a redoubled effort toward economic restructuring (Yusuf et al. 2006; Green and Liu 2005) and the rise of the private sector economy in the 1990s (Garnaut and Song 2004), saw the emergence of an extensive non-state economic sector alongside the official state sector. This study deliberately simplifies the taxonomy of actors in China’s political and economic spaces (see Figure 3.2). The justification for that is three-fold. First, the scope of this paper could not possibly do justice to the myriad of state and enterprise actors and their changing interrelationships in the context of enterprise internationalization. China’s political/administrative space, for example, has traditionally consisted of five major layers since 1949: the center (zhongyang), provinces (sheng), counties (xian), and cities (shi), with the (danwei)

29. See Jean C. Oi, “The Role of the Local State in China’s Transitional Economy,” The China Quarterly 144 (1995): 1132-1149; “Fiscal Reform and the Economic Foundations of Local State Corporatism in China.” World Politics 45, no. 1 (October 1992): 99-126; Yong Guo and Angang Hu. “The Administrative Monopoly in China’s Economic Transition,” Communist and Post-Communist Studies 37 (2004): 265-280.

64 Chapter 3 emerging after the establishment of modern-day China in 1949 (Lieberthal 2004). A slightly more elaborate institutional layering, meanwhile, might include the center, provinces, prefectures, provincial administrative cities, counties; towns or townships, community committees, and villages (Dong 2007).

Figure 3.1: Taxonomy of State and Enterprise Actors in China

a. State Actors b. Enterprise Actors

Central State Sector Non-State Sector Government Economic & fiscal • State-owned enterprises • Collective enterprises decentralization Provincial • Government agencies; • Cooperative enterprises Governments institutions and social • Private enterprises organizations

Local Governments

A simple perspective of China’s political space points to an essentially three- layered environment, comprised of the central government in Beijing, a provincial-level layer, and local state structures (Figure 3.1a). While the various state-level officials are inevitably CCP cadres, the political and economic agendas of lower-level officials oftentimes reflect vested interests that do not necessarily conform (at least at a practical level) in the strictest terms to the official views and policies articulated by the central government. The Chinese saying – “The mountains are high; the emperor is far away” – aptly captures this reality and hints at significant difficulties of coordination, implementation, and supervision in China.

Table 3.1: Major Enterprise Categories

Major Category Sub-Categories

• State-owned enterprises • Collective-owned enterprises • Cooperative enterprises Domestic-funded enterprises • Joint-ownership enterprises • Limited liability corporations • Shareholding corporations • Private enterprises

Enterprises with investment • Cooperative enterprises from Hong Kong, Macao, and • Enterprises with sole (exclusive) investment Taiwan • Shareholding corporations

• Joint-venture enterprises Enterprises with Foreign • Cooperation enterprises Investment • Enterprises with sole (exclusive) foreign investment • Shareholding corporations

• Agencies: including party and state agencies (“state-owned’) • Institutions: various types, established with approval by organization and Government agencies, staffing departments of the government, but excluding institutions where institutions, and social enterprise management systems have been introducedg organizations • Social organizations: various types, established with approval from the Ministry of Civil Affairs; excluding social organizations by social organization management regulationsgg

Source: National Bureau of Statistics (http://www.stats.gov.cn/english/indicators/) g, gg: further broken down into additional categories.

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The classification of enterprise actors is equally overwhelming. Not only does China’s National Bureau of Statistics (NBS) differentiate between domestic- funded enterprises; enterprises with investment from Hong Kong, Macao, and Taiwan; enterprises with foreign investment; and government agencies, institutions and social organizations, but it offers a range of detailed subcategories (Table 3.1). The definitional challenge, combined with the rather non-transparent and opaque organizational arrangements and interrelationships, is a second reason for adopting a simplified representation of China’s enterprise actors. State, collective and private enterprises also appear to be the major contributors to China’s GDP (see Figure 3.2.), thus lending further support to the classification chosen for this study.

Figure 3.2: The Rise and Fall of Enterprise Actors in China

6,000,000 State Collective 5,000,000 Private

4,000,000

3,000,000

2,000,000

1,000,000

0 1989 1991 1993 1995 1997 1999 2001 2003

Source: Kanamori and Zhao (2004)

By some accounts, including those of Fan Gang, one of China’s most well-known economists and director of the Beijing-based National Economic Research Institute, private enterprises generate around 70% share of China’s GDP. The rise to prominence of China’s private sector enterprises not only calls into question the pervasive myth of the Chinese central government controlling and directing all economic activity, but also holds out the distinct possibility that enterprise internationalization could potentially add a whole new dimension to the nature of interrelationships between state and enterprise actors at all levels. The latter issue will be dealt with in greater detail, and supported with illustrative examples, in Chapter 5. The NBS enterprise classification scheme, in accordance with the Regulation of the People’s Republic of China on the Management of Registration of Corporate Enterprise, will serve as the definitional basis for the taxonomy of enterprise actors in this study.

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Table 3.2: Description of Major Chinese Enterprise Structures

State-owned enterprises Non-corporation economic units where the entire assets are owned by the state

Collective enterprises Economic units where the assets are owned collectively

A form of collective economic units (enterprises) where capitals come mainly from employees as their shares, with certain proportion of capital from the outside, where production is organized on the basis of independent operation, independent Cooperative enterprises accounting for profits and losses, joint work, democratic management, and a distribution system that integrates remuneration according to work with dividend according to capital share

Profit-making economic units invested and established by natural persons, or controlled by natural persons using employed labour. Included in this category are Private Enterprises private limited liability corporations, private share-holding corporations Ltd., private partnership enterprises and private-funded enterprises

The only minor definitional clarification pertains to state-owned enterprises. In this study, SOEs are defined as companies over which the central government or relevant public authorities, such as the State-Owned Asset Supervision and Administration Commission (SASAC), set up in 1988, exercise dominant control and direction.30 Under the current SOE reform push, the central government envisions to cut down the number of central government SOEs from 161 at present to 80-100 by 2010 ( 2006). The remaining companies will come to represent the “national team” of large Chinese enterprise groups, through which the government aims to maintain control over strategic economic sectors.31 Finally, the proposition of theoretical extension to current Chinese internationalization studies adds a final justification for adopting a simple state and enterprise taxonomy. This is not only advisable on the grounds that appealing and valuable theoretical models and propositions generally reflect a high degree of parsimony. Rather, the blurred organizational and control boundaries of many Chinese enterprises and persistent transparency and corporate governance shortcomings make it a necessary condition (at least at this stage). The persistent problem of transparency in Chinese state-owned enterprises (SOEs) was summed up at a ‘Policy Dialogue on Corporate Governance in China,’ in Beijing in May 2005:

…due to the rigorous control of enterprise by the operator (insider) and the flesh-and-blood relationship between the enterprise and its employees as well as the overlong agent chain, long absence of the financer representative and “taking enterprise as home”, control by the insider is

30. SOEs may be further divided into state-owned holding companies (konggu gongsi) and state- owned groups (jituan). The level of control the government may exercise over state-owned enterprises even compels a differentiation between actual state-owned (i.e. absolute state control or guoyou juedi konggu) and relative state control (guoyou xiangdui konggu), which will be revisited in Chapter 5. Such a classification reflects Max Weber’s distinction between “domination by virtue of authority, i.e. power to command and duty to obey” and “domination by virtue of a constellation of interests” (Weber 1978: 943). See also S. Lioukas et al., “Managerial Autonomy of State-Owned Enterprises: Determining Factors,” Organizational Science 4, no. 4 (November 1993): 645-666. 31. For an overview of China’s large enterprise groups, see Dylan Sutherland, “China’s ‘National Team’ of Enterprise Groups: How Has It Performed?” China Policy Institute, University of Nottingham, Discussion Paper 23 (July 2007); China’s Large Enterprises and the Challenge of Late Industrialization (New York, NY: RoutledgeCurzon, 2003).

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quite severe, and poor transparency and asymmetric information extensively exist. It may be put down to artificial control, but it shall be more attributed to the culture formed due to custom. Not only to the outside, even between the parent company and its subsidiaries within a group, the information is sealed and the transparency is absent. (DRC/ERI-OECD 2005)

Moreover, a recent study by Kellee Tsai (2006) serves as an added reminder that, even with the rather simplified classification of enterprise actors proposed in Figure 3.2b, the challenge of accurate classification remains because of adaptive informal institutions and practices to overcome formal institutional environment and regulatory constraints.32

3.5. CONCLUSION

Is it wise or even appropriate to rely on the developmental state framework as a conceptual starting point for the analysis of China’s political economy? The comparison of contemporary China to Japan and South Korea at similar stages of development was intended to shed some initial light on this question. This chapter has sought to show that the peculiar institutional arrangements and relationships between the various actors in the Japanese and South Korean developmental model are largely absent in the case of China. Absent in large measure because of the particularistic situational factors and historical legacies that greeted the onset of China’s post-1978 economic reform era. The comparatively high degree of decentralization of China’s economic space ought to cast doubts on the perception that Chinese enterprise actors are invariably controlled and influenced by the central government. Rather, the reality is one of a multi-layered institutional environment punctuated by a range of adaptive informal institutions and mechanisms (Tsai 2006; 2002). The gradual change from authority relations to exchange relations and de facto institutionalization of economic and fiscal decentralization has already reshaped the scope, breadth and depth of relationships, cooperation and dependence between the various enterprise and state actors. Chapter Four will discuss the various enabling conditions that have given rise to internationalization (both inward and outward) and, combined with decentralization, raise the likelihood of further change in the institutional and interactional spaces of China’s political economy.

32. See also Alison W. Conner, “To Get Rich is Precarious: Regulation of Private Enterprise in the People’s Republic of China.” The Journal of Asian Law 5, no. 1 (Fall 1991).

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4. China’s Internationalization Process – A Macro- Economic Perspective

CHAPTER OVERVIEW

China has experienced an ever-expanding process of economic internationalization, beginning with Deng Xiaoping’s embrace of economic reforms in 1978, which set the stage for the ‘Open Door” policy in the early 1980s. Combined with the documented decentralization of economic decision- making and the concomitant complexities of interaction between state and enterprise actors (discussed in the previous chapter), China’s re-integration with the global economy and the resulting economic internationalization constitute the second critical driving force behind the rapidly unfolding enterprise internationalization in the late 1990s and into the early 21st century. This chapter details the critical milestones along China’s move towards global economic re- integration, and in doing so, differentiates between the inward and outward dimensions of internationalization. Specific enabling conditions and inducement mechanisms for each stage will be discussed, with the aim of paving the way for the elaboration of enterprise internationalization in a subsequent chapter.

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The decentralization of economic decision-making and devolution of state authority to lower levels, discussed in the previous chapter, represented a significant milestone in China’s post-1978 developmental process and brought about far-reaching changes in the country’s political economy. Among the most visible of these changes have been the political determination and socio- economic dynamics that have seen China growing out of the plan (Naughton 1995) and embarking on the long road to global economic reintegration. China’s economic coming-of-age and its rising influence and importance in global economic and commercial terms since the early 1980s has benefited from the promise of a comparatively cheap manufacturing base in the short-term and the promise of a strong future market potential. Eventual accession to the WTO in December 2001 served as a further investment pull-effect, as if multinational companies needed confirmation of what was already a strong and recognized market potential. By 2003, China had emerged as the top global FDI destination

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and, by 2005, FDI inflows stood at US$ 72 billion, a dramatic 20% increase over the previous year.1 From a macro-economic perspective, the opening-up of the Chinese economy ushered in an era that has started (and will continue) to induce significant changes in the political economy sphere. Through China’s re-integration into the global economy, the seeds of internationalization, which began an early germination process during the period of inward internationalization, have sprouted into full bloom by the late 1990s and into the early 21st century. Outward internationalization has become the newest manifestation of China’s ascent to the commanding heights of the global economy. Chapter One provided an descriptive overview of this phenomenon. China’s experience with internationalization, however, did not begin with the economic opening-up of the early 1980s. Rather, the country has experienced “longer-term processes of … internationalization,” although not necessarily motivated in all instances by economic and commercial considerations. In fact, a critical motivating factor of the PRC’s early internationalization push in the 1950s was a desire to incorporate China into, and shape the development of a socialist world economic system (Kirby 2006). When it comes to evaluating the contemporary process of global economic reintegration, however, it is not just antecedent historical experience alone, but also the changing context over time that matters. As Douglass North observed, “[P]ath dependence means that history matters. We cannot understand today’s choices… without tracing the incremental evolution of institutions” (North 1990: 100). In this case, that history includes the extent of China’s post-1978 economic reform period and its shaping effects on the country’s political economy structure. The legacy of China’s early internationalization drive has weighed heavily on the subsequent path-dependent process of economic reform and policy change. James Mahoney (2000: 507) proposed that “path dependence characterizes specifically those historical sequences in which contingent events set into motion institutional patterns or event chains that have deterministic properties.” Indeed, the decision in the early 1980s to re-engage and re-integrate with the global economy can be understood only in the context of China’s prior political and economic developments. Where much of contemporary analysis of China and its enterprise internationalization process falls short, however, is in the failure to contextualize China’s path dependent development. Put differently, the critical importance of visible as well as more subtle junctures along China’s road of economic transition is not always recognized. The result, then, is a path-dependent explanation of Chinese internationalization that is more deterministic than dynamic, and that fails to appreciate the subtle changes in China’s process of evolutionary change and adaptation to a changing world environment and its place in it.

1. Much of the 20% rise, however, as UNCTAD points out in its World Investment Report 2006, is attributed to changes in Chinese FDI statistics methodology. Beginning in 2005, in an effort to enhance the accuracy and reliability of FDI statistics, the Chinese government began to include FDI in financial services. Even if the financial services data were omitted, however, the FDI inflows over 2004 would still have registered a healthy 13% growth.

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In Theory of International Politics, Kenneth Waltz (1979: 127) posits that “competition produces a tendency toward sameness of the competitors.” More recently, Kenneth Pyle points out a similar process of adaptation at the heart of Japan’s rise in international politics, beginning with the Meiji Restoration of 1868. The author provides a very compelling account of Japan’s unremitting adaptation to the prevailing conditions and changes of the international system in order to achieve international reputation and stature commensurate with its ambitions (Pyle 2007). It is hardly an intellectual stretch to propose that such a process of adaptation and selective borrowing is not the exclusive purview of the international relations realm. Indeed, judging by the uncharted waters that the reformist elements of the Chinese leadership started to explore by the late 1970s-early 1980s in the spirit of growing out of the plan and gradually into the market, this observation becomes just as pertinent from a political economy perspective. The economic reform drive in China not only retooled the domestic political economy environment; it also shaped the process of adoption and emulation of market-conforming business practices that are most visibly on display in recent years through outward internationalization. And yet, the readiness on the part of transitioning countries to coordinate their development trajectory with the realities of the international context and adopt the necessary policies to ensure successful transition and adaptation has not yet come to be fully understood or appreciated in the case of China. This is especially puzzling, considering that China’s commitment to transition from a planned economy to a more market-conforming economic structure is next to irreversible unless the government was somehow willing to absorb the political, social and economic ripple effects and undermine an already tenuous political legitimacy that a turning back of the economic development clock would inevitably unleash.2 Having unleashed the forces of reform and adaptation, it was a only a matter of time before China was to take the logical next step in the economic transformation process – widespread internationalization.3 China’s internationalization process features two distinct evolutionary stages – an initial inward stage, following the opening up of the economy, that has paved the way for FDI inflows and numerous cooperative ventures in China beginning in the mid-1980s and continuing to this day, and a rising commitment to outward internationalization, with Chinese enterprises harboring distinct desires to grow into global businesses. This macro-economic turn towards internationalization in general, and the gradual shifting emphasis from inward to outward internationalization in particular is a crucial variable in explaining and understanding the unfolding (or impending) change(s) in the interaction and

2. The irreversible reality of China’s transformation from planned economy to market economy, or “” or “capitalism with Chinese characteristics” is discussed in Susumu Yabuki, China’s New Political Economy: The Giant Awakes (Boulder, CO: Westview Press, 1995): 41-45. 3. For a general overview of economic transformation, see Gregory C. Chow, China’s Economic Transformation (Malden, MA: Blackwell Publishers, 2007).

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connections between state and enterprise actors in China’s political economy space. This chapter will elucidate the factors and conditions that have triggered and are sustaining the unfolding internationalization process. Particular emphasis will be put on the situational factors or enabling conditions, including policy support at various levels of government; the effect of economic globalization; and overall business and competitiveness dynamics. Before delving into a more focused discussion of these various conditions and the likely implications, China’s turn toward internationalization in the aftermath of the transition from the Maoist era to the post-Mao environment begets another compelling question: To what extent, if at all, does the Chinese internationalization process reflect a great transformation, calculated political alignments and vested interests, or possibly a hybrid reality? This question shall be our point of departure.

4.1. CHINA’S INTERNATIONALIZATION – SITUATIONAL CONTEXT

Internationalization represents a critical process in China’s political and economic development. The very concept of economic internationalization goes beyond the conventional understanding of cross-border flows of technology, capital, and goods and services to include more far-reaching dynamics and processes that will re-shape the political economy landscape. Yongjin Zhang (2003) talks about “internalizing principles, rules and norms embedded in the world economy…” as a “more dynamic and revolutionary process of China’s economic internationalization.” In Mao’s Last Revolution (2007), Roderick MacFarquhar and Michael Schoenhals note, “To understand the 'why' of modern-day China, one must understand the 'what' of the Cultural Revolution.” In a similar vein, absent solid situational contextualization, the process of China’s economic and enterprise internationalization cannot be accurately understood. In an effort to assess the situational context weighing in on this process, several intriguing and thought-provoking issues deserve to be considered. On a more conceptual level, a line of inquiry may focus on whether the commitment to, and expansion of, internationalization attests to the inevitabiliy of market forces (Polanyi 1944), raises the specter of trade and investment influence effects (Hirschman 1945), or derives from bureaucratic politics, coalition-building and political alignments (Rogowski 1989). Or maybe, it is a complex and peculiar combination of all the above? The more immediately and contextually relevant focus pertains to critical junctures in China’s internationalization process. What are these junctures? Why and how did they emerge? How important are they? And what institutional and interactional implications do they have for China’s domestic political economy space?

4.1.1. A “Great Transformation”?

By 1978, the reformist elements of the CCP, under the leadership of Deng Xiaoping, had consolidated their political legitimacy, following the twilight of the

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Cultural Revolution, and the eventual purge of the “Gang of Four” in September- October 1976. Political radicalism espoused by the “Gang of Four,” which included Mao’s widow Jiang Qing, had given way to a more moderate course of action.4 The concept of ‘mass line’ has been largely discredited by its very use during the Cultural Revolution (White 1988). Being an ideological underpinning of Maoist policies, it also hastened the political weakness of the radical elements in Chinese politics in the aftermath of Mao Zedong’s death. China’s economic elite appeared to have been singled out as a particular target of Mao’s determination to re-inject a degree of revolutionary fervor into Chinese politics and to commit to far-reaching de-bureaucratization of the Party and the state. Roughly 100 members of the economic leadership are estimated to have been purged between 1966-1969 (Diao 1970). As early as 1978, the overall political, social and economic realities of post- Mao China also seemed to hold out the distinct possibility of a far-reaching re- calibration of policy-making. A reality, that according to Schram (1984), might well refocus policy-making driven by political considerations (“Politics in Command”) to being shaped by economic realities and goals (“Economics in Command”).5 Defining elements of this new reality included the re-adoption of the “” program, championed as early as 1965 by Zhou Enlai and thrown by the wayside during the heydays of the Cultural Revolution, and a commitment to an “Open Door Policy” and the setting-up of special economic zones (SEZs) to cultivate foreign trade and investment.6 This re-integration with the outside world, beginning in the late 1970s, which some have come to label a “Great Leap Outward” (Cheng 1979), has certainly proved instrumental in the gradual internationalization of the Chinese economy. And as such, labeling the economic realities and unfolding dynamics in post-Mao China a great transformation seems rather appropriate indeed. To return to the earlier question, however, does China’s near-three decade-long and gradual internationalization process represent a confirmation of the inevitable advance of market forces? Do bureaucratic politics, coalition-building and political alignments play a role in the contemporary extent of internationalization? Does it forshadow a particular trade and investment influence effect? The short answer: it is very likely (if not, definitively) a combination of all the above. While this does not necessarily imply that these factors ought to be given

4. For a discussion of “radical” and “moderate” factions, see Peter R. Moody, Jr. “The Fall of the Gang of Four: Background Notes on the Chinese Counterrevolution,” Asian Survey 17, no. 8 (August 1977): 711-723. A good account of the end of the Maoist era, see Frederick C. Teiwes, The End of the Maoist Era: Chinese Politics during the Twilight of the Cultural Revolution, 1972-1976 (Armonk, NY: M.E. Sharpe, 2007). 5. In the Maoist era, economic progress had by and large been sacrificed at the expense of intra- party factional rivalries (partly manipulated by Mao Zedong himself) 6. Post-Mao economic planning and decision-making revolved around three dominant “schools of thought.” These included the economic ideas of Chen Yun, Deng Xiaoping and . See David Bachman, “Differing Visions of China's Post-Mao Economy: The Ideas of Chen Yun, Deng Xiaoping, and Zhao Ziyang,” Asian Survey 26, no. 3 (March 1986): 292- 321; Yun-wing Sung, and Thomas M. H. Chan, “China’s Economic Reforms: The Debates in China,” The Australian Journal of Chinese Affairs, no. 17 (January 1987): 29-51.

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equal weight, the focus of this line of inquiry is also not to delineate the specific importance of each. Suffice it, here, to briefly spell out general observations. The transformations that China has undergone since 1978 are reverberating on many levels. Not only have the country’s gradual opening up, reform efforts and re-integration into the global economy reshaped the domestic socio-economic landscape, but the impact is also being felt powerfully on the global economic and business stage (e.g. Garnaut and Song 2004; Kynge 2006; Nolan 2004, 2001a, 2001b). In the simplest of terms, China’s great transformation is a post-Mao reform process that, over the years, has seen the economy grow out of the plan and into the market (Chai 1997; Chow 2007; Naughton 1995; Story 2003). Similar to the Polanyian notion that institutional change is the result of different elements of society adjusting to the great transformation – in his influential The Great Trasnformation, Karl Polanyi offers a powerful critique of a ‘self-regulating market economy’ and argues that the economic organization cannot be completely disembedded from societal needs and dynamics – institutional change is also observable in China. One aspect of this change has been the decentralization of economic decision-making, discussed in Chapter 3. This trend has partially resulted from new economic ideas and outlooks that have been flowing out of China’s post-1978 reform process. Ideas, in turn, “allow agents to reduce uncertainty, propose a particular solution to a moment of crisis, and empower agents to resolve that crisis by constructing new institutions in line with these new ideas” (Blyth 2002: 11). The implication, in other words, is that political economy space is inevitably undergoing considerable, at times truly path-breaking and irreversible, change in periods of economic reform, transformation and transition. Commensurate with institutional change is the building of coalitions and the coalescing of major economic interests. The rise of “local state corporatism,” “individualized bases of power,” “backyard profit centers” and a substantial shift from authority relations to exchange relations (see Chapter 3) attest to role and influence that bureaucratic politics and vested political-economic interests play in China’s transitional economy in general, and in the unfolding enterprise internationalization process in particular. Indeed, to the extent that regions and localities are increasingly benefiting from rising levels of autonomy in economic decision-making, they have a strong incentive to nurture and help grow the local economic base by supporting local enterprise structures. Conversely, with greater openness to trade and commerce, significant fault lines have begun to emerge in China’s economic terrain; fault lines that, with the passage of time, have become pressing socio-economic and political issues (Wolf et al. 2003). As Lin (2001) has detailed in Between Plan and Market, China’s socio-economic transition has propagated a highly unequal spread of economic activities and opportunities. Apart from injecting a new level of economic competition, China’s great economic transformation also virtually ensured particularistic and uneven treatment of enterprises, with regard to resource allocation, regulation, and the distribution of liabilities. Just as the initial reform efforts and economic opening-up generated political ripple effects, so too do the processes of inward and outward internationalization

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(see discussion below) influence and affect domestic political alignments. With exchange relations gradually supplanting authority relations, the dominant pre- reform institutional arrangements – public ownership of economic resources, central planning, and dominance of the CCP in decision-making – have been manifestly weakened. At the same time, the reality of preferential, ad hoc allocation of resources, selective regulatory enforcement, and discriminatory distribution of liabilities and imposition of burdens has secured a necessary importance for political alignments, and interest- and power-driven coalitions.7 A final indication of the great transformation effect of China’s economic and enterprise internationalization lies in a manifest enhancement and spread of Chinese ‘soft’ power (Kurlantzick 2007; Lum et al. 2008; Nye 2005) and rising appeal of its developmental model (Callick 2007; Dimitrov 2008). This reality derives to a large extent from what Albert Hirschman (1945) has termed the “trade and investment influence effect.”8 China’s growing thirst for oil and its attendant oil strategy provide insights into how wielding soft power can meaningfully enhance economic and enterprise internationalization. In fact, in order to secure much coveted drilling and exploration rights in oil- and gas-rich economies, the Chinese government has proved very adept at leveraging its rapidly increasing trade and investment influence effect.9 Among the more striking manifestations China’s trade and investment influence effect is a rather comprehensive charm offensive pursued by the Chinese government and major internationalizing enterprises on the African continent.10

7. According to Ronald Rogowski, Commerce and Coalitions: How Trade Affects Domestic Political Alignments (Princeton, NJ: Princeton University Press, 1989), increasing exposure to trade leads to political cleavages prompting political alignments and coalition-building. Although his work does not touch on the issue of outward internationalization, his general propositions, nevertheless, offer a compelling analytical framework for evaluating changes to the interactional dimension of China’s domestic political economy space at a time of rising internationalization. 8. In National Power and the Structure of Foreign Trade (Berkeley, CA: University of California Press, 1945), Albert Hirschman discusses the economics of welfare and the economics of power as they relate to foreign trade. Specifically, foreign trade embodies a supply as well as an influence effect. 9. The Chinese government, for example, is actively encouraging overseas activities of major construction companies. See, for example, Low Sui Pheng and Jiang Hongbin, “Internationalization of Chinese Construction Enterprises,” Journal of Construction Engineering and Management (November-December 2003): 589-598. In order to secure strategic oil and gas supplies in developing economies, China offers valuable assistance in the economic and social development of major raw material suppliers. 10. China’s rising engagement with Africa has already resulted in a noticeable changing of economic and financial rules. Major news outlets, for example, have in recent months reported on the changing dynamics of economic aid and assistance to African countries as a result of generous aid and soft loan packages (e.g. Wallis 2007). For major scholarship on the China-Africa connection, see, Chris Alden, China in Africa: Partner, Competitor or Hegemon? (New York, NY: Zed Books, 2007); Harry G. Broadman, Africa’s Silk Road: China and India’s New Economic Frontier (Washington, DC: World Bank, 2007); John H. Ghazvinian, Untapped: The Scramble for Africa’s Oil (Orlando, FL: Harcourt, 2007); Marcel Kitissou, Africa in China’s Global Strategy (Adonis & Abbey Publishers, 2007); Manji Firoze and Stephen Marks (eds.), African Perspectives on China in Africa (Cape Town, South Africa: Pambazuka, 2007); Andrea Goldstein et al., The Rise of China and India: What’s in it

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What, then, has triggered and sustained this process of internationalization over the years? In answering this question, a set of critical junctures and the overall effect of various enabling factors will yield significant explanations. It is to these aspects that we will turn in the remainder of this chapter.

4.1.2. Critical Junctures and the Evolution of Internationalization

Two historical junctures have had an undeniably formative effect on the internationalization process of China’s economy and economic actors. These are the onset of economic reforms in the late 1970s, leading to the “Open Door” policy and ever-deepening re-engagement with the world economy, and the successful WTO acession in December 2001. At the same time, these junctures also more or less correspond to distinct stages of internationalization. Whereas the economic opening up of the late 1970s-early 1980s triggered a wave of inward internationalization, the WTO milestone marked the distinctive beginning of aggressive outward orientation.11 Mainstream internationalization theory depicts enterprise internationalization – predominantly perceived from an international business perspective as a gradually expanding involvement in international operations (Welch & Luostarinen 1988) – as a process of incremental development stages. China’s internationalization process, as previously established, can certainly be viewed as a great transformation, but it does not conform to a ‘quick’ or ‘big step’ hypothesis (Pederson & Shaver 2000) transformation. Rather, this process has been unfolding over time and, in line with mainstream theory, gone through definitive stages – inward and outward.12 The various efforts and decisions over the course of the 1980s that made China open for business again to the international community constitute the inward dimension of China’s economic and enterprise internationalization. Lured by a strong market potential, a cheap labor and production base, and a host of incentive regimes, the number of foreign enterprises flocking to China increased dramatically over the years. At this stage, the internationalization of Chinese enterprises occurred in their domestic environment through joint venture (JV) activities, cooperative agreements, licensing, foreign technology transfer, etc.

for Africa? (Paris, France: Development Center of the OECD, 2006); Ian Taylor, China and Africa: Engagement and Compromise (New York, NY: Routledge, 2006) 11. Framing the internationalization debate in the context of these two major milestones, however, is not to suggest that internationalization did not occur prior to 1978. While it indeed did, the extent of it certainly pales in comparison to what was to take place beginning with the “Open Door” policy. Nor does it imply that these are the only milestones worth considering. From a broad conceptual perspective, however, they appear to be of fundamental relevance. 12. The most prominent “stage” theories of internationalization are the Uppsala Internationalization Model (U-Model) and the Innovation-Related Internationalization Model (I-Model). International business literature offers behavior and industrial economics theories of internationalization. See also fn. 27 in Chapter 2. Industrial economics also looks at business internationalization from classical and neo-classical perspectives. For specific details and additional references on this differentiation, see Candida G. Brush, International Entrepreneurship: The Effect of Firm Age on Motives for Internationalization (New York, NY: Garland Publishing, Inc., 1995): 15-27.

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The outward orientation, meanwhile, started to take shape by the late 1990s, encouraged in large measure by the Chinese government’s determination to nurture a number of national champions and global business contenders. Bolstered immeasurably by China’s WTO entry, outward internationalization of Chinese enterprises has not only increased dramatically since but is also sustained by a comprehensive “charm offensive” that is injecting a new dimension into global economic competition.

4.1.2.a From Inward Internationalization …

The late 1970s and the eventual rise of Deng Xiaoping to the pinnacle of the CCP power structure was a critical highpoint for China’s socio-economic future. The analysis of China’s re-integration into the world economy after 1978 (and the policy formulation and implementation problems that have accompanied that period) is not complete without an adequate contextualization of the pre-1978 economic policy environment. For years prior to 1978, a rather intense and increasingly bitter rivalry had been raging between different factions within the ranks of leading CCP cadres. That rivalry triggered several crisis cycles in foreign economic policy and had the Chinese leadership engaged in serious debates over the nature of the inward- oriented development paradigm.13 While the oscillation between import substitution and autarky strategies prior to 1978 undeniably hampered what may well have led to an earlier adoption of a more outward-oriented development regime, it did by no means “condemn China to an unchanging loop of history. Elites incrementally learned from their policy successes and failures and implemented these changes when they had the opportunity” (Reardon 2002: 11). Even though advocates of a more autarkic approach became increasingly marginalized as the post-GLF faction succeeded in gradually gaining ground and retaining it, the debate was by no means settled. Indeed, the decline and fall of the ‘politics-in-command’, and by inference autarkic strategy, focus, merely ushered in a new debate in the late 1970s, focusing on “the depth of involvement with the international community” (Reardon 2002: 180). Following Deng Xiaoping’s consolidation of political power by 1978, China began to take the first concerted steps towards a more strongly outward-oriented developmental regime.14 Even so, the economic policies adopted in the early

13. In The Reluctant Dragon: Crisis Cycles in Chinese Foreign Economic Policy (Seattle: University of Washington Press, 2002), Lawrence Reardon offers a rather detailed and compelling account of the political jockeying and rivalries that underlined much, if not most, of the debate over the appropriate nature of the Chinese development regime. He identifies a set of five crisis cycles that befell the Chinese economic policy sphere prior to 1978: 1959-66 (initiated by the Great Leap Forward (GLF); readjustment of GLF policies); 1966-71 (initiated by the Cultural Revolution; focus on semi-autarkic strategies); 1971-75 (initiated by Zhou Enlai’s readjustment of previous development strategies); 1975-76 (initiated by opposition to Zhou Enlai’s post-1971 “normalization” policies; policy readjustment, culminating in Deng Xiaoping’s purge); and 1976-78 (initiated by the downfall of the “Gang of Four” and Hua Guofeng’s accession to power). 14. Lest the reader be confused, the “more strongly outward-oriented development regime” is qualitatively different from outward internationalization. In the former, ‘outward-oriented’

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1980s nevertheless still seemed more aimed at finding a middle ground between import substitution and outward-oriented development rather than breaking decisively with past practices. This gradualist approach reflected the desire for a cautious and manageable strategy. After all, the period of policy oscillation prior to 1979 carried a host of unintended consequences for China. In particular, both the Great Leap Forward and the Great Proletarian Cultural Revolution dealt a severe blow to economic and social cohesiveness. It is that historical legacy which, understandably so, contributed to a much more cautious economic reform and opening-up process in the early 1980s. At a macro-level, the creation of SEZs in China’s coastal provinces was an early and crucial step toward inward internationalization.15 These zones were not only experimental pockets of economic activity and foreign capitalism that became virtual magnets for FDI inflows in the late 1980s and throughout the 1990s. The proscribed nature of economic and business cooperation between domestic and foreign companies within these zones (mostly JV operations, with the Chinese partners controlling a majority stake16) also played a crucial role in skill and technology transfer and exposed Chinese companies increasingly to international business practices. Hence, internationalization, albeit of an inward dimension. Opening the window to the outside world had the added effect of gradually extending the economic playing field and sowing the seeds for the rising appeal and importance of the private sector economy and proto-capitalist ideas.17 The

effectively refers to China’s gradual re-integration with the global economy, and the gradual promulgation of laws and policies that would be instrumental in generating an economic and investment pull-effect resulting in the gradual, but quickly expanding, influx of FDI into China. In other words, the initial outward-orientation was a sign that China was, once again, to be open for business. Such an attraction of FDI, and the spillover effects it would generate, in turn, fueled the inward internationalization of China’s economy and enterprises. It provided an environment for crucial skill and technology acquisitions without which the subsequent outward internationalization would have been far less successful and enterprises would have found themselves much more disadvantaged in terms of international business competitiveness than they do nowadays. This, of course, is not to suggest, that Chinese enterprises are no longer burdened by comparative competitive disadvantages, but they are less so than they would have been without the prior inward internationalization stage. 15. For a discussion of Chinese special economic zones, see George T. Crane, The Political Economy of China’s Special Economic Zones (Armonk, NY: M.E. Sharpe, 1990); Tony Frye, “Economic Zone Policy as an Agent of Rapid Economic Growth: The Case of the People’s Republic of China,” Doctoral Dissertation, Department of Political Science, Miami University (August 2007); Wei Ge, Special Economic Zones and the Economic Transition in China (River Edge, NJ: World Scientific, 1999); Y. C. Jao, and C. K. Leung (eds.), China’s Special Economic Zones: Policies, Problems, and Prospects (New York, NY: Oxford University Press, 1986); Jung-dong Park, The Special Economic Zones of China and Their Impact on Its Economic Development (Westport, CT: Praeger Publishers, 1997); Michael W. Oborne, China’s Special Economic Zones (Paris, France: Development Center, OECD, 1986); Clyde D. Stoltenberg, “China’s Special Economic Zones: Their Development and Prospects,” Asian Survey 24, no. 6 (June 1984): 637-654. 16. Over the years, however, the regulatory regime has changed considerably, and nowadays, wholly foreign-owned enterprises (WFOEs) overshadow JV operations. 17. On the effect of opening up on the economic space in China see, for example, Robert Kleinberg, China’s Opening to the Outside World – The Experiment with Foreign Capitalism

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“Wenzhou Model,” named after the coastal city of Wenzhou, Zhejiang Province, was but one illustration of the changes in China’s political economy space.18 China’s race to market and adoption of proto-capitalist practices – a process that has variously been described as “capitalism with Chinese characteristics” or “socialism with Chinese characteristics” – is both the result of exogenous and endogenous factors. Just as inward internationalization allowed for the gradual inflow of new ideas and technological know-how, so too was the Open Door policy and Deng Xiaoping’s pragmatic approach to economic development a conduit that allowed for the sprouting of endogenous, historically-antecedent seedlings of quasi-capitalist manifestations in a gradually more liberalized economic environment.19 In Schumpeterian terms, the Chinese leadership, through its decision to open up to the outside world, engaged in its own version of “creative destruction,” which has begun to reshape institutional and interactional patterns at the domestic political economy level.

(Boulder, CO: Westview Press, 1990). Susan Young, Private Business and Economic Reform in China (Armonk, NY: M.E. Sharpe, 1995) and “Wealth but not Security: Attitudes Towards Private Business in China in the 1980s,” The Australian Journal of Chinese Affairs, no. 25 (January 1991): 115-137 elucidates the revival of the private sector as well as its relationship with state control and its overall role in the contemporary Chinese economy. See also Barbara Krug (ed.), China’s Rational Entrepreneurs: The Development of the New Private Business Sector (New York, NY: Routledge Curzon, 2004), and Kellee S. Tsai, Capitalism Without Democracy: The Private Sector in Contemporary China (Ithaca, NY: Cornell University Press, 2007). 18. For an extensive review of economic privatization in China, best represented by the Wenzhou Model, see Peter Nolan and Dong Furen (eds.), Market Forces in China: Competition and Small Business – The Wenzhou Debate (London, UK: Zed Books, 1989); Alan P. L. Liu, “The ‘Wenzhou Model’ of Development and China’s Modernization,” Asian Survey 32, no. 8 (August 1992): 696-711; and Kristen Parris, “Local Initiative and National Reform: The Wenzhou Model of Development,” The China Quarterly, no. 134 (June 1993): 242-263. 19. Much has been written on where and when to locate the earliest sprouts of capitalism (zibenzhuyi mengya) in China. Etienne Balazs, “The Birth of Capitalism in China.” Journal of the Economic and Social History of the Orient 3, no. 2 (August 1960): 196-216, takes the inquiry into the birth of capitalism in China as a far back as the Tang (618-907) and Song (960-1279) dynasties. The development and spread of commercial activities during this time period – including the invention of instruments of credit, founding of the first proto-banks, and the emergence of money lending practices – Balazs asserts, “oblige us to seek for the germ of capitalism at this early date” (Balazs 1960: 2006). Timothy Brook, “The Merchant Network in 16th Century China: A Discussion and Translation of Zhang Han’s “On Merchants”,” Journal of the Economic and Social History of the Orient 24, no. 2 (May 1981): 165-214, reviews some of the dominant and divergent views of the transformative potential of commerce, i.e. possibly constituting the “sprouts of capitalism”. See also, Chi-Kong Lai, “China’s First Modern Corporation and the State: Officials, Merchants, and Resource Allocation in the China Merchants’ Steam Navigation Company, 1872-1902,” Doctoral Dissertation, Department of History, University of California, Davis, 1992; Yen-p’ing Hao, The Commercial Revolution in Nineteenth-Century China: The Rise of Sino-Western Mercantile Capitalism (Berkeley, CA: University of California Press, 1986); Ping-ti Ho, “The Salt Merchants of Yang-chou: A Study of Commercial Capitalism in Eighteenth-Century China.” Harvard Journal of Asiatic Studies 17, no. 1/2 (June 1954): 130-168; and Yen-p’ing Hao, “A ‘New Class’ in China’s Treaty Ports: The Rise of the Comprador-Merchants.” The Business History Review 44, no. 4 (Winter 1970): 446-459.

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4.1.2.b … To Outward Internationalization

Deng Xiaoping’s “Open Door” policy and the decision to set up SEZs in China’s coastal areas20 in the early- to mid-1980s unquestionaly was a defining milestone in China’s economic transition. Global economic integration, however, only came full circle with a second major critical juncture in the history of China’s political economy. That juncture, as previously alluded to, has been the granting of WTO membership in December 2001. This newfound status gave added impetus to China’s reform agenda and renewed the commitment to structural adjustments begun in the 1980s, with profound implications for the institutional and interactional features defining the domestic political economy space.21 Outward internationalization is not merely the next stage in China’s engagement with the broader international economic system but also a direct and inevitable response to the effects of opening the country up for business. The critical juncture of WTO accession, moreover, has meaningfully contributed to the overall internationalization of the Chinese economy, rather than simply building onto the antecedent inward wave or triggering the commitment to a “Go Out” strategy. The processes and contemporary manifestations of trade and capital liberalization appear to be on an irreversible course, and the potential of enticing, coopting (or, if need be, coercing) China into becoming an increasingly responsible actor in the international system has markedly improved. In expanding its internationalization, China is expected to respect and adhere to internationally accepted best practices and norms. This expectation applies as much to the economic/business realm as to the socio-political realm. Outward internationalization takes on a variety of forms. A natural first step for many enterprises is to adopt an export orientation, with their products reaching markets in neighboring countries, in the broader East Asian region, or reaching the shores of far-flung advanced industrial economies in North America and the European Union or those of other developing economies in Africa, the and Latin/South America. Other dynamics, indicative of a more focused, ambitious and advanced form of outward internationalization, include: setting up overseas wholly-owned subsidiaries; concluding JV agreements with overseas business and government entities; bidding for minority and/or majority stakes (principally through M&A moves) in internationally established business enterprises; securing exploration rights in natural resource-rich economies; displaying a growing tendency to list on overseas capital markets; and so on. The Chinese government’s “Go Out” strategy is still in its early phases, and it remains to be seen how it will unfold in the years ahead. Two trends, however, are

20. The first zones were set up in Shenzhen, Shekou, and Zhuhai (Guangdong province), and Xiamen (Fujian province). The number of zones has over the last two decades risen to over 50 officially sanctioned zones, not including the many zones unofficially, if not outright illegally adopting the SEZ designation. Additionally, the geographic location of these zones has also evolved to include coastal as well as inland areas. 21. For an in-depth analysis and discussion of the opportunities and challenges facing China’s rejoining the global economy, see Nicholas R. Lardy, Integrating China into the Global Economy (Washington, DC: Brookings Institution, 2002).

80 Chapter 4 already emerging as a near-certainty for the mid- to long-term. First is the Chinese government’s unwavering commitment to seeing outward internationalization grow into a force that will credibly anchor China into the international economic and business arenas. To that end, institutional and legal changes and reforms will continue, although such changes are oftentimes more likely to be a subtle nature, and thus, more difficult to observe, particularly if pursued at a continuous and steady pace. This, in turn, prompts another trend that, to some extent, remains as pervasive in some intellectual and policy circles, as it is an understandable trend among a large segment of the general public – and that is the perception/reception greeting the rather more tangible manifestations of Chinese enterprises’ globalizing business strategies.22 The international expansion of Chinese enterprises is but the latest manifestation of the broader “peaceful rise” of China and of its claiming a position in the world economy that conforms to its economic might.23 The successful implemenation of China’s global strategy combines tools of culture and business, which fuel the appeal and rise of its soft power. This trend, in turn, has begun to draw attention to a so-called “China Model” as a likely and pallatable alternative to the Washington Consensus, especially in the developing world (see Callick 2007; Dimitrov 2008). Though this developmental formula combines economic liberalization with political repression, it does not a priori suggest that the power of the State is all pervasive. As Chapter 3 has already established, China’s post-1978 developmental model has allowed for significant devolution of power and decision-making authority in the economic realm to lower levels of government rather than remaining narrowly confined to the central level.

22. Joshua Kurlantzick (2007) discusses both the intangible and tangible manifestations of China’s distinctive outward orientation. The “tools of culture” and the “tools of business” are the two pillars of the internationalization strategy. 23. China’s rising international clout was first described as a “peaceful rise” during “China's Peaceful Rise and New Role of Asia” roundtable discussions at the Boao Forum for Asia (BFA) in 2003 and has subsequently fueled substantive debates on this very topic. Apart from a two-day conference organized by the Carnegie Endowment for International Peace and Security debating the question of whether China’s rise is likely to be peaceful (for video footage and transcripts of the main events, go to http://www.carnegieendowment.org/events/index.cfm?fa=eventDetail&id=714), the terminology itself has drawn criticism – with “rise” seen as suggesting a degree of aggression and thus better replaced by “development”. See also Bijian Zheng, “China’s ‘Peaceful Rise’ to Great-Power Status.” Foreign Affairs 84, no. 5 (September-October 2005): 18-24.

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Figure 4.1: The Geographical Focus of China’s Enterprise Internationalization

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The offensive of Chinese business enterprises is truly global in nature. Rather than proceeding in stages from a limited beginning of outward internationalization – starting with immediate neighboring economies – through a broader regional focus to an eventual global reach, Chinese companies are pursuing all avenues at once in fulfilling a wide range of political, economic and strategic interests. As shown in Figure 4.1, Chinese enterprises are establishing a foothold in markets ranging from North America, Europe (Liu and Tian 2008), Australia and throughout East and Southeast Asia to the Middle East (Garver 2006; Kumaraswamy 1999), Latin America (Santiso 2007; Devlin et al. 2006; Lafargue 2006), Africa (Alden 2007; Broadman 2007; Firoze 2007; Kitissou 2007; Taylor 2006) and everyhwere in between.24 Commitments and determination to expand business activities abroad are shared by both the national and subnational levels, with provincial governments increasingly championing “complementary programs to encourage Chinese companies to venture into neighboring countries” (Kurlantzick 2007: 89). The comparative lack of scholarship on Chinese investments in developed economies may be because the concurrent flow of Chinese outward FDI to developed and developing economies powerfully contradicts conventional assumptions and theories of business internationalization – i.e leveraging competitive advantages as opposed to trying to overcome competitive disadvantages (see Kojima 1990). Investments in advanced industrial economies are designed in part to secure strategic beachheads for further expansion, assess (and improve on) current competitiveness levels, or even acquire the necessary brand power, supply chain or distribution channels that are crucial for business success and growth – but still laregly eluding China’s nascent internationalizing and enterprises – through acquisitions of established global players. Lenovo’s purchase of IBM’s PC division in December 2004 and WuXi PharmaTech’s announcement on January 3, 2008, to acquire US-based AppTec Laboratory Services, Inc. (its first acquisition) are among a rapidly rising number of illustrative examples.25 The disadvantages and prevailing weaknesses of Chinese enterprises in competing with established Western companies, however, are more than offset by their comparative advantages in successfully navigating oftentimes murky business waters of developing economies, many of which provide a relatively familiar environment for Chinese enterprises. Tight political control, potential for

24. Natural resource assets are targets eagerly pursued in both developed and developing economies. On December 9, 2007, Sinosteel, one of China’s largest steel manufacturers, announced a US$1.04 billion cash bid for Australia’s Midwest Corporation, a major iron ore explorer. On the same day, China Minmetals Noferrous Metals (a metals trading group), in conjunction with Jiangxi Copper (a mining group), extended a US$450 million cash bid for Peru’s Northern Peru Copper (a Canada-listed mining company), following earlier completed takeovers of copper mining companies Peru Copper and Monterrico by China’s Chalco and Zijin Mining Group, respectively. 25. WuXi PharmaTech specifically noted that “[T]he acquisition of AppTec allows WuXi PharmaTech to immediately obtain biologics capabilities and expertise, gain a significant U.S. operational footprint, and expand its customer base and addressable market size.” See “WuXi PharmaTech to Acquire AppTec Laboratory Services, Inc.” (January 3, 2008). Accessed on January 12, 2008, at http://www.wuxipharmatech.com/news/show.asp?id=640&classid=15.

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instability and strife, the lack of an independent and impartial judiciary (raising concern over adequate legal recourse and protection) nebulous ownership structures, and lack of transparency and good corporate governance tend to raise a number of red flags in the boardrooms of Western companies assessing the viability of investments in developing economies. Why, on the other hand, does this reality not similarly affect Chinese FDI decisions? On the one hand, the Chinese government, especially in explaining the go-ahead of investments by SOEs and other firms benefiting from substantial government backing, has been adamantly championing a strictly ‘business, not politics’ approach. In other words, in sticking to a strict interpretation of national sovereignty and non-interference in internal affairs of foreign countries, the Chinese government avoids being pinned down by issues of morality and internationally accepted norms of behavior at the expense of immediate national interests.26 Chinese companies’ relative ease of expansion in neighboring as well as more far-flung developing economies with purportedly challenging and uncertain economic, political and social conditions is tied to their formative experience in a similar domestic market in China and hence a comparatively better understanding of the ways of doing business in developing economies. Complementing this shared developmental similarity, Chinese companies are also, comparatively speaking, less protective of technology. Nor are their investment plans limited by political constraints as are those of Western companies. In the end, then, these are all aspects that facilitate the efforts of Chinese companies in building and spreading political and economic influence in targeted host countries in the developing world.27 Having briefly commented on the motivations behind, and overall development of, inward and outward internationalization, it remains to be said that a proper and contextually accurate explanation and analysis of China’s internationalization process is not complete without careful scrutiny of the factors and conditions that have given rise to this phenomenon and continue to sustain and nurture further growth.

26. A number of pundits, especially those hailing from the “China Threat” school and those with an active interest in prolonging the unipolar moment of the post-Cold War international system, would charge that Beijing’s ‘business, not politics’ approach has in fact heavy political undertones. As one participant in Stanford University’s 2007 Collaboratory for Research on Global Projects (CRGP) Roundtable put it, “China is interested in having a more multi-polar, heterogeneous international order… Also, they’re trying to alter the idea of development, with an emphasis on political stability and economic development over democratic institutions. China wants to promote this vision of development in Africa in lieu of more Western ideas of development” (See Annie Jia, “Roundtable probes the politics of China’s large-scale investments in Africa,” Stanford Report, May 16, 2007). 27. For illustrative details, see Kurlantzick (2007: 82-107). For a list of noteworthy deals sealed by Chinese companies in developing countries in Africa, Latin America, Central Asia and the Middle East, see: “China Spreads Its Wings: Chinese Companies Go Global,” Accenture Report (2005: 4), accessed on 14 January 2008 at http://www.accenture.com/NR/rdonlyres/6A4C9C07-8C84-4287-9417- 203DF3E6A3D1/0/Chinaspreadsitswings.pdf

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4.2. ENABLING CONDITIONS OF CHINA’S INTERNATIONALIZATION

If the past three decades of economic reform can serve as a general indicator of things to come, then it would appear rather certain that China will soon – if it has not already done so – enter a new stage in its inexorable transition to a market- conforming economic structure. While the specific effects and implications of such a shift remain still rather difficult to predict accurately, two trends can nonetheless already be outlined with a broad degree of certainty. On the one hand, the competitive dynamics in China’s increasingly crowded domestic marketplace may not only result in a continuous improvement (read, liberalization) of the economic and financial spheres, but the number of enterprise actors will also increase as the domestic political economy space continues to evolve towards a more even level playing field and opens up even further to non-state enterprise structures. Additionally, while Beijing will inevitably retain a certain degree of control and influence over strategic industrial sectors, it is rather inconceivable that it will retain, or for that matter, even want to retain, the breadth and depth of ownership commonly attributed to socialist regime structures. Rather, the degree and nature of state control and influence are likely to be increasingly based on specific national interests. Judging by the gathering wave of privatization, this is already happening (Green and Liu 2005; Yusuf et al. 2006). Inroads by Chinese enterprises in overseas markets have become a nascent reality and will inevitably increase in number and scope in the years ahead. In order to appreciate this trend, one has to understand the various drivers and conditions buttressing the internationalization stages that have seen China climb the economic development ladder and begin to stake a claim to economic superpower status in the 21st century.

4.2.1. Political Rationale

From a political perspective, putting emphasis on economic reform and development in the post-Mao era seemed necessary, albeit not sufficient to overcome the haunting legacy effect of the Cultural Revolution and the socio- economic dislocation it had brought on. Deng Xiaoping and the reformist elements in China’s political hierarchy were keenly aware that the excesses and devastation of Mao Zedong’s “last revolution” (MacFarquhar and Schoenhals 2006) could likely call into question the continued political legitimacy of the CCP. If the Party were to secure its political hold on power, a simple distancing from the Maoist legacy clearly would not be nearly enough. It was imperative to fill the vacuum left by the demise of Maoist ideology with a solid alternative. That alternative proved to be a drastic overhaul and re-orientation of the management of economic affairs and economic development. Breaking down the proverbial Great Wall and paving the way for re-integrating with the global economy, beginning with inward internationalization, proved indispensable steps towards meeting that goal. The ideological bankruptcy of the political system that ensued with the demise of the Communist moral and political order in the former Soviet Union and its Eastern European satellite states in the 1990s has left the Chinese Communist Party with nothing but the “economic” mandate of heaven. China’s foremost

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economic and social development goal – the creation of a “well-off” society (xiaogang shehui) by 2020 – hinges to a critical extent on the ability to secure the various factor inputs needed to sustain current economic growth rates. The reality and seriousness of the situation, meanwhile, has not been lost on the Chinese government. In order to guard against short-term pressures and problems, as well as plan for longer-term challenges, the government has been committed to providing an environment that proves conducive for, and actively encourages further liberalization and marketization, with the aim of mitigating as best as possible the likely challenges and demands on the China’s political, social and economic systems. Promoting and sustaining inward and outward internationalization processes while capitalizing on the beneficial trickle-down effects ranks among the most promising options to assuage a range of economic fault lines (Wolf et al. 2003) and social concerns that are weighing increasingly heavily on the minds of China’s political cadres.28 China’s fourth generation of political leaders is keenly aware of the destabilizing spiral that can result from failure to maintain social harmony and stability. Despite the worrying specter of economic overheating, the central leadership has taken but tepid action to reign in China’s continued high economic growth trend, considering that maintaining current economic growth rates is necessary in order to prevent worsening of unemployment.29 At the other extreme, the government also needs to secure the necessary factor inputs to keep the economic juggernaut running smoothly, lest any drastic downturn also endangers social stability.30 A particularly important factor driving enterprise internationalization, from a macro-economic perspective, is China’s rapidly rising energy consumption. Having become a net importer of oil in 1993, China’s oil import dependency has risen to over 36%, or just over 91 million tons, of all its processed crude oil within the following decade. According to preliminary projections, dependence on oil imports could reach 45% by 2010 (Troush 1999). With China’s main oil- producing zones nearing depletion, saturating the rising thirst for oil is guaranteed to feature ever more prominently on the political agenda. Considering the security and strategic implications of such dependence, and the widely accepted belief that

28. For a discussion of the fragile nature of China’s domestic political space, see Susan Shirk, China: Fragile Superpower: How China's Internal Politics Could Derail Its Peaceful Rise (New York, NY: Oxford University Press, 2007). 29. At the present time, it is estimated that China needs to maintain an average annual economic growth rate of at least 9 percent to generate enough jobs for university graduates. While this will not help solve unemployment levels, it is nonetheless designed to prevent exacerbating a trend that has already fueled significant social unrest in China’s rust belt in the wake of SOE restructuring and the crushing of China’s . See, Neil C. Hughes, China’s Economic Challenge: Smashing the Iron Rice Bowl (Armonk, N.Y.: M. E. Sharpe, 2002). 30. To prevent China’s economic engine from stalling, a veritable race for energy sources and security, as well as worldwide access to and supply of a critically needed raw materials has been launched. See, for example, Bernard D. Cole, “Oil for the Lamps of China – Beijing’s 21st Century Search for Energy,” McNair Paper 67, Washington, D.C: .Institute for National Strategic Studies, National Defense University, 2003; Erica S. Downs, China’s Quest for Energy Security (Santa Monica, CA: RAND, 2000).

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it is virtually unavoidable in the medium- to long-term, the government has largely adopted an “outward-looking oil economy.” Apart from political support and encouragement of outward internationalization, the Chinese government is also lending substantial financial help to ensuring the cultivation of so-called “global champion” enterprises. State financial support is especially forthcoming in economic sectors that remain crucial to ensuring economic growth and political stability. It is hardly surprising that the energy sector features high on the list of financially state-backed and state-assisted internationalization plans.

4.2.2. Policy Support & Regulatory Framework Governing Overseas Investments

Chinese government policy concerning outward investment has undergone notable changes in recent years, particularly following the official adoption of the “Go Out” policy in 2002. Yet, applying a historical perspective to China’s overall outward investment trends suggests that government policy and support has undergone a stage-like evolution from the early days of economic reform to the present (Figure 4.2). In his report to the 16th National Congress of the Communist Party of China, held in 2002, President Jiang Zemin not only highlighted the importance of inward internationalization, but also championed the outward dimension. In his words at the time,

By both “bringing in” and “going out”, we should actively participate in international economic and technological cooperation and competition and open wider to the outside world… We should form large internationally competitive companies and enterprise groups through market forces and policy guidance.31

On March 5, 2006, Chinese Premier Wen Jiabao, in his report on the work of the government to the National People’s Congress, declared,

We will support qualified enterprises in going global, making overseas investments, conducting international business in conformance with general international practices, and establishing processing centers, marketing and service networks and R&D centers in other countries. We will institute a policy support and service system and improve the mechanisms for coordinating overseas investment and risk management.32

In his report to the 17th Party Congress on October 15, 2007, President Hu Jintao struck a similar note, stressing that,

31. The full text of political report delivered by President Jiang Zemin at the 16th National Congress of the Communist Party of China on November 17, 2002, can be found at: http://china.org.cn/english/features/49007.htm (accessed on January 20, 2008). 32. The full transcript of the Chinese Premier’s remarks to the Fourth Session of the Tenth National People’s Congress, delivered on 5 March 2006, can be found at http://english.people.com.cn/200603/14/eng20060314_250510.html (accessed on January 20, 2008).

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We will encourage formation of internationally competitive conglomerates… We will make innovations in our way of overseas investment and cooperation, support domestic enterprises in carrying out international operations of R&D, production and marketing and accelerate the growth of Chinese multinational corporations and Chinese brand names in the world market…”33

Figure 4.2: Changing Government Policy on Outward Investment (1979-present)

& Streamlining Policy Loosening Loosening Policy Policy Policy Tightening

1979 Time Present Source: Kenny Zhang, “Going Global: The Why, When, Where and How of Chinese Companies’ Outward Investment Intentions (Asia Pacific Foundation of Canada, 2005).

It should also be worth acknowledging that, in their reports to the 16th and 17th Party Congresses, Presidents Jiang Zemin and Hu Jintao, respectively, also spoke about the need to continue efforts to cultivate a conducive environment for the successful nurturing of non-state enterprises, including private enterprises.34 Though the initial desire to create internationally competitive companies implied an obvious prioritizing of state-backed enterprises, it is a fair assumption to make that in due course non-state enterprises will also assume greater prominence in China’s outward internationalization.35 According to China’s Ministry of Commerce (MOFCOM) and the National Bureau of Statistics, SOE overseas investments accounted for less than 32% of the US$12.3 billion in non-bank

33. The full text of political report delivered by President Hu Jintao at the 17th National Congress of the Communist Party of China on October 15, 2007, can be found at: http://www.chinadaily.com.cn/2007-10/25/content_6226673.htm (accessed on January 20, 2008). 34. The issuance of “Certain Opinions on Supporting and Guiding the Development of the Private Economy” by China’s State Council on February 25, 2005 was a major step towards creating a level playing field that will grant private enterprises access to new markets and confer similar rights as those currently enjoyed by SOEs and foreign-invested enterprises. 35. This merely suggest that the contextual path dependent approach is not merely relevant, but indeed necessary to a balanced assessment of the institutional and interactional dynamics of Chinese business internationalization.

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foreign investments in 2005. A predicted uptake in overseas investments by non- state enterprises may certainly derive momentum from their current contribution to the country’s GDP structure. Furthermore, the promise of easier access to financial capital provided by an expanding domestic venture capital and private equity industry may also credibly enhance the representation of China’s non-state sector in outward internationalization over time. To bolster the “Go Out” policy, the Chinese government has begun to relax foreign currency controls in 2002-2003 and simplified and improved the overall regulatory framework governing overseas investments. The regulatory framework for overseas investments differentiates between financial and non-financial sector investments. The People’s Bank of China (PBOC), the China Banking Regulatory Commission (CBRC), the China Insurance Regulatory Commission (CIRC) and the China Securities Regulatory Commission (CSRC) are the main approval- granting authorities for overseas financial investments. In light of excessive liquidity in the Chinese domestic market, the Chinese government has been laying the foundation for additional investment outlets for a range of qualified domestic institutional investors. In particular, the aim is to offer individual investors new wealth management products to help address concerns over irrational exuberance in China’s “casino” stock-markets as well as to deflect international criticism in the face of soaring foreign exchange (FOREX) reserves and continued widening of China’s trade surplus. The latest government regulations aimed at facilitating outbound portfolio and equity investments include:

• Tentative Measures for the Administration of Overseas Investment of Insurance Capital (issued by CIRC, PBOC, and SAFE on June 28, 2007)36 • Trial Measures for the Administration of Overseas Securities Investment by Qualified Domestic Institutional Investors (issued by CSRC on June 18, 2007) • Circular on Revising the Scope of Overseas Investment for Overseas Financial Management Services on Behalf of Customers of Commercial Banks (issued by General Office of the CBRC on May 10, 2007) • Tentative Measures for the Administration of the Entrusted Overseas Financial Management Business of Trust Companies (issued by CBRC and SAFE on March 12, 2007). • Circular on Issues Relevant to Foreign Exchange Control with Respect to Overseas Securities Investments of Fund Management Companies (issued by SAFE on August 30, 2006). • Circular on the Revision of Certain Foreign Exchange Control Policies Relating to Overseas Investment (issued by SAFE on June 6, 2006). • Circular on Issues Relevant to Further Intensifying the Reform of Foreign Exchange Administration on External Investments (issued by SAFE on October 15, 2003)

36. On July 25, 2007, regulators announced that insurance companies will be allowed to invest up to 15% of their assets in overseas equities and derivative products.

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Financial investments by domestic qualified institutional investors have been aimed primarily at improving the rate of return (ROI) on investments and diversifying the investment portfolio as part of a general risk-management strategy. Two of the most notable developments in this area include the setting up of China’s first sovereign wealth fund, China Investment Corporation (CIC), in September 2006 (see Chapter 5 for additional details), and the invitation extended by China’s National Social Security Fund (NSSF) on April 28, 2006, through “Tentative Provisions for the Administration of Overseas Investments by the National Social Security Fund”, to qualified institutional investors to apply for managing substantial pools of capital from the national social security funds. The noticeable uptake in financial-sector overseas investments notwithstanding, China’s non-financial investments have seemingly attracted most of the attention and scrutiny in recent years.37 On July 16, 2004, the State Council issued Decisions on the Reform of the Investment System, which entailed simplification of the approval regime and improvements in government approval procedures. The threshold for central government approval of overseas investments has been raised from US$ 1 million to US$ 10 million (or US$30 million for energy-related projects). In addition to government authorities now assuming the role of market regulators rather than market participants, the new regulatory policy also accords greater leeway in the approval process to local levels of government – thus raising hopes that the pool of actors engaged in overseas investments will indeed in due course grow beyond state-owned and state-backed enterprises.38 The State Development and Reform Commission (SDRC) and MOFCOM share the regulatory responsibilities for non-financial sector investments. SDRC or, in some cases the State Council, assume specific policy-related evaluation and approval responsibilities whereas the review and approval process of the relevant transaction documents rests with MOFCOM (see also Table 4.1). Both SDRC and MOFCOM have promulgated regulations that conform to the State Council’s decisions regarding the reform of the investment system announced on July 16, 2004. These include the Tentative Measures on the Administration of the Verification of Foreign-Invested Projects (effective October 9, 2004) and the

37. This trend is rather surprising, considering the extent of influence and power to be wielded through financial means. Recent developments, notably the willingness of emerging market players to satisfy the capital raising needs of financial power houses like JP Morgan, CitiGroup, Merrill Lynch, and so many others burdened with billion-dollar losses from the U.S. subprime mortgage crisis, are but the clearest evidence to-date of an marked shift in the distribution of wealth and power in the international system. As noted: “…So far, the foreign investment in Wall Street firms hasn’t provoked a political backlash in the U.S. in contrast to the uproar that followed Dubai Ports World’s attempt to acquire the operations of U.S. ports last year…The issue of selling chunks of Wall Street to Middle Eastern and Asian investors hasn’t figured much in political campaign rhetoric – perhaps because voters don’t care much about who owns shares in Citigroup or Merrill Lynch.” See, Wall Street Journal, “World Rides to Wall Street’s Rescue” (January 16, 2008): A1; A10. 38. For more details on the new regulatory framework governing overseas investments, see Aihong Yu and Basil Hwang, “Chinese Companies on the Global M&A Stage Domestic Regulatory Issues,” China Law & Practice (September 11, 2005).

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Provisions Regarding Verification Matters Relevant to Investment in and Establishment of Enterprises Overseas (effective October 1, 2004), respectively.

Table 4.1: Overseas Investment Approval for the Non-Financial Sector

SDRC’s Provincial Project Name State Council SDRC Branches

Energy resource exploration US$ 30 million or US$ 200 million or projects with investment above, but less than Below US$ 30 million above amount of: US$ 200 million

US$ 10 million or Other projects requiring US$ 50 million or above, but less than Below US$ 10 million foreign exchange of: above US$ 50 million

Investments in Taiwan or countries without official All investments are subject to approval by

diplomatic relations with SDRC or State Council (no clear division of China lines of authority between the two entities)

Source: Yu and Hwang (2005).

Overseas initial public offerings (IPOs) are yet another nascent manifestation of Chinese enterprises’ expanding outward internationalization. Early attempts to regulate this trend have included the promulgation of circulars on Further Strengthening Administration of the Issue and Listing of Shares Outside of China (issued by the State Council on June 20, 1997) and on Relevant Questions Concerning Issues and Listing of Shares by Offshore Companies Involving Domestic Rights and Interests (issued by CSRC on June 9, 2000). In light of the rising appeal and drastic uptake of overseas listings, CSRC has aimed to remove any lingering ambiguity surrounding off-shore listing, particularly so-called Offshore Spin-Off Listings, with a circular on Certain Issues Regarding The Regulation of Offshore Listing of Subsidiaries of Domestic Listed Companies (August 10, 2004). The reasons for, and ramifications of, Chinese enterprises’ offshore listings will be discussed in greater detail in the following chapter.

4.2.3. Economic Globalization & Business Competitiveness Dynamics

It was only a matter of time, especially following China’s accession to the WTO, before Chinese companies were going to capitalize on the reciprocity notion of trade and investment that accompanies an increasingly interdependent and interlinked global economy. The notion of market access, certainly, never was to remain a unidirectional arrangement. Just as foreign multinational companies (MNCs) have flocked to China in the hope of tapping the proverbial one billion consumer market, so too have Chinese enterprises grown increasingly determined to work hard at pursuing a similar potential for growth and development by expanding abroad. Although their overseas expansion is largely driven by different corporate strategy calculations and overall motivations compared to MNCs from advanced industrial economies, the sudden and purportedly disruptive emergence of Chinese enterprises on the global scene is primarily a contextual reflection of China’s peculiar 21st-century domestic political economy

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circumstances and conditions, rather than an example of enterprises embarking on “discontinuous trajectories”.39 Following a two-decade near-exclusive focus on attracting inward FDI, the growing competition from foreign MNCs in the domestic Chinese marketplace, unless countered, is bound to seriously undermine or at the very least retard the competitiveness of Chinese companies in international business. The gradual outward internationalization of Chinese enterprises, then, at last partially, appears to derive from a rational calculation that business competitiveness and viability will stand to greatly benefit by tapping new markets, benchmarking against established global players in advanced industrial economies,40 acquiring crucial technology, attracting management know-how, building up international brand recognition, and, more generally, boast internationalizing businesses that complement China’s undisputable rise to prominence in global economic terms. According to the research unit of Deutsche Bank, China’s commitment to economic and enterprise internationalization holds great potential for enterprises currently depicted as “global champions in waiting” (DB Research 2006). In many ways, outward internationalization embodies the determination of both political and business leaders to capitalize on the opportunities presented by economic globalization. Meanwhile, a lack the contextual nuance to detect the institutional and interactional patterns informing this trend, combined with the belief that this latest China challenge represents but the most disconcerting consequence of economic globalization yet, may merely further detract from the inherent opportunities presented by China’s embrace of economic globalization and enhancement of business competitiveness through outward internationalization. First and foremost among them are opportunities to reinforce China’s post-WTO global economic integration through subtle, yet consistent, inducements of normative changes above and beyond the nascent behavioral changes already on display.41 The initial rationale behind inward internationalization, apart from the obvious means of facilitating an operational catch-up and learning process through

39. Araujo and Rezende (2003), discussing the internationalization process of established and experienced multinational companies, argue that “path dependence can be employed to produce a realistic explanation of internationalization processes, covering both incremental and discontinuous trajectories.” See: Luis Araujo and Sergio Rezende, “Path Dependence, MNCs and the Internationalization Process: A Relational Approach,” International Business Review 12 (2003): 719-737. 40. This approach is deeply enshrined in Haier Group’s strategy of fostering business internationalization and expansion by targeting the difficult markets prior to focusing on developing economy markets. Based on interviews at the corporate headquarters of the Haier Group in , Province, on July 11, 2007. See also Jeannie Jinsheng Yi and Shawn Xian Ye, The Haier Way: The Making of a Chinese Business Leader and a Global Brand (Dumont, NJ: Homa & Sekey Books, 2003). 41. China’s WTO entry may rightfully be seen as marking a milestone that holds out the possibility of capitalizing on China’s economic internationalization as an heretofore unavailable channel to encourage and induce, in ever so subtle or not so subtle fashion, a process of “immutable internalization and cognitive embracing of laws, standards and norms prevailing in the world economy.” See, Yongjin Zhang, “Reconsidering the Economic Internationalization of China: Implications of the WTO Membership,” Journal of Contemporary China 12, no. 37 (November 2003): 699.

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cooperative ventures with foreign enterprises, derived from a perceived mutually beneficial arrangement between Chinese and foreign enterprises. By the start of China’s economic reform period, Chinese enterprises were especially eager to secure much-needed capital, technological sophistication, and long-term potential of accessing overseas markets in order to grow their business. On the other hand, foreign enterprises were drawn to China by prospects of lower-cost manufacturing and the sheer size of the domestic marketplace. Notwithstanding the fact that early forays into the Chinese market could only be completed under a JV umbrella, inward internationalization held out the prospects of a positive-sum arrangement. At a deeper level of analysis, and as economic reforms proceeded in China, it became gradually apparent that internationalization had both intended and unintended consequences for all parties involved. On the one hand, it provided both foreign and Chinese enterprises with opportunities to attain peculiar political, commercial and/or social goals. Although these goals were not necessarily mutually reinforcing, the possibility of tensions and a souring of the relationship was not as strong as in cases where one or both partners began to realize somewhat belatedly that the cooperative arrangement did not necessarily benefit all parties equally. In both scenarios, inward internationalization, then, may well be a critical precursor to an eventual outward orientation, as captured by the Danone-Wahaha JV and GM-Shanghai Automotive Industry Corporation (SAIC) JV examples. The JV between French dairy giant Danone S.A. and China’s Hangzhou Wahaha Group is but one of many examples of dashed hopes and expectations. In this particular instance, the Chinese partner, according to the terms of the JV agreement, was not to produce any food products that would be in direct competition with those produced by the JV. The Chinese partner, with ambitions on his own, found himself increasingly cornered in the domestic market, unable to implement the business ambitions harbored by company management. In the words of Wahaha’s chairman, “we consider such provisions unfair, prohibiting us from making goods that are produced by the joint ventures while imposing no restrictions on Danone itself.”42 Apart from seeking redress in the domestic environment, companies faced with similarly disconcerting business realities as Wahaha may thus also try to offset domestic business challenges and rapidly overcrowding and competitive market environments with ‘forced’ outward internationalization strategies. On the other hand, as the SAIC example shows, inward internationalization may also trigger a specific motivation to voluntarily transition into the outward phase. The Chinese automobile industry has benefited for years from cooperation with foreign manufacturers, to the extent that the Chinese companies are beginning to turn the tables on the JV partners, following an extended period of technology transfer and knowledge accumulation. On April 5, 2006, SAIC

42. For additional information on the Danone-Wahaha dispute, go to http://www.chinadaily.com.cn/bizchina/wahaha.html (accessed on January 18, 2008). See also: Steven M. Dickinson, “Danone vs. Wahaha,” China Economic Review (September 2007); “Wahaha – haha!” The Economist (April 19, 2007).

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stunned the automotive industry in China when it announced the launching and marketing of its own brand of cars, including the production of a own luxury sedan model (Roewe), independent of its JV with General Motors. In the wake of that announcement, Ford Motor Company’s JV partner, Chang’an Automotive, also alluded to the possibility of following SAIC’s lead sometime in early 2007. China’s automotive industry, after years of warming up in the JV-hangar, is ready to shift into new gear. Not only are the Chinese car manufacturers willing to try their mettle on the competitive, quality- and safety-conscious highways of advanced industrial economies. They are furthermore determined to capitalize on the car craze in China with newly-launched indigenous brands and cars produced under acquired foreign brands, such as South Korea’s Ssangyong and Great Britain’s Rover, acquired by SAIC and Nanjing Automobile, respectively.

4.3. CONCLUSION

Explanation, understanding and evaluation of Chinese enterprises’ outward internationalization will not be complete without adequately grasping the conditions and dynamics that have given rise to it in the first place and will continue to contribute to its further expansion. In other words, what are the underlying domestic political, economic, social, and business competition conditions? These conditions are not likely to be static, but rather evolve over time as the country experiences critical developmental milestones. It is imperative to recognize these milestones for what they are and what they imply for the structure and interactional patterns of the world’s most dynamic economy in the 21st century. Through a range of illustrative examples, the following chapter will document the extent to which appreciation of China’s evolving political economy context has yet to come full circle, and how in the absence of it, the motivations behind enterprise internationalization tend, more often than not, to be viewed through an emotional rather than detached framework. In many cases, this has resulted in a perpetuation of misperception and politicization of what is largely an attempt by an emerging economy to eagerly and decisively capitalize on the opportunities and advantages accompanying global economic connectivity and interaction.

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5. Perceptions and Realities of Chinese Enterprise Internationalization – A Descriptive Illustration

CHAPTER OVERVIEW

This chapter aims to lay to rest the perceptions of continued all-pervasive Chinese state-control over all matters business and industrial. It will elaborate on specific fears and concerns that China’s internationalization continues to elicit, with the aim of evaluating their veracity. Additionally, it also seeks to argue that three emerging political economy trends have begun to induce defining changes and evolutions in terms of interactions and interdependence of state and enterprise actors in China’s domestic political economy space; trends whose impact will only increase over time. The company examples presented here are not meant so much as case studies than illustrative examples, providing an initial frame of reference for the suggestion that Chinese enterprise internationalization, though still in its early stages, is already long overdue for a contextual re-calibration. Failure to embrace such contextual analysis is bound to be detrimental from at least two perspectives. On the one hand, it might just become more difficult to divest an outdated ideological perception just when the wave of internationalization will pick up momentum in the years ahead. On the other, it might simply reinforce and strengthen current misperceptions and biases. Either outcome would be less than optimal to both Chinese internationalization and to the targeted host countries and/or enterprises.

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Internationalization, as discussed in previous chapters, has two dimensions – inward and outward. The company examples produced in this chapter, however, are primarily illustrations of the outward dimension. The rationale for this decision is two-fold. First, the inward dimension has not only been extensively discussed in the literature, but is also easy to comprehend from an intellectual perspective. After all, the primary motivation has been a desperate attempt to “catch up” with the developed economies and to improve on individual enterprise, or industry-wide, competitiveness.1 The second reason has to do with the widely-

1. A classic study of the late development phenomenon is Alexander Gerschenkron’s Economic Backwardness in Historical Perspective (Cambridge, MA: Belknap Press of Harvard University, 1962). On issues of competitiveness and competitive advantage, see Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York,

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held conviction that China’s political econony space, including all its participants, are invariably under close or total central government control and/or influence. This perception is reflected in a significant number of recent evaluations of Chinese commercial attempts at overseas expansion, notably in advanced industrial economies. Moreover, it has given rise to heated debates, controversy and nascent protectionism and economic nationalism just at a time when the emerging markets phenomenon is beginning to draw increasing attention (Agtmael 2007), and when there is lingering uncertainty as to what the rise of emerging market multinationals will have in store for international business.2 How the global economy will react to their emergence will serve as a critical test of free and fair market competition that advanced industrial economies, at least nominally, hold in high esteem. But the added conundrum in the case of China seems to be a general uneasiness, if not unwillingness, on the part of advanced industrial economies to come to terms with the fact that China is ‘shaking the world’ (Kynge 2006). Adding to the consternation is the fact that China’s commercial challenge is not merely relying on market-conforming practices, but does so while remaining under Communist Party political control. Seen from that angle, it is hardly a far cry for vested political and economic interests in developed countries to stymie this challenge while sounding the drumbeat of ideological rhetoric reminiscent of the heights of the Cold War.

5.1. INTERNATIONALIZATION AND THE MYTH OF STATE CONTROL

With a few notable exceptions, including perhaps most prominently Richard Nixon and Henry Kissinger’s bold move to dare to look at China in the context of the broader realist rules of the Cold War chessboard in pragmatic rather than strictly ideological terms, the history of China analysis since 1949 features a marked ideological imprint. Post-Mao China’s gradual course correction in the economic realm and deepening re-integration into the global economy, combined with the depiction of China as a “strategic partner” by the Clinton Administration,

NY: Free Press, 1985); The Competitive Advantage of Nations (New York, NY: Free Press 1990). 2. Judging by the available scholarship, the notion of emerging market multinationals is not an altogether recent phenomenon. See for example, Kyung-il Ghymn, “Multinational Enterprises from the Third World,” Journal of International Business Studies 11, no. 2 (Autumn 1980): 118-122; Krishna Kumar. “Third World Multinationals: A Growing Force in International Relations.” International Studies Quarterly 26, no. 3 (September 1982): 397-424; Krishna Kumar and Maxwell G. McLeod, Multinationals from Developing Countries (Lexington, MA: Lexington Books, 1981); Sanjaya Lall, The New Multinationals: The Spread of Third World Enterprises (New York, NY: Wiley, 1983); John A. Mathews, Dragon Multinational: A New Model for Global Growth (New York, NY: Oxford University Press, 2002); Louis T. Wells, Third World Multinationals: The Rise of Foreign Investment from Developing Countries (Cambridge, MA: MIT Press, 1983); and Henry Wai-chung Yeung (ed.), The Globalization of Business Firms from Emerging Economies (Northampton, MA: Edward Elgar, 1999).

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has done surprisingly little to invoke a fine-tuning and recalibration of Cold War era perceptions and assumptions. The significance of obvious and somewhat more subtle changes in the overall political and economic discourse has not readily translated into a fresh, more open-minded, and less ideologically-influenced analytical angle. In an effort to differentiate its China policy from that of the Clinton administration, the George W. Bush administration was quick to view China as a “strategic competitor” rather than a “strategic partner.” Whether in economic and/or geo-political terms, an immediate consequence – intended or otherwise – of this shift was the injection of a significant dose of ideological zeal into the China debate. Consequently, the proecss and motives of Chinese enterprise internationalization are being scrutinized through an analytical lens that has a high potential of projecting an image that may not do justice to the true nature and underpinnings of this unfolding trend. As previously discussed, the perception of undisputed, strong central government control and influence over the economic space and all enterprise structures in China’s political economy lies at the heart of these analytical shortcomings. The discussion of decentralization in Chapter 3 was one way to chip away at this prevailing myth. Two additional avenues include 1) highlighting the difference between the historical role of the state and its contemporary reality in the institutional arrangements at the enterprise level, and 2) proposing that the idological basis for enterprise internationalization has been gradually replaced over the course of thirty years of economic reforms, restructuring and inward internationalization by hard-nosed business calculations, including competitiveness and profit motivations.

5.1.1. Institutional Look at the Historic and Contemporary Role of the State

Owing to sustained economic reform efforts, the Chinese economy has cultivated, especially since the 1990s, an unwavering commitment to economic restructuring and marketization. Viewed in a broad historical context, the implication is obvious – China’s economic system has been undergoing change. Change, in turn, implies a deviation from the status quo ante. In the case of China as well as in the post-communist economies of Eastern and Central Europe, this change gradually led to the jettisoning of command-distributive economic systems in favor of market-exchange economic systems.3 In many instances, analysis of Chinese internationalization, especially if approached from an institutionalist perspective, fails to adequately grapple with the dichotomy between utopia and actual development in communist/socialist economic systems.4 Richard Löwenthal, for example, talks about the Communist

3. Lin (2001) captures this evolution when he refers to an evolution from “authority relations” to “exchange relations.” See Yi-min Lin, Between Politics and Markets: Firms, Competition, and Institutional Change in Post-Mao China (Cambridge, UK: Cambridge University Press, 2001). 4. For a discussion on the link between utopia and reality and their influence on the structure and evolution of communist/socialist economic systems, see Wlodzimierz Brus, “Utopianism and Realism in the Evolution of the Soviet Economic System.” Soviet Studies 40, no. 3 (July 1988): 434-443; Richard Löwenthal, “Development versus Utopia in Communist Policy,” in

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dilemma of “dualism of goals” – trying to reconcile utopia and modernity; that is, achieving successful modernization while at the same time aspiring to create a classless society. In the end, this dualist pursuit will transpire into modernization ultimately edging out utopian ideals:

…as Communist-governed developing societies approach the level of advanced industrial societies, the arbitrary reshaping of their social structure by ideologically-guided political power – in Marxist terms, the reshaping of their “basis” by their “superstructure” – becomes increasingly difficult and ultimately impossible. But once a Communist party regime recognizes that permanent revolution has reached its limit, it becomes extinct as a movement regime, and turns into an essentially conservative bureaucracy; and such a change of function and values is bound to affect its institutional structure as well (Löwenthal 1970: 54).

In studying communist/socialist economies undergoing economic transitions, it is not only relevant but necessary to come to terms with how the dilemma between development and utopia is reshaping the institutional and interactional space of political economy. As Wlodzimierz Brus succinctly puts it, “… in the course of post-revolutionary development the utopian goals of communism in power are gradually fading away when confronted with the need to solve real political and socio-economic problems” (Brus 1988: 434). Any informed analysis of the post- 1978 dynamics in China’s political economy sphere is likely to paint a more clarifying picture of how early commitments to modernization and economic development have garnered a momentum that resulted in China’s capitalist market reforms leading to a “post-communist personality” (Wang 2000).

5.1.2. From Ideological Zeal to Business Rationale

Even if Party-centered State power, as Guangbin Yang asserts, remains “unchanged” (Yang 2006), the visible contradiction between non-state enterprises resisting State power while also reflecting the functions of State power raises two immediate observations. How sustainable is the Party-centered State power structure in contemporary China, and (more pressingly) what is the legitimating basis of such State power in the context of economic transition and reform? On the first issue, the institutional perspective that informs Yang’s proposition may trigger a debate in its own right.5 It is certainly an intellectually worthwhile pursuit to ascertain the degree to which State power and influence in China today remains Party-centered, but the more important question in the context of this study is whether or not such State power retains its ideological basis. Evaluating contemporary manifestations of State power and the unfolding process of enterprise internationalization from a purely ideological perspective of socialism/communism, without adding requisite contextualization, runs the risk of interpretations that may no longer conform to reality. Leszek Balcerowicz devotes

Chalmers Johnson (ed.), Change in Communist Systems (Stanford, CA: Stanford University Press, 1970): 33-116. 5. See, for example, Shiping Zheng, Party vs. State in Post-1949 China: The Institutional Dilemma (Cambridge, UK: Cambridge University Press, 1997).

98 Chapter 5 considerable attention to this problem in the context of economic transitions in Central and Eastern Europe (Balcerowicz 1995: 233-269). The proposition put forward in this study is not to challenge the continued relevance and existence of State influence and power in the economic realm. Rather, it is to suggest that the primary rationale behind continued exercise and manifestion of State power, control and influence is not a reflection of ideological zeal so much as hard-nosed business competitiveness and political motivations. Nor is it suggesting monolithic influence by the central government. For some enterprises, the motivations for internationalization may be a combination of political calculations and business dynamics. This is particularly the case in the SOE sector in general, and reflected in government support for, and active nurturing of, a national team of enterprise groups. For other companies, meanwhile, the decision to engage in outward internationalization may derive predominantly from strategic business considerations, with little to no input by state authorities. Either way, the reality of ideological bankruptcy of communist/socialist ideals suggests that political motivations for the support and encouragement of internationalization derive from the CCP’s explicit determination to provide for social stability and to create a harmonious society (hexie shehui).6 In other words, a continued commitment to modernization and development rather than the realization of a discredited utopia might be a credible explanation behind remnants of State power being mobilized in support of internationalization. In the illustrative examples that follow, it will become readily apparent that the ideological underpinnings of State power, contrary to (intentionally or unintentionally) lingering perceptions, hardly provide any compelling motivational basis for Chinese enterprise internationalization. Moreover, the ownership and organizational structure of enterprises engaged in this nascent process expands significantly beyond the “national champion enterprises” that are nominally state-owned. The “nominal” description is a deliberate choice, for the notion of control is no longer all that clear-cut, even with regard to SOEs. Direct control rights may have gradually become the purview of enterprise management rather than state planning commissions and industrial bureaus but different governmental layers (central, provincial or local) may still exercise significant degrees of “indirect” control (Yusuf et al. 2006: 86-90). In other words, the meaning of state ownership of enterprises, as commonly understood, is rapidly fading away. Since the mid-1990s, the Chinese government has taken steps towards divesting significant amounts of state assets. This privatization and ownership diversification drive is reshaping the essence of China’s political economy in important ways and is fueling debates over the nature, scope and depth of State power and control in the future (Yusuf et al. 2006; Green and Liu 2005). The transformation (gaizhi) process, however, is

6. Hexie shehui (和谐社会) has become a signature focus of domestic priority for China’s fourth- generation leadership, represented by President Hu Jintao and Premier Wen Jiabao. At the heart of this political commitment is the recognition that, in order to retain tianming (天命) or mandate of heaven (i.e. political legitimacy), the CCP will have to ensure that economic growth does not come at the expense of ever-widening social and/or economic fault lines.

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partly the result of a desire for enterprise efficiency improvements. Beyond that, however, it is also linked to advances in marketization (with regional differentiation) and to the rising influence of the private sector economy (Garnaut et al. 2005).7 In characteristically pragmatic fashion, however, the Chinese government, keenly aware that large-scale privatization, if unproperly phased in, could possibly endanger the achievement of a harmonious society (hexie shehui), is retaining some measure of state control in strategic industrial sectors through its “grasp the large, and let go of the small” policy of SOE reform. Put differently, to the extent that State involvement in and influence and/or control over certain industrial sectors and enterprises persists, it reflects domestical political and economic considerations rather than a desire to cling to old planned-economy legacies. After all, as Barry Naughton highlighted in his study, the Chinese economy started growing out of the plan by 1978, and has on the whole not only sustained but accelerated this trend as the economic reform efforts have been unfolding. In analyzing China’s internationalization, then, it is imperative to grasp how and why State control and power has evolved over the years, how this affects the specific motivations for and support of outward internationalization. Moreover, state-owned and state-backed enerprises are no longer the only enterprise structures aiming for outward internationalization. Rather, these companies are gradually but increasingly joined in this process by private and collective enterprises; a reality that is likely to unfold further as three nascent trends – the rise of a venture capital industry in China; the rising appeal of overseas listings; and an entrepreneurial wave of rising proportions (all of which will be discussed at the end of this chapter) – are bound not only to reshape interactional dynamics of China’s domestic political economy but also to assist ambitious enterprises in fulfilling their internationalization motivations without being unduly hindered in this process by varying degrees of institutional dependencies or lack of access to the necessary capital injections.

5.2. CHINESE ENTERPRISE INTERNATIONALIZATION – DESCRIPTIVE ILLUSTRATIONS & EMERGING TRENDS

China’s outward internationalization is still in a comparatively early stage. Not only is the amount of outward FDI relatively small compared to the overall size of the Chinese economy, but the largest enterprises ranked in terms of outward FDI, keeping in line with Beijing’s stated desire to nurture a national team of enterprise groups, tend to be SOEs. As previously remarked, however, non-state enterprises are also beginning to set their sights on outward internationalization, although their presence may not be captured by official statistics due to their comparatively

7. According to Liu and Woo (2001), the survival of many state firms in the post-WTO accession environment hinges on their willingness to submit to an evolution in ownership structure away from a wholly state-owned/state-controlled structure to a more diluted ownership level and commensurate reduction of state control. See Guy Shaojia Liu and Wing Thye Woo, “How Will Ownership in China’s Industrial Sector Evolve with WTO Accession?” China Economic Review 12, no. 2/3 (2001): 137-161.

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minor contribution. Seen from the perspective of potential host countries, especially those that may hold reservations against inroads by Chinese enterprises, the overbearing presence of SOEs in the ranks of enterprises going abroad may only exacerbate the misperception that any and all Chinese enterprises will be tied to the State. This may potentially damage the prospects of non-state enterprises in the short-term. According to one study of China’s offshore businesses, Chinese transnational companies (TNCs) are not easily accommodated by a general typology of TNCs (based on level of home country development, and ownership type of the parent firm). Rather, an institutional heterogeneity that precludes any easy generalization regarding motives, objectives, and overall behavioral dynamics defines Chinese TNCs. The enterprise pool includes central state bodies, state financial institutions and industry-wide corporations, provincial governments and large municipalities, SEZs, giant state enterprises, and institutions controlled by the army and/or police (Ding 2000: 128). While these public bodies have largely received central government approval for transnational operations, the gradual decentralization of economic decision-making and steady but slow liberalization of outward FDI regimes has seen the number and types of public-sector investors pursuing overseas projects far exceed those approved by the central government. To some degree, the rapidly accelerating inability of the central government to monitor all aspects of transnationalization effectively has merely helped to accentuate this very trend. As the author further observes, “[T]he failure of central control over this arena is inevitable as state firm managers and public officials are strongly self-interested…and operate in a vast country that has evolved economically into a para-federalist arrangement granting localities substantial autonomy” (Ding 2000: 129).8 The illustrative examples presented below are meant to highlight why the analysis and interpretation of Chinese enterprise internationalization not only deserves, but in fact, requires an effort in contextualization. I have not intended to put forward an unassailable proposition regarding the likely effect and impact on future interaction and relations between state and enterprise actors at various levels of China’s political economy. Indeed, such a goal would require scope and breadth that goes beyond this study. Rather, the aim pursued here has been more modest and limited to paving the way for a “theoretical extension” of China’s internationalization from a political economy perspective.9 Meanwhile, a

8. See also Yi-min Lin, Between Politics and Markets: Firms, Competition, and Institutional Change in Post-Mao China (Cambridge, UK: Cambridge University Press, 2001) and Yongnian Zheng, De Facto Federalism in China: Reforms and Dynamics of Central-Local Relations (Hackensack, NJ: World Scientific, 2007). 9. The author is indebted to John Child and Suzanna B. Rodrigues who first raised the possibility of a “theoretical extension” of internationalization from the perspective of international business literature. After all, the major rationale for Chinese companies going abroad (overcoming competitive disadvantages) challenges the conventional view of companies expanding abroad to leverage their competitive advantages. See John Child and Suzanna B. Rodrigues, “The Internationalization of Chinese Firms: A Case for Theoretical Extension?” Management and Organization Review 1, no. 3 (2005): 381-410. In this study, meanwhile, the author intends the theoretical extension to include a concerted look at the dynamics of China’s political economy and how the economic reform efforts and various critical junctures in the

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combination of specific factors contributes to descriptive illustration being a more appropriate analytical mechanism at this point. Not only is information concerning the nature, scope and breadth of relations between various state actors and industrial enterprises hard to come by, but SOEs largely still dominate the pool of internationalizing companies at this early stage. If a robust theoretical extension or elaboration is to include statistical testing of the propositions outlined in Chapter 2, the current level of available information would make this a very difficult task indeed. Nevertheless, the company examples and trends discussed below will help to illustrate that indeed internationalization not only includes a rapidly diversifying pool of enterprise structures, but in some cases has already begun to inject extensive changes in China’s political economy, and certainly will do so even more strongly in the future.

5.2.1: China’s Internationalizing Enterprises: Perceptions vs. Contextual Reality

At this point, it is appropriate to preface the illustrative portion of the study with a brief overview of commonly held (mis)perceptions and fears surrounding Chinese enterprises and their internationalization motives. Doubts and misunderstandings regarding the underlying political and strategic motivations, national security concerns, and unfair trade practices (e.g. government subsidies) consistently rank among the most pressing recurring issues. While this may not be an exhaustive list, it nevertheless provides a rather instructive window on the general framing and analysis of Chinese enterprise internationalization. Seen in conjunction with the illustrative examples that follow, the case for contextual reappraisal will become that much clearer.

Ominous political and/or strategic goals?

Concerns and worries over the trade and investment influence effect (Hirschman 1945) of China’s strengthening position in the global economy fuel one side of the debate focusing on the unfolding trend of high-profile Chinese overseas commitments. Notable cases include recent investment decisions by China Investment Corporation (CIC), China Aluminum Corporation’s (CHINALCO) aggressive buying into mining giant Rio Tinto, and the global ambitions of China’s national energy companies and their accruing overseas investments in oil and gas production. For some analysts, and as consistently argued by the Chinese side, which finds itself increasingly hard-pressed to make the case for the exclusively commercial nature of such business transactions, the policy implications of these moves generally hold out the promise of a “win-win” outcome.10

country’s economic liberalization process compel a re-examination of the lingering (mis)perceptions derived from a planned-economy, state-controlled institutional/interactional political economy space. 10. On this point, see also Friedrich Wu, “The Globalization of Corporate China,” NBR Analysis 16, no. 3 (December 2005). Of particular relevance is the author’s dissection of policy implications on pages 20-21.

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A second, and purportedly more pressing, cause for concern centers around the ulterior motives of corporate China’s internationalization drive, especially those of state-owned, state-controlled and/or loosely state-affiliated enterprises. Is there more than meets the eye to these business deals and commercial activities? Is China pursuing ominous political and/or strategic goals by actively supporting and encouraging the internationalization of companies that are part of the national team of enterprise groups? Global investment statistics collected by UNCTAD suggest no immediate causes for concern. Since 1995, Chinese acquisitions of foreign enterprise assets have only marginally increased and still dwarf the sale of Chinese business entities to foreign companies.11 Arguments presented by Trevor Houser concerning the contextual factors shaping the overseas activities of Chinese national energy companies offer a credible alternative to the charge that such companies are merely a “corporate vehicle of a Communist dictatorship.”12 In particular, the author notes that the combination of enterprise reform, price liberalization, and the adoption of management incentives and competition has begun to blur the national oil companies-government relationship. Second, specific economic and business interests tend to influence overseas investments of these national energy companies, above and beyond stated government policy. Third the wave of internationalization is rather more attributable to Chinese enterprises’ comparatively higher risk threshold and initial concern over market share rather than return on investment (Houser 2008). Compelling though they may be in terms of helping to alleviate undue fears and concerns over ulterior political or strategic motives, these are not necessarily prominently held views, at least not yet. What, then, may account for this? Apart from an outdated ideological reference point that leaves no space for accommodation of the true extent of change brought on by years of economic reforms (as alluded to earlier), a comparison with Russia may prove instructive here. For our purposes, I will restrict the comparative analysis to national energy companies in both Russia and China and try to briefly elucidate the contextual

11. See Van Jackson, “China Unlearns U.S. Trade Lessons,” Far Eastern Economic Review (January-February 2008): 29-33. During CNOOC’s takeover bid for UNOCAL in May-July 2005, Charles Schumer, the senior senator of New York State who appeared determined to derail the deal, asked, “Does anybody honestly believe that the Chinese would let an American company take over a Chinese company?” Apparently, little did he and/or his staff know (or was it perhaps disregarded out of convenience and political expediency?) that Procter & Gamble had hit the M&A jackpot in China when it bought out its Hong Kong partner, Hutchison Whampoa, for $1.8 billion in May 2004. Or, that Anheuser-Busch had prevailed in a takeover (valued at $757 million) of Harbin Brewery Group, one of China’s largest and oldest beer makers (See Douglas Wong, “Merger Activity Soars in China: Privatization is Expanding Opportunities for Foreign Buyers,” International Herald Tribune (February 24, 2005)). 12. This is how James Woolsey, former director of the Central Intelligence Agency (CIA) and now a vice-president of Booz Allen Hamilton, described CNOOC at the time of its takeover bid for UNOCAL in May-July 2005. See also, Steve Lohr, “Who’s Afraid of China, Inc.?” New York Times (July 24, 2005).

103 Chapter 5 factors influencing these enterprises as well as the motivations for respective state involvement.13 What should become easily apparent is that the overall political and economic contexts that Russian and Chinese energy companies are operating in are fundamentally different. The conclusion of assumed similarities between the two countries is fallacious on several levels – and the Russian demonstration effect, I argue, could possibly be a cause for de-contextualized and inaccurate extrapolation to the Chinese case, and hence fuel the fires of concern over ulterior political and/or strategic goals. First, Russia has demonstrated a noticeable nostalgia for the political power and influence in world politics that dissipated with the collapse of the Soviet Union. Under Vladimir Putin, Russia has taken significant steps to reclaim at least some measure of great power status. The overabundance of natural resources – noticeably oil and gas – bestowed on Russia an economic supply and influence effect (Hirschman 1945) the Russian government has not hesitated to leverage, as demonstrated by the activities of the state-owned gas giant, Gazprom, among others. Russia has already been described in some circles as an “energy superpower” (Goldthau 2008) or “petrostate” (Goldman 2008). Judging by the context of its ascendance to economic stardom, China does not need to wield coercive leverage in order to present itself as a credible economic power. Its economic reform track record and sustained high growth rates, combined with a promising market potential that continues to lure massive FDI inflows, has the country blessed with implicit power recognition.14 Notwithstanding similarities in authoritarian leadership styles, a second differentiating factor that helps to invalidate looking at China through the Russian lens is that whereas politics appear to dominate energy decisions in Russia (at least, as seen from the vantage point of internationalization of Russian energy companies), economic rationale and demand are driving the internationalization of their Chinese counterparts. Whereas Russian state-owned energy companies leverage a competitive advantage that bestows coercive power – i.e. control of energy resources and exporting them to other countries – China’s energy companies are engaged in a veritable race to secure energy sources. To the extent, then, that political considerations play a role in the Chinese context, above and beyond market or commercial considerations, they are geared primarily towards

13. This industrial sector restriction is adopted for argumentative expediency. Moreover, both countries have significant SOEs in the oil and gas sectors, and these players are repeatedly grabbing headlines by virtue of their activities. This comparative exercise, however, should not be construed as an attempt at rigorous comparison aimed at deducing solid, unshakable explanations. Rather, I intend it as a thought process to highlight the overarching differences in contextual conditions faced by these two countries and their respective national energy companies. For the sake of analysis, such differences are oftentimes marginalized or ignored, resulting in conceptual stretching and miscomparison (Sartori 1970; 1991) as well as erroneous assessments of their true motivations. 14. For more in-depth analysis of the diverging reforms paths of China and Russia, see Christopher Marsh, Unparalleled Reforms: China's Rise, Russia's Fall, and the Interdependence of Transition (Lanham, MD: Lexington Books, 2005); Peter Nolan, China's Rise, Russia's Fall: Politics, Economics and Planning in the Transition from Stalinism (New York, NY: St. Martin’s Press, 1995).

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ensuring an uninterrupted flow of energy imports so as to sustain economic growth rates and thus help to maintain social stability and harmony.15 As this short comparative exercise suggests, accusations that Chinese SOEs are doing the exclusive bidding of the State and pursuing ulterior political and strategic goals, as James Woolsey would have it, largely do not necessarily conform to the contemporary conditionalities and exigencies of China’s transitioning economy. China’s enterprise internationalization simply marks the latest stage in the country’s economic transition and development strategy and is a critical underpinning of the continued political legitimacy of the CCP.

National security concerns

The drumbeat of national security concerns is merely a direct and convenient outgrowth of lingering skepticism over what the ulterior political and/or strategic ends (if any) of enterprise internationalization may be. Political grandstanding and hysterical warnings of a purported Communist threat promise to be the most expedient means to thwart overseas forays of Chinese enterprises. Though the assessment and scrutiny of FDI inflows through the national security lens (Graham and Marchick 2006) is not exclusively applied to Chinese overseas investments, the Chinese trend has drawn peculiar attention in recent years. Such a concern with national security has been true as much for Chinese investments (and the implications thereof) in the U.S., as demonstrated by CNOOC’s failed Unocal bid and the proposed sale of 3Com (a U.S. manufacturer of networking equipment) to China’s Huawei Technologies and Bain Capital Partners, as in other parts of the world (e.g. Ellis 2005). Wary of potential hurdles facing proposed business deals in the U.S, China’s ambassador to the United States, Zhou Wenzhong, in an interview with the Financial Times in mid-February 2008, had stressed China’s desire to seek free trade and fair play and expressed hope that Chinese investment decisions would not be overly politicized (Dombey 2008). The raising of possible national security concerns over China’s overseas investments, meanwhile, can be analyzed from several angles. From a political economy perspective, invoking national security may be a convenient cover for what otherwise could likely be perceived as blatant economic nationalism and protectionism. While such inherent tendencies may be a consequence of globalization discontent and the competitive challenges embodied by a globalizing world,16 it could also portend an unwillingness to accept that the latest, and arguably most formidable, commercial challenge to come out of Asia yet could possibly emanate from a socialist-communist base. An embrace of and adaptation to China’s internationalization holds out the promise of co-opting China into becoming an ever more responsible member of the international community, and of influencing its economic behavior by inducing a process of internalizing international norms, rules and principles

15. This nuance remains largely unexplored. See, for example, Stephen Blank and Kevin Rosner, Russo Chinese Energy Relations: Politics in Command (GMB Publishing, 2006). 16. See Joseph E. Stiglitz. Globalization and Its Discontents (New York, NY: W.W. Norton, 2002).

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(Zhang 2003). On the other hand, choosing to erect a protectionist wall manned by national-security proponents could possibly, and very ironically so, result in the gradual weakening of the very security such a policy move pretends to uphold. As The Economist (2005) noted in the aftermath of CNOOC’s failed bid for Unocal, “…by denying China access to energy assets through legitimate means, America might expose itself to bigger threats.”17 From an economic perspective, it ought to be apparent that large-scale investments and M&A activities of Chinese companies pose significantly fewer risks than counting on China to help to finance the national debt of developed economies by buying government bonds, which can be much more easily divested than large-scale investment in facilities. As Clyde Prestowitz shrewdly observed, “We handed China the money they are using to try to buy Unocal…And now we’re telling the Chinese, please keep investing in our bonds but you can’t invest what amounts to a sliver of their surplus in an oil company” (Lohr 2005). On the other hand, China’s inexorable rise may not bode well in geopolitical/strategic terms for the maintenance of the status quo in the international system. The activities and expansion of Chinese enterprises may be viewed as an integral part of an unfolding dynamic that may augur a reorganization of the global grand chessboard – both geopolitically and economically – and possibly mark the beginning of a reappraisal of American primacy and geo-strategic imperatives. Furthermore, the internationalization drive of Chinese enterprises may also stoke strategic concerns in terms of the possible acquisition of dual-use technology. In other words, the fear that China’s overseas investments may (in)directly facilitate the modernization of China’s People’s Liberation Army (PLA) may also explain why national security concerns accompany assessments of Chinese investments abroad. This particular argument, however, ought to be embraced rather judiciously. In 2005 CNOOC’s attempted takeover of Unocal drew attention to the purported access that China might gain to potentially dual-use deep-sea drilling technology. The proposed acquisition of 3Com by Bain Capital and China’s Huawei Technologies similarly gave rise to national security concerns related to dual-use technology. In both cases, the Chinese entity offered to sell off the subsidiary operations that had given rise to these concerns in the first place. To no avail; in the end, political grandstanding and national security hysteria carried the day. From a political perspective, the implications of these decisions are likely to weigh heavily on the bilateral relationship between China and the United States and have already generated concerns that the negotiations between the two countries over a bilateral investment treaty may well hit a snag in the short-term. The reaction out of Beijing, which understandably grows frustrated over what seems like an expanding trend of Chinese investments being scuttled over what some have argued are “bogus fears” (Economist 2005) and excessive and opportunistic politicization of business deals, has been demonstrably sharp and

17. See also Francis Schortgen, “Protectionist Capitalists vs. Capitalist Communists: CNOOC’s Failed Unocal Bid In Perspective,” Asia Pacific Perspectives VI, no. 2 (September 2006): 2- 10.

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pointed. Hence, the position argued in this study – the internationalization of Chinese enterprises needs to be analyzed in the proper, contextual frame of reference, taking into account the notable changes and evolutions in China’s political economy. Anything short of that may not only result in a loss of opportunities that could be gained by capitalizing on and accommodating China’s increasingly market-conforming business activities. Perhaps, more important, it might well ensure that China will indeed become a formidable strategic competitor if it continues to see its hopes of free trade and fair play thwarted by the very same developed economies that so adamantly insist on these issues when their own MNCs expand abroad. As Liu Jianchao, a spokesman of the Chinese Ministry of Foreign Affairs bluntly put it, “We demand the US side abandon its Cold War thinking and stop it gratuitous criticism of China… I think everyone is weary of this kind of farce, and it should end” (Dombey 2008).

Government financial support

Financial backing by the government for a wide range of overseas business deals has done much to reinforce speculations that Chinese enterprises’ international investments and expansion may well harbor more ominous political and/or strategic goals rather than be based on hard-nosed commercial interests. Viewed from the comparative perspective outlined in Chapter 3, Chinese government support for and financing of a national team of enterprise groups shares similarities with the Japanese and South Korean developmental models where governments, through the allocation of government subsidies, made a transition from banker to entrepreneur “using the subsidy to decide what, when, and how much to produce.” The Chinese government, through its major policy banks – China Development Bank (CDB), Export-Import Bank of China (EIBC) and the Agricultural Development Bank of China – actively supports internationalizing SOEs to help them overcome the competitive disadvantages resulting from late industrialization and to even out the level playing field in international competition.18 Critics may depict this as giving Chinese enterprises a competitive advantage. Yet, it should also be noted that China is by no means the only country that relies on government banks in “promoting the nation’s interest in external trade and investment” even if the terms of support may be different.19

18. More often than not, financial subsidization may actually include a of lenders rather than being exclusively financed by Chinese state-owned policy banks. For example, the financing structure of CNOOC’s attempted bid for Unocal in June 2005, according to information released by the company on 23 June 2005, included: (1) CNOOC cash reserves of over US$3 billion; (2) bridge loans provided by Goldman Sachs and JPMorgan totaling US$3 billion (expected to be replaced by permanent debt financing in the form of bonds at or shortly after completion); (3) bridge loans provided by Industrial and Commercial Bank of China (ICBC) in the amount of US$6 billion (expected to be replaced by permanent debt financing in the form of term loans at or shortly after completion); (4) long-term, subordinated loan provided by CNOOC’s majority shareholder, China National Offshore Oil Corporation, of US$4.5 billion, which is expected to receive equity treatment for credit ratings purposes; and (5) a subordinated bridge loan provided by CNOOC’s majority shareholder of US$2.5 billion, which is expected to be refinanced with equity within two years. 19. As Peter Evans and Erica Downs point out, “…Other examples include the U.S. Export Import Bank, the Overseas Private Investment Corporation, Export Development Canada, and

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The reasons for the Chinese practice resulting in greater levels of scrutiny, skepticism and resistance may be a reflection of the changing dynamics of the international system. Whereas Japan and South Korea proved critical players in Northeast Asia in the Cold War containment of Communism – and their neo- mercantilist trade and investment practices were deemed acceptable to nurture fast, visible and quantitative economic growth that could stave off the appeal of socialism/communism domestically – China remains not only, albeit nominally, a socialist state in the 21st century, but has in recent years also come to be seen more as a “strategic competitor” rather than a “strategic partner.” Additionally, the onset of globalization, in an ironic twist, helped to dampen the openness of world markets that benefited Japan and South Korea during their overseas internationalization, and resulted in a gradual but sustained increase in economic nationalism and protectionism. Under these circumstances, state financing of overseas activities is bound to draw attention more than before, even if the rationale for such support may not be all that different from the government support once extended to Japan’s keiretsu or South Korea’s chaebol. How can the various stereotypes and misperceptions that define much of the contemporary understanding of Chinese enterprise internationalization be bridged? The illustrative cases that follow are designed to highlight the imperative need for contextual considerations. Based on a 30-year track record of substantive economic reform and restructuring, it is certainly no exaggeration to expect more than a limited degree of change and evolution in China’s domestic political economy. By logical extension, the analytical lens used to evaluate Chinese internationalization needs to reflect the changes that economic reform and restructuring have exerted on China’s institutional and interactional space as well as overall motivations for internationalization. Failing that, the assessment of the very dynamic of internationalization will invariably remain biased and burdened with inaccuracies that are bound to result, if not in short-term, then certainly in medium- to long-term, in far-reaching unintended consequences.

5.2.2: State-Owned Enterprises

The state-owned sector must be in a dominant position in major industries and key areas that concern the life-blood of the national economy …. we shall effectuate a strategic reorganization of state-owned enterprises by managing well large enterprises while adopting a flexible policy toward small ones. By using capital as the bonds and relying on market forces, China will establish highly competitive large enterprise groups with trans-regional, inter-trade, cross-ownership and trans- national operations.

Jiang Zemin (1997)

the Japan Bank for International Cooperation…” See Peter C. Evans and Erica S. Downs, “Untangling China’s Quest for Oil Through State-Backed Financial Deals,” Policy Brief #154, The Brookings Institution (May 2006).

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Notwithstanding a lingering social stability function, the primary objective of SOEs in the economic reform era has been the pursuit of profit and operational efficiency improvement. Then-President Jiang Zemin’s observation on SOEs during the 15th Party Congress in 1997 points to the pragmatic thinking that the Chinese leadership applied to the role of SOEs in China’s transitional economy. Continued State ownership of critical industrial sectors, including armaments, electrical power and distribution, oil and chemicals, telecommunications, coal, aviation and shipping, meets specific political and domestic political economy needs but also puts profitability, efficiency, and the desire to plug into the world economy above ideological pretenses.20 As Li Rongrong, minister in charge of SASAC notes, “State capital must play a leading role in these sectors, which are the vital arteries of the national economy and essential to national security.”21

The Catalogue for the Guidance of Foreign Investment (外商投资产业指导目录), issued by MOFCOM and the National Development and Reform Commission (NDRC), also yields insights into the nature and scope of industrial state ownership, as it classifies investment projects for foreign companies as either “encouraged,” “restricted,” or “prohibited.”

A Note on SOE Classification

China’s National Bureau of Statistics (NBS), relying on the Regulation of the People’s Republic of China on the Management of Registration of Corporate Enterprise, defines SOEs as “Non-corporation economic units where the entire assets are owned by the state.” Carsten Holz, an associate professor of social science at the Hong Kong University of Science & Technology, meanwhile, breaks down the SOE definition into the following categories:

• Pure SOEs • SOE-SOE joint operation enterprises, and solely state-owned limited liability companies • All (other) shareholding companies (i.e., limited liability companies and stock companies) in which the state has a controlling share • All (other) enterprises or shareholding companies in which the state has a stake, with the economic data counted towards the SOE category in proportion to the state’s equity share, where the share of legal persons in paid-in capital is ignored for the purpose of the calculation (Holz 2003: 18-19)

State control, moreover, may either be absolute (guoyou juedui konggu) or relative (guoyou xiangdui konggu) and can be exercised by either the central government (i.e. national SOEs) or by lower levels of government, such as

20. Andrei Shleifer and Robert Vishny present a bargaining model between politicians and company managers to ascertain whether politicians derive a specific benefit from state ownership of enterprises. See Andrei Shleifer and Robert W. Vishny, “Politicians and Firms,” Quarterly Journal of Economics 109, no. 4 (November 1994): 995-1025. 21. See http://www.china-embassy.org/eng/gyzg/t283953.htm (accessed on 11 February 2008).

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provincial or municipal authorities.22 In other words, the suggestions that all SOEs are a priori controlled by the central government, or for that matter exclusively state-owned, are rapidly becoming obsolete. The enterprises discussed below, including CNOOC, the Haier Group, CIC and major state-banks, help to differentiate between absolute and relative state control and/or ownership.

China National Offshore Oil Corporation (中国海洋石油总公司)

The Chinese are on an aggressive quest to increase their supply of oil around the world; whether Iran, Sudan or Venezuela, you name it, they are after it

James Lilley (former U.S. Ambassador to China)

Together with China National Petroleum Corporation (CNPC) and China Petroleum & Chemical Corporation (Sinopec), China National Offshore Oil Corporation (CNOOC) ranks among China’s national oil companies (NOCs). Under a 1998 petroleum industry restructuring, designed in part to “further separate regulatory and commercial functions, to improve the efficiency and competitiveness of CNPC and Sinopec and create world-class petroleum companies” (Arruda, 2003/2004: 20), the NOCs underwent partial privatization.23 Faced at the time with weak oil market outlooks and the specter of heightened foreign competition following official accession to the World Trade Organization (WTO), the partial privatization route presented a critical means for writing off huge debts, and using the funds raised through the listing process to defray oil exploration costs and invest in much-needed equipment modernization. Established in 1982, CNOOC was China’s first state-owned oil company. Since the early days of oil exploration in Chinese territorial waters, CNOOC has expanded significantly over the years and currently has activities spanning the globe (Table 5.1). Attracting particular scrutiny was an unsolicited takeover bid by CNOOC for California-based Unocal Corp in June 2005. Though CNOOC ultimately withdrew its offer, the move itself laid bare in unmistakable detail fundamental misunderstandings of the inherent motivations that prompted CNOOC to launch a bid in the first place.

22. In the case of absolute state control, the State holds more than 50% of total capital, compared to less than 50% in instances of relative state control. Yet, even in the latter case, the state share is relatively large compared to the shares of other ownership categories, or the State may still enjoy control rights by agreement (xieyi kongzhi) even if one or more other ownership categories have a larger capital share than the state. See http://ihome.ust.hk/~socholz/SOE-definition.htm (accessed on 11 February 2008). 23. In addition to partial privatization, the restructuring effort ended market segmentation and created vertically-integrated enterprises. For details, see Yinhua Mai, “Can the New Chinese Oil Giants Compete after China’s WTO Entry?” EAI Working Paper No. 74. East Asian Institute, National University of Singapore (May 8, 2001).

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Table 5.1: A Snapshot of CNOOC’s Overseas Activities

Region Country Activity Africa Algeria E; DP; R; S Kenya E; DP Nigeria Middle East Iran DP(g) Oman E(g); DP; DP(g) South/Southeast/East Asia Australia SC(g), E(g), DP(g) Indonesia P (bio-fuel) Philippines E Taiwan E Americas Canada DP; P (oil sand) United States P

Note: E: Exploration; DP: Development & Production; P: Production; R: Refinery; S: Service Contract; SC: Supply Contract; (g): gas Source: Ma and Andrews-Speed (2006); various news outlets; CNOOC

The internationalization of Chinese enterprises in general, and the overseas activities of China’s NOCs in particular, have prompted a peculiar China Fantasy; one that is influenced by “geopolitics, animosity perceptions, and other ‘nonrational’ considerations” (Shenkar 2005: 21).24 In contrast to the perceived challenge posed by a ‘new model of capitalism’ (created by Japanese banking and governmental policies) employed by Japanese companies in their overseas activities in the 1970s-1980s, resistance to Chinese enterprises derives in large measure from the incredulity that a socialist/communist political and economic environment could mount a credible and aggressive wave of internationalization, ostensibly rewriting the rules of international political economy and business competition.25 This incredulity led to CNOOC being derided as nothing more than the “corporate vehicle of “a Communist dictatorship.” Overall, the objectives of NOCs may differ substantively from those of privately-held international oil companies. Yet, a more probing contextual analysis will also alert to the fact that strong convictions regarding the Chinese state’s control and influence over NOCs may need revision. On a general level, the overseas activities of NOCs may reflect any or more of the following issue-areas – energy policy, industrial policy, social policy, or foreign policy (Ma and Andrews-Speed 2006: 18-20; Pirog 2007). From a political perspective, the diversified and omni-directional overseas activities of CNOOC, as well as those of China’s other NOCs, reflect inherent energy security concerns. At the same time, these activities are also depicted as critical to the sustainability of high levels of economic growth and development, which in turn

24. The term “China Fantasy” is drawn from James Mann’s, The China Fantasy: How Our Leaders Explain Away Chinese Repression (New York, NY: Viking, 2007). 25. For an overview of the phenomenon of Japanese foreign investments, see Dipak R. Basu and Victoria Miroshnik, Japanese Foreign Investments, 1970-1998: Perspectives and Analyses (Armonk, NY: M.E. Sharpe, 2000); Terutomo Ozawa, Multinationalism, Japanese Style: The Political Economy of Outward Dependency (Princeton, NJ: Princeton University Press, 1979).

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help to combat the specter of a looming unemployment increase.26 These realities, meanwhile, should not detract from equally credible commercial motivations that drive companies like CNOOC overseas, independently of the Chinese state. While national concerns are part of the overall rationale for internationalization, they are by no means the overarching and exclusively definite reason. As a result of the afore-mentioned industrial reorganization and (partial) privatization efforts, hard- nosed business strategy and overall competitiveness have become critical variables in overseas expansion decisions (Ma and Andrews-Speed 2006; Zhang 2004). In the words of Fu Chengyu, CNOOC’s chief executive officer, “The idea of buying Unocal was purely initiated by our company…The idea did not come from the government, and not one cent of government money is involved in the deal.” CNOOC stressed the business strategy fundamentals behind the UNOCAL bid, arguing that it would nicely complement the company’s overall strategic orientations.27 Notwithstanding the fact that property rights in China’s economic transformation remain somewhat fuzzy, there has been a demonstrated trend of ownership and control diversification, devolution of economic-decision-making, and entrenched “vested interests” at various levels of government, all of which help to discredit the notion of strict state control and ownership in favor of “fragmented authoritarianism” (Eurasia Group 2006). However, the perception that CNOOC was merely carrying out orders of the Chinese state rather than acting on business interests sealed the fate of the Unocal deal by July 2005. The politicized debate left no room for entertaining the notion that Chinese enterprises, including NOCs like CNOOC, do enjoy a significant degree of autonomy in overseas investment decisions, and in some cases actually have the potential to directly influence Chinese energy policy (Eurasia Group 2006). The CNOOC case also demonstrates how decontextualized analysis may result in the foregoing of economic benefits at the expense of short-term political grandstanding, especially if such an outcome derives primarily from perceptions that overseas activities of China’s NOCs are inevitably master-minded by the Chinese government rather than possibly reflecting strong business fundamentals and commercial motivations. As noted by Laura D’Andrea Tyson (2005), “China’s purchase of Unocal could have meant more investment in global oil exploration and drilling than Unocal or other American companies have been willing to make.”28 Finally,

26. It should also be noted, however that while both issues are important, they are not necessarily mutually compatible. Indeed, from an economic perspective, it is difficult to see how sustained economic growth defuses unemployment pressures if economic growth rate also reflects a general rise in labor productivity. In other words, as that productivity measure increases, labor demand will decrease. See Charles Wolf, Jr., “China’s Rising Unemployment Challenge,” Asian Wall Street Journal (July 7, 2004). 27. See Francis Schortgen, “Protectionist Capitalists vs. Capitalist Communists: CNOOC’s Failed Unocal Bid In Perspective.” Asia Pacific Perspectives VI, no. 2 (September 2006): 5. 28. In the U.S. context, the need for further investments in refinery operations became especially apparent when Hurricane Katrina disrupted energy production, triggering oil price hikes. As

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rather than recognizing the opportunity to transform CNOOC into an active “stakeholder,” the U.S. government merely further emboldened China to step up bilateral energy ties between China and countries such as Angola, Nigeria, Iran, Sudan and Kazakhstan rather than meeting their oil needs by trading on the open world markets.

The Haier Group (海尔集团)

If we don’t destroy these refrigerators today, what is to be shattered by the market in the future will be this enterprise!

Zhang Ruimin (1985)

The history of Haier, headquartered in the seaside city of Qingdao ( province) dates back to 1984 when the Qingdao municipal government tapped Zhang Ruimin, an assistant city-manager to breathe new life into the ailing and near-bankrupt Qingdao Refrigerator Company. Under his leadership, the fortunes of Haier dramatically improved and the company established itself as a credible enterprise, both domestically and internationally. At the present time, Haier is China’s third-largest domestic manufacturer, after Shanghai’s Bao Steel and First Auto Works (FAW) of Changchun, province. As of 2008, the company has also established itself as a leading global player, being the third largest home appliance maker, behind Whirlpool Corp. of the United States and Electrolux of Sweden. The company’s average annual growth rate stood at around 80% over the 1984-2006 time period.29 Haier may still be officially classified as a “collective enterprise,” the municipal government may still have a broad interest in Haier’s activities, especially in light of the trickle-down effect to the local economy, and Zhang Ruimin may have been honorably elected as an alternate member of the 19th Central Committee of the Chinese Communist Party. Yet, none of these realities, individually or combined, would likely be enough to credibly argue significant government control over, and involvement in, the operations and activities of Haier. In fact, although various levels of the Chinese government are encouraging its internationalization, such government involvement is as much a cause behind, as well as a consequence of, Haier’s commitment to internationalization (Liu and Li 2002: 701). More specifically, the role of government appears to be limited to a supportive and facilitating function rather than actual involvement in the operational decision-making or the financing realms. Attesting to this reality was Zhang Ruimin himself who, commenting on Haier’s decision in 1991-1992 to start a business diversification phase, noted, “The budget required for that [i.e. product range expansion] was RMB 1.5 billion. We only had RMB 80 million in our

recently as February 28, 2008, U.S. President George W. Bush recommended that new refineries be built, partly as a means of offsetting rising gas prices. 29. Interview with management officials of Haier, conducted at the company’s headquarters in Qingdao on July 12, 2008.

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coffers at the time, and the government would not finance us, because Haier was not an SOE…”30 The Haier case underscores in fundamental ways the commercial nature of many a Chinese enterprise’s commitment to internationalization. Indeed, Haier has been singled out in many instances as a leading case for management innovation and leadership in the Chinese context.31 Its management culture and business orientation are decidedly innovative and market-driven.32 Haier’s aspiration is to develop into a truly world-class brand.33 As such, the company is aggressively moving from “branding based on exports” to ‘branding based on overseas operations” and embraces the slogan of “Go Abroad, Go Localized, Go Higher.” Further indications that Haier’s internationalization process is guided by predominantly business motivations are the corresponding strategic transitions, pushed by Zhang Ruimin, targeting 1) managerial direction; 2) market direction; and 3) product direction. The aim of each transition is summed up by Haier as follows:

• Managerial direction: moving from linear function-based structure to a market-chain based business process reengineering (BPR), characterized by flat structure and improved information flow • Market direction: moving from domestic market to the international market • Product direction: moving from manufacture to service34

In its approach to internationalization, Haier represents the most obvious case yet for a theoretical extension of the kind that Child and Rodrigues (2005) propose. Indeed, its “first difficult, then easy” approach to overseas market penetration turns the conventional wisdom of internationalization – leveraging competitive strengths – on its head. Rather, under Zhang Ruimin’s leadership Haier is committed to achieving excellence and global brand recognition through competitive benchmarking in developed markets first. An attempt to acquire the troubled U.S.-based Maytag Corp. in June 2005 marked the first visible M&A step taken by Haier on the international business stage. The bid itself, involving a consortium including Haier and U.S. buy-out firms Bain Capital and Blackstone Group, was decidedly commercial in nature. It

30. Drawn from an interview with Zhang Ruimin, conducted by Wharton School management professors Michael Useem and Marshall W. Meyer. For a full transcript, go to http://www.thegopoint.com/interviews/zhang.htm (accessed on 8 March 2008). 31. See Tarun Khanna, Ingrid Vargas, and Krishna G. Palepu, “Haier: Taking a Chinese Company Global,” Harvard Business School Case (October 17, 2005). 32. Yoshihara and Ou-yang talk about a “market economy model” of Chinese management. See Hideki Yoshihara and Tao Hua Ou-yang (date unknown), “Market Economy Model of Chinese Management – Case of Haier.” Accessed on February 25, 2008 at http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp131.PDF. 33. According the general indicators of what makes a world-class brand – band value in excess of USD 1 billion; non-native country sales accounting for over 20% of global sales; non-native country profits over 30% of total profits – Haier currently already meets the first two criteria (based on interviews with management officials at Haier in Qingdao, July 12, 2008). 34. These three strategic directions are featured in the “I am Haier, I Smile” Corporation Culture th Brochure (8 revision), Culture Center of Haier Group (June 2006): 32.

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was as much a calculated move to try and offset the competitive pressures of the domestic Chinese market as to boost the company’s brand image through the addition of established Maytag product lines. In the end, however, Haier’s decision to withdraw its bid offer reflected the concerns that the move to acquire an iconic U.S. manufacturer might well attract undue political scrutiny and trigger excessive resistance. Additionally, following Whirlpool’s joining the bidding for Maytag with a higher offer, Haier’s withdrawal also established that Chinese enterprises are taking into account business fundamentals rather than being willing to pay any price in their pursuit of internationalization.

China Investment Corporation

Apart from majority or solely state-owned national strategic sector companies, government agencies are an additional category that ought to be given attention. One such agency that is of particular interest, given its recent overseas activities, is the newly created China Investment Corporation (CIC). A sovereign wealth fund (SWF), CIC has a total of US$200 billion of China’s current foreign exchange reserves (approx. US$1.5 trillion) under management. Since its inception in September 2006, a string of investment decisions have moved CIC increasingly into the international spotlight. Arguably serving as a simple tool for raising the return on investment (ROI) of China’s foreign exchange reserves, the decision to allocate US$70 billion exclusively for overseas investments by CIC has raised international concern over Beijing’s ulterior motives. The most prominent investments to date include a US$3 billion investment for a 10 percent stake in The Blackstone Group, a major U.S. private equity firm, and a US$5 billion injection for a 9.9 percent stake in Morgan Stanley, a top investment firm that has been reeling from the after-effects of a substantial sub-prime mortgage write-down.

Table 5.2: Chinese Overseas Investment Activities

Recipient Source $ bn % stake

Standard Bank ICBC 5.5 20.0

Morgan Stanley China Investment Corporation 5.0 9.9

Blackstone Group China Investment Corporation 3.0 10.0

Barclays Bank China Development Bank 3.0 2.6

Bear Sterns Citic Securities 1.0 6.6

Source: Dealogic; featured in Financial Times (December 20, 2007).

China’s sovereign wealth fund, however, is not the only major source of recent Chinese investments into major international financial institutions (Table 5.2.). While such investment flows may speak to the continued overall attractiveness of U.S. assets, they nonetheless also attest to the rising attuning of the Beijing leadership to alternative forms of wielding power and influence in an era of globalization. These “tools of business” are but one aspect – although a very real and powerful one – with which Beijing aims to differentiate residual state ownership, control, and/or influence from the ideologically-infused nature of state ownership and control that prevailed prior to China’s opening-up and gradual and

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sustained process economic and financial liberalization. It is far from tenuous to posit that, given the contemporary context, if not the definitional and organizational meaning of state ownership and/or control, then certainly the motivations and calculations governing and sustaining it (albeit in rapidly decreasing instances) are qualitatively different from the pre-opening-up and pre- globalization era. In fact, from the perspective of internationalization, the broader economic and national as well as international interest calculations ensure the near-complete marginalization (if not, eradication) of communist/socialist goals propounded in the early days of the PRC.35 SWFs have deep financial pockets that are coveted by global financial players who find themselves increasingly strapped for cash as a result of the sub-prime mortgage crisis that emanated from the U.S. and has since blown significant holes in the balance sheets of many a global financial player. The resulting influence effect may well be the product of rising consumption levels in advanced industrial economies that have allowed many developing countries to amass huge foreign exchange reserves, a portion of which they are now looking to invest overseas with the aim of securing higher ROIs. While these flows have not yet been subjected to the same level of scrutiny that FDI inflows have been, it is likely to be only a matter of time for the regulatory machine to kick in and raise concern of the political motivations for, and national security implications of, such flows.36 The distinct concern, meanwhile, is that lack of understanding of the true motivations and nature of SWFs may lead to “exaggerated” concerns and excessive politicization, resulting in financial protectionism at a time when emerging powers aim to take advantage of the investment opportunities offered by global capital markets (Dombey 2008; Kimmitt 2008). In a pre-emptive bid, SWFs have begun to commit to a more indirect investment approach in order to drop off the radar of regulatory authorities and stave off much of the seemingly inevitable political backlash.37 As of February 2008, China’s CIC is planning to invest up to $30 billion of its ballooning foreign exchange reserves with international fund managers as a means of bypassing

35. For a discussion of the rationale behind early commitments to internationalization, see William C. Kirby, “China’s Internationalization in the Early People’s Republic: Dreams of a Socialist World Economy,” The China Quarterly 188 (December 2006): 870-890. 36. On February 13, 2008, the United States Congress held a Joint Economic Committee Hearing, titled “Do Sovereign Wealth Funds Make the U.S. Economy Stronger or Pose National Security Risks On April 8, 2008, it was announced that the CFIUS body in the United States would increase regulatory scrutiny of foreign investment inflows, including sovereign wealth fund investments, even if they fall below the usual 10% threshold that would trigger national security investigations. See also Daniella Markheim, “Sovereign Wealth Funds and U.S. National Security,” Heritage Lecture # 1063, The Heritage Foundation (March 6, 2008). 37. The International Monetary Fund (IMF) is being pressed into drafting a multilateral code of conduct for SWFs. Australia has taken the lead in imposing stricter controls over the activities of SWFs and state-owned companies, with the aim of ensuring that “an investor’s operations are independent from the relevant foreign government”. See Peter Smith, “Australia to Screen Sovereign Funds,” Financial Times (February 18, 2008). Meanwhile, the United States has also begun to push for greater transparency of these funds in meetings with both the Abu Dhabi Investment Authority and the Government of Singapore Investment Corporation. See Bob Davis, “U.S. Pushes Sovereign Funds to Open to Outside Scrutiny,” Wall Street Journal (February 26, 2008).

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transparency and accountability concerns. An estimated $4 billion is scheduled to be managed by JC Flowers, a U.S. private equity firm.

Major State Banks

In the past we may have had our problems, but now the situation has completely changed…Yet the U.S. has still not changed its attitude. It's unfair.

Guo Shuqing, China Construction Bank (CCB) Chairman October 17, 2007

In The Coming Collapse of China, Gordon Chang (2001: 122-165) raised serious concerns over the solvency and viability of Chinese banks. Critics have especially pointed to the large number of problem or non-performing loans weighing down the balance sheets of Chinese banks.38 There is no doubting the fact that the Chinese banking sector will have a long way to go to address lingering flaws and inefficiencies. Yet, at the same time, gradual reform and restructuring efforts in recent years have seen substantial advances and improvements in China’s financial and banking sector and have largely confounded excessively pessimistic predictions for the future of Chinese banks. Indeed, in a stunning confounding of predictions of collapse over structural weaknesses and widespread insolvency, some of China’s major state-owned banks have ushered in a new banking “world order.” As of January 2008, for the first time, no less than three of China’s main banks rank among the top five globally in terms of market capitalization (Table 5.3).

Table 5.3: Chinese Banks Rise to the Top

Rank Market Capitalization Rank Bank Name ($ bn) 1/31/08 1/31/07 1/31/03 1 ICBC 277.514 4 NA 2 Bank of America 195.933 2 2 3 HSBC Holdings 176.788 3 3 4 China Construction Bank 165.234 7 NA 5 Bank of China 165.087 6 NA

Source: Bloomberg (http://www.bloomberg.com/apps/news?pid=20601103&sid=aBhYtHt.s3gM&refer=us)

Similar to the case of NOCs discussed above, substituting shareholding structure for exclusive state ownership has been a key factor in engineering a more commercial orientation for China’s major state-owned banks. The state, however,

38. These are often the result of “policy loans” (zhengce daikuan) or “relending” (zai daikuan); funds that have largely been allocated through administrative discretion. Non-performing loans in China have generally been classified as either “past due loans” (yuqi daikuan), “doubtful loans” (daizhi daikuan), or “bad debt” (daizhang daikuan). For a broader overview of the challenges and evolution of China’s banking sector, see Nicholas R. Lardy, China’s Unfinished Economic Revolution (Washington, D.C.: Brookings Institution Press, 1998): 59- 127.

117 Chapter 5 still retains a majority ownership share in the so-called “Big Four” – the Bank of China (BOC), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China. While the restructuring efforts have not eliminated issues-areas of immediate concern, the financial health of these banks has improved markedly between 2004 and 2006. Concurrently, foreign institutional investors have taken note of that and, in a true vote of confidence, channeled substantial investments into those banks. Coupled with successful overseas initial public offerings (IPOs), institutions such as ICBC, BOC and CCB have seen their fortunes rise to unprecedented levels, while resulting in a discomforting reversal of fortunes for many established Western banking powerhouses.39 As China’s major banks are searching for opportunities to invest much of the newly accumulated capital, such moves have more often than not generated politicized fears, concerns and regulatory foot-dragging – most notably so in advanced industrial economies. On the one hand, Chinese banks have of late begun to extend a rescue line to established global financial players reeling under the adverse effect of the sub-prime mortgage crisis emanating from the United States. Citigroup executives reportedly had been in contact with, and secured an initial agreement with, China Development Bank for a US$2 billion cash injection. Similarly, both BOC and ICBC had apparently been approached separately about assisting in the rescue of the ’s beleaguered Northern Rock through acquisitions of minority stakes ( 2007). Yet, the recognition extended to Chinese banks as potential white knights to established global players quickly gives way to pessimistic assessment of their independent pursuit of overseas investment opportunities, including the desire to set up overseas branches. Ironically, the application of such obvious double standards has also presented China with a major bargaining chip. In exchange for removing purported discriminatory roadblocks to Chinese banks’ plans to establish a more global presence, Chinese authorities have hinted at possibly raising the current 25% limit on investment stakes in Chinese banks – an offer that would be especially welcome news for foreign banks vying to expand their position in the Chinese banking sector.40 The motivations for China’s state banks’ internationalization are of a combined political and commercial nature. On the one hand, Chinese authorities recognize the need for state banks to drastically improve on the operational front. The competitive benchmarking and enhancement of operational efficiency as well as diversification of financial service offerings that is likely to be gained through overseas expansion will be a particularly good fit with the growing service needs and demands of joint-stock companies and private enterprises that are rapidly expanding their importance in China’s political economy.

39. The public offerings of CCB, BOC and ICBC set new records. On October 20, 2005, CCB raised US$ 8 billion. This was trumped by a US$ 9.6 billion BOC offering on May 24, 2006, while ICBC raised a staggering US$21.9 billion in its Hong Kong-Shanghai IPO on October 20, 2006. 40. The chairman of CCB had openly expressed his frustration with perceived double standards during the 2007 National Party Congress, lamenting that “We have applied to set up branches in the U.S., but we have been subject to unequal treatment” (Kwok 2007a).

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On the other hand, China’s state banks have also begun to focus more on minority acquisitions so as to mitigate excessive political fears and/or regulatory scrutiny, while simultaneously pursuing specific commercial goals through less obvious means. As Zhou Xiaochuan, the governor of the People’s Bank of China acknowledged, the Chinese government is actively encouraging qualified financial institutions “to establish overseas operations, and explore equity investment in overseas financial institutions through merger and acquisition, in order to provide enterprises with convenient financial services in their overseas investment and operation.”41 ICBC’s October 2007 acquisition of a 20% stake in South Africa’s Standard Bank is directly in line with strategic business and broad political-economy interests. With this move, China will be able to leverage both Standard Bank’s extensive knowledge and expertise in resource financing and commodities trading – areas of critical interest to the Chinese government – as well as its African regional network and hence support a wide range of charm offensive operations on the African continent (Kurlantzick 2007; Timewell 2007). Finally, further explanations for Chinese banks’ internationalizing ambitions can be gleaned from the conditions prevailing in the broader global economic arena. Plugged ever more deeply into the global economy, Chinese banks can hardly be faulted for shrewdly acting on the opportunities that developments in overseas markets (e.g. the sub-prime mortgage crisis in the United States) present for global expansion and investment diversification.

5.2.3. Non-State Enterprises

It will not take a long time for Chinese private enterprises to become a new force in overseas investment. Maybe only three to five years. Hou Zhirui All-China Federation of Industry and Commerce February 7, 2007

A particularly indicative sign of China’s ongoing economic transition and the evolution of the domestic political economy sphere is a series of amendments that have been made to the 1982 (China’s current) Constitution.42 Each of these amendments granted increased recognition to the private sector economy. Attesting to its rising importance to China’s overall economic activity, the constitution recognized the private sector economy as a “complement to the

41. This remark is drawn from a speech that Mr. Zhou delivered at the 11th China International Fair for Investment and Trade and the International Investment Forum 2007 on September 8, 2007. For the full transcript of the speech, titled “Providing Financial Support to Enterprises ‘Going Abroad’,” go to http://www.bis.org/review/r070927c.pdf (accessed on 27 February 2008). 42. As of January 2008, the National People’s Congress (NPC) has amended the country’s constitution on four occasions – on April 12, 1988 (1st session of the 7th NPC); on March 29, 1993 (1st session of the 8th NPC); on March 15, 1999 (2nd session of the 9th NPC); and on March 14, 2004 (2nd session of the 10th NPC). For details on the various amendments, go to http://english.peopledaily.com.cn/constitution/constitution.html (accessed on 15 February 2008).

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socialist public economy” (emphasis added) in 1988. The 1999 amendment further elevated the status of individual, private and other non-public enterprises structures to “major components of the socialist market economy” (emphasis added). By March 2007, guarantees for the protection of private property had been adopted, paving the way for an even stronger market-conforming political economy environment in China. The law, which officially came into effect on October 1, 2007 and declares “the property of the state, the collective, the individual and other obligees is protected by law, and no units or individuals may infringe upon it” (People’s Daily 2007), confirms the growing importance of the private sector to China’s evolutionary economic transformation. Yet, even prior to this explicit recognition of the role of the private sector, the Chinese domestic economic space had already implicitly begun to condone and nurture private enterprises, albeit on a rather localized, and contained spatial dimension. The Wenzhou Model, named after the city of Wenzhou in Zhejiang province, exemplifies critical instances of institutional reform, resulting in non- state enterprise arrangements, which the local government either helped foster through the creation of favorable environments or run directly by local governments (most notably large-scale collective enterprise structures).43 From a political economy perspective, the implications of this trend are worth reflecting on. If initially, the complementary nature of the private sector drew on its potential as a quick-fix to pressing political concerns elicited by unemployment levels, its growth trend over time, together with its rising contribution to Chinese economy, explains its eventual recognition as a “major component” of China’s political economy. At a more fundamental level, however, the coming of age of China’s private sector economy suggests that private enterprises will become (and to some extent already are) a critical player in outward internationalization. Some of these private enterprises may actually have concealed their true identity by embracing an adaptive, informal strategy of “wearing a red hat” (dai hongmaozi) or registering as a collective enterprise in order to effectively navigate the “the rugged terrain of competition” (Lin 2001: 67-97) and bypass constraints and restrictions related to resource allocation, regulatory issues and the distribution of liabilities.44 As the institutional environment is moving to recognize and guarantee the stature of private enterprises among the range of

43. Judging by the growth trend of various enterprise structures (see Figure 3.3), it appears that the private enterprise structure is becoming rapidly an institutional reality that cannot be discounted in analyses of Chinese political economy. 44. For an overview of the ‘red hat’ strategy of private enterprises in China, see Wenhong Chen, “Does the Colour of the Cat Matter? The Red Strategy in China’s Private Enterprises,” Management and Organization Review 3, no. 1 (March 2007): 55-80; Kellee Tsai, “Adaptive Informal Institutions and Endogenous Institutional Change in China,” World Politics 59, no. 1 (June 2007): 116-141. This strategy contributes to some extent to a blurring of ownership rights and enterprise control and of business interactions and degrees of (inter)dependence between economic and state actors. See Neil Gregory, Stoyan Tenev and Dileep Wagle, China’s Emerging Private Enterprises: Prospects for the New Century (Washington, DC: International Finance Corporation, 2000), and Ross Garnaut, Ligang Song, Yang Yao and Xiaolu Wang, Private Enterprises in China (Canberra, Australia: Asia Pacific Press, 2001).

120 Chapter 5 enterprise structures, this trend may gradually subside. Private entrepreneurs are not merely poised to blazing a new trail in China’s domestic political economy. In doing so, they will also meaningfully effect changes to its institutional and interactional spaces. As illustrated by the examples below, non-state enterprises are also invariably and unalterably going to become an integral component of China’s outward internationalization. Hence, another compelling reason to look beyond the narrow view of state ownership and control of enterprises in trying to adjust and adapt to Chinese enterprises’ expanding presence in the international business realm.

China Minsheng Banking Corporation, Ltd (中国民生银行)

Easy to overlook amid the newfound status of China’s major state-owned banks is another banking-related trend, the implications of which are no less path- breaking, in terms of the internationalization and evolution of China’s political economy. This trend is the gradual emergence of non-state banks. Back in 2000, the Chinese government began to envision private banks playing an instrumental role in cushioning the impact of increased foreign bank competition in the domestic market, which China had consented to in the WTO agreement struck with the United States in November 1999. Private banks still largely remain an oddity in China’s contemporary financial space. Even so, China Minsheng Banking Corporation (hereafter “Minsheng Bank”) already stands out as a major player in the banking sector. Established in January 1996, Minsheng has earned the distinction of being China’s first private bank.45 The list of achievements and recognitions it has since earned challenge the general perception of structural weakness and inefficiency of Chinese banks. In fact, Minsheng has excelled in areas ranging from overall competitiveness and asset quality to financial innovation and risk management. Finally, it has also been spearheading a new trend in overseas investments by Chinese banks. Its October 2007 purchase of an initial 9.9% ownership stake in San Francisco-based UCBH Holdings (with an option of raising the investment to 20% over two stages by 2009) for over US$ 200 million represents the first strategic investment of a Chinese bank in the U.S. banking sector. Irrespective of its weaker financial clout compared to China’s major commercial banks, Minsheng’s investment fits an alternative investment approach that is gradually being adopted by other Chinese financial institutions, including CIC. This new approach stresses minority-stake investments in foreign financial and banking institutions, with the aim of minimizing political scrutiny and potential politicization of proposed deals. At the same time, it can be argued that the fundamental motivations for the expansion of Chinese banks (whether state- owned or not) is to acquire the know-how and competence in a bid to insulate

45. The Wall Street Journal raised doubts over the true nature of independent control of Minsheng, stating, “Although Minsheng bills itself as a bank run by private businesspeople, the government will get to choose who runs the lender. The 15-member board and its nominations committee will take a back seat, waiting for the government to hand down its choice.” See Rick Carew, “Beijing Stays in Boardrooms: One lender’s search for a new chief shows role of government,” Wall Street Journal Asia (June 9, 2006).

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themselves as best as possible from the competitive pressures that the post-WTO environment will bring to bear in the domestic financial and banking space. In other words, the political motivations may be as much a reflection of the domestic situational context as well as a desire to invest excess capital in locations yielding promising ROIs while simultaneously conferring to China a degree of power and influence in broader international circles.

Huawei Technologies Co., Ltd (华为技术有限公司)

If the U.S. government is concerned about Huawei, if some of the lawmakers are concerned about Huawei, Cisco is everywhere within China. Who should be more concerned? Xu Zhijun Chief Marketing Officer, Huawei February 2008

Huawei Technologies Co., Ltd. (hereafter “Huawei”) was established in 1988 and has emerged as China’s largest telecommunications equipment maker. In addition, the company has successfully expanded its operations internationally and enhanced its global brand status, particularly in developing economies. At the present time, Huawei has over 100 branch offices in 90 countries. In 2006, international operations accounted for 65% or US$7.15 billion of total sales of US$ 11 billion. Contrary to expectations, Huawei’s status as a private enterprise has not only failed to assuage concerns regarding its corporate ownership structure but is also weighing negatively in on its overseas expansion and investment plans – in advanced industrial economies much more so than in the developing world. There are several reasons that appear to sustain lingering suspicions about the company’s motives for internationalization. On the one hand, Huawei reportedly has intricate connections to the PLA. Not only is Huawei’s founder and current CEO, Ren Zhengfei, a former PLA officer and former director of the PLA General Staff Department’s Information Engineering Academy, but the PLA remains one of its most important clients.46 Second, Huawei, given its connections to the PLA, is seen by critics as an integral component of a Chinese defense-industrial complex that is eager to acquire advanced technology as a means of upgrading China’s overall military capabilities. According to a 2005 RAND study, Huawei maintains deep ties with the Chinese military, which serves a multi-faceted role as an important customer, as well as Huawei’s political patron and research and development partner (Medeiros et al. 2005). Finally, excessive corporate secrecy and an unwillingness

46. As discussed below, a particularly notable evolving trend in China’s political economy in light of deepening marketization is a growing tendency by political cadres and even the military to “jump into the sea” (xiahai) and display a vibrant entrepreneurialism that may well be independent from their actual status and be much more market-conforming. This is a reality, however, that has gone unappreciated or largely unrecognized thus far. Hence, Ren Zhengfei’s former PLA affiliation should not a priori imply that Huawei’s overseas activities are invariably designed to benefit the PLA.

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to publicize its actual shareholding structure are widely seen as undermining Huawei’s claim to independent status as a private enterprise.47 In October 2007, Huawei, in conjunction with Bain Capital announced its intention to acquire U.S.-based 3Com Corp. Attracting initial suspicion over Huawei’s real intentions was the fact that from a business perspective, the deal did not appear (at least to Western analysts) to make business sense, considering 3Com’s beleaguered financial situation and its competitive weakness, compared to Cisco Systems. From the Chinese side, however, 3Com presented a unique opportunity for Huawei to overcome an image problem arising from its rumored PLA connections and to facilitate expansion in the U.S. market. One of 3Com’s business units, Tipping Point, is a major provider of network intrusion prevention systems (IPSs) to the U.S. government. As such, it was a foregone conclusion that the proposed deal would draw close scrutiny and conjure up national security concerns. Although Bain Capital and Huawei took pains to downplay such concerns, the bid became once again a ready political football, reminiscent of the Unocal case in 2005. Such attempts at downplaying security fears included most specifically Bain Capital declaring its willingness to immediately divest Tipping Point.48 Furthermore, Huawei was to acquire only a minority ownership share (16.5%) of 3Com, while foregoing any management control. Yet, just as CNOOC’s willingness to address security concerns raised by the Committee on Foreign Investment in the United States (CFIUS) did not receive much attention in the political debate, neither did the proposed concessions and clarifications by both Huawei and Bain Capital assuage fears that China may use 3Com technological know-how to build up cyber warfare capabilities. Indicative of Huawei’s frustration over the politicized nature of the acquisition process was the curt comment by Xu Zhijun, Huawei’s chief marketing officer. Responding to the charge that Huawei’s takeover bid amounted to a “stealth assault on America’s national security,” Xu noted “That would be bullshit” and went on to stress that the deal was simply a “business investment” meant to generate promising “investment returns” (Parker and Taylor 2008). National security concerns notwithstanding, the reaction to the attempted takeover of 3Com is furthermore surprising, considering Huawei’s long-standing relationship with 3Com. The cooperation began back in November 2003 with the establishment of Huawei-3Com, a joint venture that elevated 3Com as a credible player in the Chinese technology market.49

The preceding illustrative examples provide a simple snapshot of a rapidly expanding complexity and evolution of China’s political economy environment.

47. According to Forbes magazine, Huawei only acknowledges that, apart from Ren Zhengfei’s 1% ownership stake, the remainder is under the control of a “union” of unidentified principals. See Russell Flannery, “Mystery Man,” Forbes (December 27, 2004). 48. China in fact already has sophisticated hacking technology and cyber warfare capabilities. In the second half of 2007, China was accused of hacking into computer of the German Chancellery and the U.S. Department of Defense. 49. Fours years later, 3Com acquired full control of the JV in an $822 million deal. See Shu-ching Jean Chen, “3Com’s Big China Venture,” Forbes (November 29, 2006).

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Owing to decades of economic reform and restructuring, pure state enterprises alone no longer dominate the enterprise space. Non-state enterprises and nominally state enterprises restructured into shareholding structures have been making gradual inroads over the years. The newly emerging institutional and interactional reality is a direct result of a “decline of the advantage of redistributive power and other forms of political capital relative to nonstate economic actors who possess market power” (Cao and Nee 2000: 1175; emphasis in the original). Hence, it behooves to factor this dynamic and changing contextual reality into the analysis of enterprise internationalization. At the same time, however, the Huawei and CNOOC examples should not suggest that national security concerns are a priori irrelevant. In fact, arguing that position would be just as indefensible on an analytical and intellectual level as is the unwillingness to look at China through anything other than a Cold War paradigm. Rather, these examples illustrate that even relevant and willing concessions on the part of Chinese enterprises oftentimes have little effect on the vetting process of their investment plans. Indeed, more often than not, these concessions are simply drowned out by political grandstanding and hysterical warning of the Chinese communist threat. In other words, while national security concerns are a relevant measure of evaluation, and should remain so, a set of relevant procedures ought to be implemented to guard against excessively politicized scrutiny of Chinese as well as other foreign investment inflows, so as to maintain a commitment to free and fair business competition. Of course, the irony then again is that this presupposes an objective and factual grasp of the changing realities and institutional and interactional dynamics within China political economy space. This remains a contemporary weakness – hence the focus of this study.

5.3. EMERGING TRENDS

Having elucidated the diverse nature of internationalizing enterprises, let us now briefly look at several important trends that intensify this internationalization, and in the process, will be instrumental in reshaping the institutional and interactional spaces of China’s domestic economy and in helping to further propel the country along its market-conforming developmental trend. A defining feature of China's reform process is the simultaneous occurrence of economic liberalization and continued lack of political liberalization. The latter reality, arguably, has more often than not prompted a relative marginalization and under-appreciation of the ramifications and implications that a combination of subtle and more obvious advances in economic reform augur for China’s future. The fundamental argument underpinning this study has been that an accurate assessment of the challenges of opportunities raised by Chinese enterprise internationalization – especially the outward variant – necessitates expansion of a constricting ‘central-government ownership and control and SOE structure’ model in order to ascertain and understand how far China has progressed and evolved after thirty years economic reform and transition.

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The gradual inroads made by venture capital (VC) financing, a pronounced uptake in overseas IPOs and a spreading entrepreneurial culture50 offer strong suggestions that the institutional and interactional patterns of China’s political economy are in a continuing evolutionary stage, with profound impact on and implications for enterprise internationalization.

5.3.1: The Transformative Power of Venture Capital Financing

In a study assessing the effect of financial liberalization on the financing constraints of firms in developing economies, Luc Laeven (2003) posits that small firms may experience a relaxation of such constraints whereas large firms may face higher constraints. Whereas analysis of the Chinese context may not provide conclusive evidence in support of the purported increase of financing constraints for large firms, financial liberalization has certainly improved small firms’ access to financing, as evidenced by the gradual rise and growing appeal of VC financing. Most of the current studies and analyses of VC financing in China focus on the challenges and opportunities it presents to market participants whereas the broader political implications have gone largely unaddressed. This issue, however, is of critical importance for Chinese political economy, and hence also for our understanding of the underlying dynamics of enterprise internationalization. In fact, the gradual expansion of VC financing has far- reaching implications for the evolution of institutional and interactional patterns in China’s political economy, i.e. the linkages between government and enterprises. According to Kellee Tsai, official financial institutions generally lacked “the experience and the institutional mandate to cater to small businesses.” This has forced private entrepreneurs to devise a number of adaptive strategies to gain access to official bank capital, including registering as “collective enterprises” or “joint venture enterprises” (the so-called red hat strategies), or to borrow funds at higher interest rates from SOEs that do have easy access to bank funds. Small- scale entrepreneurs, meanwhile, resorted largely to activities such as borrowing from friends and family, using neighborhood loan sharks, underground money shops, and rotating credit associations, and a variety of non-banking financial institutions such as pawnshops and rural cooperative foundations (Tsai 2002).

50. See Victoria E. Bonnell, and Thomas B. Gold (eds.), The New Entrepreneurs of Europe and Asia: Patterns of Business Development in Russia, Eastern Europe, and China (Armonk, NY: M.E. Sharpe, 2002); Donald N. Sull, : What Western Managers Can Learn From Trailblazing Chinese Entrepreneurs (Boston, MA: Harvard Business School Press, 2005); Keming Yang, Entrepreneurship in China (Burlington, VT: Ashgate, 2007)

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Figure 5.1: SOE Sector vs. Private Sector in China

70 140 Growth rate of SOE sector Growth rate of private sector 60 120 Growth of SOE average output Growth of private firm average output 50 100

40 80

30 60

20 40

Sector Growth Rate (%) Rate Growth Sector 10 20 Average Output Growth (%) Growth Output Average

0 0 1992 1993 1994 1995 1996 1997 1998 1999 -10 -20

Source: China National Bureau of Statistics (2002)

VC financing in China, according to Zeng (2004), can be broken down into several distinct periods. Between 1991 and 1993, China experienced its first major wave of VC financing at the hands of foreign VC companies. Geared predominantly towards SOEs, this trend began to change by 1994, following a widespread performance deterioration of VC-backed SOEs. In fact, throughout the 1990s, the private sector overshadowed the SOE sector in terms of overall growth rate and average output growth (Figure 5.1). By the late 1990s, private and small-and-medium enterprises (SMEs) started benefiting in increasing numbers from VC financing (Table 5.4). As of year-end 2007, total VC investments in China stood at US$ 2.49 billion, up 5% year-on-year.

Table 5.4: Distribution of VC-Backed Enterprises (1991-2001)

Year SOE Private TVE*

1991-1993 91.30% 8.70% 0.00%

1994-1997 62.92% 34.83% 2.25%

1998-2001 10.39% 89.61% 0.00%

Source: Zeng (2004). The distribution is based on data from 266 VC-backed portfolio firms from 1991-2001. * Township and Village Enterprise

Most of the studies on VC investments in China focus on the difference in institutional context between China and other economies and, consequently, on how this will affect the operation and expansion of VC firms in China (e.g. Ahlstrom et al. 2007; Bruton and Alhstrom 2003; Xiao 2002; Xu 2002). And yet, the spread of this trend in and of itself is also rapidly emerging as a critical factor in the ongoing reshaping of institutional and interactional patterns of China’s transitioning political economy. The resulting political and analytical implications for the assessment and understanding of enterprise internationalization are particularly noteworthy. On the one hand, it frees enterprises from the likely constraints derived from dependency relations with various levels of government. From an interactional perspective, access to VC financing reinforces “institutional autonomy” (Yang

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2007: 177-201). As far as institutional space is concerned, the rather more formalized mechanism of VC financing may also constitute an attractive alternative to various “adaptive informal institutions” and practices (Tsai 2007) employed by non-state enterprises in their quest for sources of credit and capital. The fact that over 60% of total VC investments in 2007 flowed to seed and first- round deals indicates the overall effect that VC financing will have on political economy patterns. Finally, VC-backed status is also likely to confer advantages that might become critical if and when enterprises decide to internationalize. Absent any state subsidization of their business activities, it will be rather more difficult to claim that expansion plans of internationalizing are meant to do the bidding of state authorities rather than representing exclusively business transactions.

5.3.2: The Lure of Overseas IPOs

Overseas initial public offerings (IPOs) by Chinese enterprises have decidedly picked up in recent years (Table 5.5). In fact, launching an IPO on overseas stock markets can be an integral, albeit not always a necessary, component of business internationalization. In some instances, VC and/or private equity (PE) financing may also have spurred the process along.51

Table 5.5: Chinese Enterprises – Overseas IPO Trend (2005-2007)

2005 2006 2007 Offer Offer Offer Market IPO IPO IPO Amount Amount Amount Events Events Events (US$M) (US$M) (US$M)

HKMB 19,012.72 37 41,284.14 39 31,127.38 52

NYSE 395.70 1 480.55 3 4,490.51 18

SGX 201.83 20 1,336.79 24 1,987.84 26

NASDAQ 718.84 7 527.07 6 1,469.10 11

HKGEM 74.74 8 227.49 6 255.58 2

TSE 0.00 0 0.00 0 191.09 1

AIM 62.09 2 130.42 6 135.43 5

MOTHERS 0.00 0 0.00 0 41.78 1

KOSDAQ 0.00 0 0.00 0 31.52 1

SESDAQ 23.94 6 11.55 2 14.56 1

Total 20,490.32 31 43,997.99 36 39,744.79 118

Source: Zero2IPO – China Venture Database

The business motivations for overseas listings appear rather straightforward. A successful overseas IPO can raise the profile of an enterprise and attest to its solid business fundamentals, given the strict disclosure and transparency requirements of overseas stock markets. As such, this process may be seen as critical in facilitating the overall internationalization process. IPOs are also an indispensable source of capital for non-state enterprises to finance their business expansion plans. In a similar vein to the appeal of VC financing, overseas listings allow companies to avoid entangling patron-client relationships and a web of

51. According to Zero2IPO, a total of 14 Chinese enterprises listed on overseas stock markets (NASDAQ, NYSE, SGX, HKMB and AIM) in the first quarter of 2007. Of these 14, nine were backed by VC/PE funds.

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restrictions that may accompany access to lines of credit extended by various levels of government. Yet, a set of more immediate political considerations is also influencing the decision to proceed with overseas stock market listings. A study on the political relations and overseas IPO decisions of SOEs concludes that economic and political agendas of the political leadership can be determining factors in the approval of overseas IPOs (Hung et al. 2007). However, such political and economic agendas may also fluctuate over time, as demonstrated by the Chinese government’s decision in February 2007 to put a temporary halt on overseas listings of SOEs; a move that was partly intended to combat fears of market overheating by increasing the supply of equities through domestic market listings (Kwok 2007b). This, of course, cleared the way for private enterprise IPOs that, as a result of the policy measures adopted to cool the economy, have seen their growth potential and business expansion threatened due to a lack of adequate funding access. Overseas stock markets not only present an alluring source of capital, but they are also engaging in a tight race to secure Chinese company listings (Kissel and Santini 2004). A partial explanation behind this China IPO frenzy has been the stratospheric rise in market capitalization of many Chinese firms. According to the latest data, Chinese companies head global market capitalization rankings in industries ranging from banking and insurance, to telecoms and airlines (Chen 2007). According to the literature, the decision to list on overseas stock exchanges is influenced by political, financial, as well as marketing and public/labor relations calculations (Saudagaran 1988). The underlying political determinants of overseas stock exchange listings of U.S. companies – circumventing a host country’s political barriers, complying with ownership requirements and overcoming barriers to direct investment (Ngassam 2001) – may also apply in a broad political and economic context to Chinese enterprises. Such a proposition commands credibility in its own right, considering the wall of protectionism and economic nationalism that is being built in response to overseas expansion plans of numerous Chinese enterprises in advanced industrial economies. A 2006 study by Sun et al. (2006) on foreign primary listings52 of Chinese SOEs attempted to elucidate whether overseas market listings contribute to internationalization of the cost of capital (see Stonehill and Dullum 1982), and

52. It is not uncommon for companies to engage in cross-listings, i.e. listing in their domestic market as well as on overseas stock exchanges. In some cases, companies will give preference to overseas listings prior to domestic listings, or eschew domestic listings altogether. Listing on the is generally counted as a non-domestic market listing for Chinese companies. The choice of Hong Kong as a listing location may be attributed to geographical proximity and a rather more conducive information environment than that presented by other overseas locations. For a general discussion of the role of proximity in overseas listing decisions, see Sergei Sarkissian and Michael J. Schill, “The Overseas Listing Decision: New Evidence of Proximity Preference,” The Review of Financial Studies 17, no. 3 (2004): 769-809. A China-specific study is, Ting Yang and Sie Ting Lau, “Choice of Foreign Listing Location: Experience of Chinese Firms,” Pacific Basin Finance Journal 14, no. 3 (June 2006): 311-326.

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hence are appealing to governments of countries with weak and comparatively underdeveloped or less-developed capital markets. The authors explain the puzzle presented by the Chinese government’s continued willingness to pursue overseas market listings for major SOEs in spite of comparatively higher cost of capital by highlighting “market order” and “bonding” considerations. Under the “market order” hypothesis, the authors argue that overseas listings are an effective mechanism for diverting and relieving pressures that large domestic IPOs would inevitably exert on weakly developed domestic stock markets. It is, thus, correspondingly easy to deduce that the mere possibility of market disorder resulting from excessive IPO pressures generates incontrovertible incentives for the political leadership not to stand in the way of, but rather to encourage and help facilitate, overseas IPOs. The “bonding” hypothesis, meanwhile, underscores the intermeshing of the leadership’s political and economic agendas. A fundamental belief here is that overseas listings will ensure that an enterprise’s corporate governance structure will broadly converge to international standards and norms. This, in turn, would enhance “the credibility and prestige” of enterprises in the eyes of investors, and may help explain why a large number of China’s overseas listed firms are affiliated with “strategically important industries according to the classification of government industrial policy.”

5.3.3: Xiahai or ‘Jumping into the Sea’

Largely ignored in discussions of China’s business revolution is a distinctive and rising domestic trend with consequential ramifications for the analysis and interpretation of the institutional and interactional dynamics of China’s political economy arrangement. Described as “jumping into the sea” (xiahai), this trend can be assessed on two levels.53 First, it may well have sustained a certain degree of government-business collusion, fostered corruption and administrative monopolies (Guo and Hu 2004), or led to quasi-public, quasi-private trends, with “strong interpenetration and interdependence of social and market forces and the spread of hybrid institutional forms” remaining a reality (Francis 2001). Second, it also reflects the degree to which ideological dimensions have irreversibly given way to the pursuit of market opportunities. Political backgrounds and/or connections are undoubtedly a comparative advantage domestically, but they do not a priori imply that cadres, bureaucrats, or former military officers (e.g. Huawei’s Ren Zhengfei) are merely corporate ‘agents’ of a Communist dictatorship. For example, it is a well-known fact that the PLA is running its very own extensive business operations (Tai 2001). Yet, while some of these business activities may be intricately tied in to China’s defense-industrial complex, others are committed to the near-exclusive pursuit of commercial opportunities. A case in point is a major PLA-affiliated specialty vehicle

53. For a detailed overview of xiahai, see Liping Ji (ed.), Zhongguo xiahai chao (The Tide of ‘Jumping into the Sea’ in China) (Shijiazhuang: Hebei Renmin Chubanshe, 1993); Ruying Chen, Xiahai kuangchao (The Craze of Xiahai) (Beijing: Tuangjie, 1993). See also Xiaogang Wu, “Communist Cadres and Market Opportunities: Entry into Self-employment in China, 1978-1996,” Social Forces 85, no. 1 (September 2006): 389-411.

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manufacturer in central China that is deeply interested in tapping into the civilian specialty vehicle market, both domestically and abroad.54 The xiahai trend, in short, is a clear manifestation of China’s budding entrepreneurial spirit – an entrepreneurialism that is generally devoid of any ideological baggage but deeply reflective of Deng Xiaoping’s “to get rich is glorious” maxim. It is also a further reason for a more contextual analysis of China’s internationalization push. The continuing expansion of marketization in China has redrawn the motivational and dynamic underpinnings of China’s political economy to the point where the invocation of “Communist China” in the contemporary context is more of an oxymoron than a statement of objective reality and where depoliticization of business and investment is growing ever more pronounced in China. To the extent that political motives continue to influence some aspects of internationalization, they are manifestly lacking an ideological bent.

5.4. CONCLUSION

The Chinese Communists are just such great capitalists. They're just unbelievable capitalists masquerading as Communists

Jim Cramer December 25, 2006

After three decades of economic reform, restructuring, and tightened integration with the global economy, China’s enterprises are showing strong signs of living up to market economy expectations. Yet, all too often, their overseas trade and investment ambitions fall afoul of lingering stereotypes and bogus fears. The notion of “capitalist communists” and the corresponding competitive challenge, appear to be a hard reality to swallow for some advanced industrial economies. The message that is embedded in the illustrative examples and emerging trends outlined above, is unmistakable. Lifting the fog of ad hoc and impromptu politicization and emotional assessments will reveal a multi-faceted rather than monolithic Chinese enterprise structure – including both state- and non-state enterprises – driven to internationalization by a multitude of goals, interests, and ambitions. Indeed, the institutional and interactional patterns of Chinese political economy today are not only distinctly different from the past; they are an invariable and unalterable reflection of the success of China’s on-going transition from a command-economy structure to market-conforming arrangement. With China plugged into the global economy as never before, Chinese enterprises are by both choice and necessity embracing market-conforming practices. The latter because of the inevitable competitive pressures facing Chinese companies in a post-WTO context, and the former because of companies’ inherent desire to partake in the opportunities that a global economic space has to offer in terms of profit maximization, efficiency improvement, market access, and

54. The company’s top management freely announced this ambition to the author in a factory tour/briefing session on July 24, 2006.

130 Chapter 5 so on. Political motivations certainly still prevail to some extent, as demonstrated not least by the central government’s overt lending of support to internationalization. But, it is a political motivation borne out of domestic social and economic interests and pressures rather than of ominous geo-strategic goals heavy with ideology.

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6. ‘Same Bed, Different Dreams’ – Causes, Manifestations, Implications

CHAPTER OVERVIEW

By way of conclusion, this chapter offers a comprehensive summary of the study. Following a brief revisiting of the broad context that has given rise to this study, Section One offers a succinct overview of the primary arguments and propositions discussed in the previous pages. In Section Two, specific limitations of the study will be acknowledged, complete with a brief explanation of reasons for these shortcomings. Finally, Section Three discusses possible avenues for further research based on the broad conceptual framework for studying Chinese enterprise internationalization, as argued in this research.

*************************************

[China]…requires our understanding and engagement – not our enmity and suspicion, which might be self-defeating, creating the very crisis we fear

Will Hutton (2006: 3)

A picture, the saying goes, oftentimes speaks a thousand words. And so do the efforts of cartoonists, for these individuals have an unparalleled gift for compressing complex and important issues into a single image without diluting the poignancy of the intended message. A cartoon that emerged at the height of the debate over CNOOC’s takeover bid for Unocal in 2005 aptly depicted a fundamental reality of economic globalization in the 21st century; that being, free and fair trade is no longer a one-way street. It depicted a frantic Western business official catching up to his Chinese counterpart, who has just completed a buying spree on the international business market, and declaring, much to the consternation and surprise of the latter, “By ‘Free Market Economy,’ we meant your market for our economy.” As a way of conclusion, this chapter is divided into three section. First, the main focus and propositions of this study will be revisited. This is followed by an acknowledgment and discussion of specific research limitations. Section Three will put the study in a broader context by suggesting promising and stimulating avenues of further research.

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6.1. STUDY SUMMARY

Americans have not looked for Mexico in Mexico; they have looked for their obsessions, enthusiasms, phobias, hopes, interests…

Octavio Paz Lozano The Labyrinth of Solitude (1961)

Judging by contemporary trends, the combination of communism and China, broadly speaking, appears to be more of an oxymoron than a reflection of reality. The reality is that, as a result of sustained economic reform and restructuring efforts, China has successfully embarked on an irreversible transition from a command-economy to an increasingly market-conforming economic structure. Yet, there remains a lingering dichotomy between perception – China as a socialist, communist entity – and the reality of a China defined by deepening marketization and an accelerating embrace of market-conforming business practices. The principal conjecture of this study has been that any analysis of Chinese enterprise internationalization is likely to remain flawed unless this perception-reality gap is bridged and genuine efforts are made to accommodate the manifestations and implications of China’s political economic reality. To that end, a new conceptual frame of reference that reflects the intricate changes in the institutional and interactional patterns of China’s political economy space is not only relevant, but indeed necessary!

6.1.1. Capitalist Communists – In Need of a New Analytical Framework

Why argue for a new conceptual lens? In fact, is there a justifiable need for it? As implied above, there is at the present time a noticeable disconnect between perceptions and realities of contemporary China. That observation begets yet another question – what explains this apparent disconnect? More specifically, can the explanation be found at a superficial level, or could it possibly imply deeper, more calculating motivations, influenced by vested interests and agendas? The “structural space” component of Ekiert & Hanson’s contextual path dependent model – a variable omitted in this study – holds promising elucidating potential if applied to the broader international system context. Whether China will continue its peaceful rise to great power status or will become more aggressive over time, the incontestable fact is that it will inevitably challenge the position and national interests of other powers in the international system.1 In this context, the unfolding and expanding process of enterprise

1. Relevant theoretical strands in international relations literature include “power cycle” and “power transition” and “power shift” theories. Applied to the international political economy context, the globalization of Chinese businesses will then be seen as a significant emerging challenge that may well result in a renewed “trading of places” (Prestowitz, 1988). For a discussion of the economic dimension of power transition, see Antoine van Agtmael, The Emerging Markets Century: How a New Breed of World-Class Companies Is Overtaking the World (New York, NY: Free Press, 2007); Clyde Prestowitz, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East (New York, NY: Basic Books, 2005); and

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internationalization represents a critically important economic and commercial means of projecting power and influence. Broader strategic and political motivations may also, at times and to varying degrees, influence and direct this particular application of power and influence, but it is by no means a foregone conclusion that this constitutes a primary, as opposed to a more subsidiary, basis in most instances. Yet, judging by the consistent invocation of national security concerns and hysterical warnings of a Chinese Communist threat, the belief that enterprise internationalization is somehow motivated by ominous strategic and political goals appears to be rather widespread. This is apparently complemented by a sense of incredulity and unwillingness to countenance that China, which remains a nominally socialist/communist state, could possibly somehow be rejecting command-economy-style planning and organization as well as socialist/communist ideology in favor of more market-conforming mechanisms, entrepreneurial vitality and proto-capitalist goals. Recent trends lend a certain degree of credibility to the suggestion that vested interests within advanced industrial economies unflinchingly frame the emerging Chinese commercial challenge in ideological and national-security terms in the expectation that it can deflect much of this challenge at a time when such economies do not appear ready – whether on emotional or objective grounds – to put stock in the purportedly commercial ambitions of China’s “capitalist communists.”

6.1.2. From Past to Present – A Set of Propositions

This study has also advanced a set of more specific propositions to further reinforce the apparent need for a new conceptual framework by which to assess the outward internationalization drive of Chinese enterprises. In advancing these propositions, I have aimed to highlight the unquestionable importance of incorporating all relevant situational factors and contextual dynamcis rather than basing one’s analysis on a political-economy “China Fantasy.”2 The contextual path dependence model, proposed by Ekiert and Hanson (2003) to study the post-communist transitions in Central and Eastern Europe, is particularly well-suited to the task of contextualizing the process of enterprise internationalization in China. Indeed, applying the concepts of “temporal space,” “institutional space,” and “interactional space” to China’s domestic political economy helps to debunk a set of deep convictions that, though broadly representative of the pre-1978 context but, owing to the transformative effects of economic reform efforts over the last 30 years, do no longer offer an accurate representation of the contemporary political economy space. The propositions discussed over the course of the preceding chapters have been broadly classified into three main categories – issues of state control over, state

Kishore Mahbubani, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East (New York, NY: Public Affairs, 2008). 2. James Mann uses this term in a more specifically political context. In his work, the fantasy centers on the notion that engagement of China was sold to the American public as a way to induce political change as well. See James Mann, The China Fantasy: How Our Leaders Explain Away Chinese Repression (New York, NY: Viking, 2007).

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ownership of, and state involvement in all aspects of economic affairs; enterprise typology and motivations for internationalization; and the changing nature of China’s domestic political economy structure. State Control, Ownership and Involvement: Owing to the institutional legacies of Communist organization, a perception of absolute state control (guoyou juedui konggu) and ownership persists to some extent despite the transformative effect that economic liberalization and restructuring have visited on the institutional and interactional fabrics of Chinese society and economy. The fact that most of the business firms spearheading the first wave of aggressive outward internationalization have been SOEs seems merely to reinforce this perception. This, in turn, has given rise to charges that the real goals and motivations of these companies are rather more worrisome, given that they are “corporate vehicles of a Communist dictatorship.” The notion of absolute state control, ownership and involvement, however, has been gradually superceded by developments since 1979. A comparison with the institutional and interactional features of the Japanese and South Korean developmental states, shows that state control over economic affairs was not as centralized nor as absolute in China and has only been further weakened through sustained resolve and commitment, condoned by the highest levels of government, to grow out of the plan and into the market over the course of the last three decades. Decentralization of economic decision-making, the economic- reform-driven change from auhority relations to exchange relations, and an accelerated privatization drive beginning in the mid-1990s are incontrovertible manifestations of a change from absolute to relative state control, ownership and involvement in China’s domestic political economy space. Related to that is the rising importance of administrative levels below the central government, including provincial, municipal and local levels of political power. These developments have been critical in spawning widespread instances of local state corporatism and administrative monopoly. Enterprise Typology: The second proposition relates to noticeable trends of ownership changes and enterprise restructuring in China’s domestic political economy sphere. In 1998, Zhu Rongji, upon becoming Premier of the PRC, set out to implement an ambitious reform agenda.3 The restructuring and reorganization of the SOE sector, the legitimization and nurturing of the private sector and efforts to clamp down on the PLA’s vast and diversified business activities were critical elements of Zhu’s 1998-2000 reform agenda. Although ensuing costs and unintended consequences prevented full-scale implementation, this “fifth wave,” together with its antecedents, nevertheless was to prove instrumental in reshaping the enterprise landscape in fundamental ways.4 Changes in the organizational and ownership structures, coupled with (partial) privatization of the SOE sector have put the debate over absolute vs. relative state

3. Described as the ‘fifth wave’ of reform (1998-2000), Zhu’s efforts built on previous reform packages pushed through under the aegis of Deng Xiaoping in 1978-79, 1984-85, 1987-88, and 1992-93 (following his famous Southern Tour (nanxun)). 4. See David Zweig, “China’s Stalled “Fifth Wave”: Zhu Rongji’s Reform Package of 1998- 2000,” Asian Survey 41, no. 2 (March-April 2001): 231-247.

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control of enterprises in a new light. At the same time, the non-state enterprise sector has also begun to exert a powerful impact on China’s political economy. Chapter 5 discusses a range of company examples to illustrate how perceptions regarding state control and ownership as well as enterprise type can and do in fact impact overseas investment plans of Chinese enterprises. Changing Political Economy Structure: I have tried to show how China’s post- 1978 economic reform and restructuring period and the gradual shift from inward to outward internationalization, as a result of critical enabling factors and conditions – broad political rationale; economic globalization; business competitiveness dynamics; policy support; and a conducive and facilitating regulatory environment – has led to a visible alteration of the country’s political economy structure, notably with regard to institutional and interactional patterns. Further contributing to the evolutionary dynamic radiating from the Chinese economy are a seemingly infectuous entrepreneurial spirit (xiahai) and willingness to take risks, a nascent venture capital and private equity boom, and the lure of overseas stcok market listings.5 A common denominator shared by all these manifestations is the very distinct possibility of enterprise internationalization resulting in a newfound degree of institutional autonomy rather than having to operate in a hybrid environment of political and market forces (Lin 2001).

Taken together, these various propositions elucidate the changing nature of the institutional and interactional spaces of China’s political economy. China still has a communist/socialist political structure and the political rhetoric retains manifest elements thereof. And yet, the CCP, the party of public property, has recently enshrined the protection of private property in the country’s constitution. The government actively encourages the development of private enterprises alongside national state-owned champions. Private entrepreneurs and business people have even been invited to join the ranks of the CCP through Jiang Zemin’s ‘Three Represents” (san ge dai biao) theory. The image of strong central power has been all but discredited by expanding decentralization, and manifestations of local state corporatism. Similarly, Chinese enteprises are no longer a priori synonymous with state-owned enterprises. The private sector economy has largely eclipsed the state sector. Finally, the SOE label still includes pure SOEs (enterprise structures over which the state retains absolute control), but a majority of SOEs have since been reorganized into shareholding enterprises in which the state retains mainly relative control (even if that means the state might remain the largest shareholder). These are the realities of China’s contemporary political economy structure. Unfortunately, judging by much of the discourse and analysis surrounding recent instances of enterprise internationalization, these are also realities that have yet to be taken into account.

5. According to ChinaVest, a leading merchant bank operating in China since 1981, China is quietly yet decisively building up a domestic private equity industry, with significant implications for the operations of foreign PE and VC firms in China. As of 2007, domestic funds accounted for fewer than 20% of all private equity funds raised in China, compared to virtually none a few years ago.

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Above and beyond stressing the importance of contextual analysis of enterprise internationalization in light of the evolutionary nature of China’s political economy space, a set of valubale learning points can also be deduced from this research:

1. Given China’s deepening re-integration into the world economy, its current WTO member status, and the government’s unwavering commitment to forge ahead with market opening reforms – albeit in incremental and pragmatic fashion rather than through “shock therapy” – Chinese enterprises’ overseas ambitions deserve an objective assessment based on economic and business strategic viability. It might be expedient to discredit their embrace of market-conforming, if not outright capitalist, business practices on the grounds that they simply could not be market transactions “because China is not a market economy.”

2. Second, emotional assessments of Chinese enterprise internationalization, characterized by political grandstanding and hysterical warning about a Chinese Communist threat, are not only likely to mask the opportunities presented by such trends, but may ironically enough lead to the actual realization of “bogus fears.” Rather, it should be recognized that by encouraging and accommodating Chinese overseas ventures in the spirit of free and fair market competition, the outcome is likely to be mutually beneficial. Not only will it strengthen China’s integration into the global economy, it will also give the West subtle, yet important, avenues to prod China into becoming an ever more responsible and active stakeholder in the international system. Indeed, the potential blowback from actively trying to thwart the expansion of Chinese enterprises into the markets of advanced industrial economies could be far more counterproductive in the long-run than would a near-term accommodation of this new trend. Already, China’s extensive charm offensive in developing economies, notably on the African continent, has resulted in the distinct possibility of the “China Model” or “Beijing Consensus” presenting a very credible and potentially more appealing alternative to the “Washington Consensus” among ruling elites in the region.

The Mexican writer and poet, Octavio Paz, noted in The Labyrinth of Solitude (1961), “Americans have not looked for Mexico in Mexico; they have looked for their obsessions, enthusiasms, phobias, hopes, interests…” The reactions to recent overseas activities and investment plans of Chinese enterprises seem to echo much of Paz’s insight. Fears, concerns, and threat perceptions about a rising China abound, yet are devoid of context. On the one hand, some reactions to Chinese companies’ international forays appear to be carefully crafted and pointedly delivered sound bites meant for domestic political consumption.6 Yet, it

6. This is reminiscent of the former U.S. House of Representatives Speaker, Tip O’Neill’s adage, “All politics is local.” See Tip O’Neill and Gary Hymel, All Politics Is Local, And Other Rules of the Game (New York, NY: Times Books, 1994). For a more detailed analysis of this trend, see David R. Mayhew, Congress: the Electoral Connection (New Haven, CT: Yale

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is nonetheless also difficult to dismiss the possibility that (at least in some instances) the political rhetoric is based on broader geopolitical and geo-strategic calculations and a general resistance to the inevitable shift of power and influence to the East (Mahbubani 2008; Prestowitz 2005). Decisions to expand into foreign markets invariably and unalterably have strategic underpinnings. Yet why should the only frame of reference for China be of a geo-strategic and geo-political nature? Why not consider the possibility that many of these investments and activities follow a primarily business rationale and derive from the challenges and opportunities presented by economic globalization and interdependence?

6.2. STUDY LIMITATIONS

In its current breadth, depth and scope, Chinese enterprise internationalization is a relatively new phenomenon. Overseas investments and operations by SOEs still largely overshadow those of non-state-owned enterprises. In short, nascent trends do support the overall propositions presented, but stronger empirical testing – involving leading and supporting cases, rather than headline-grabbing illustrative examples – will become possible only once the internationalization trend transitions from its current infant stage to a pronounced ascendant stage. A second challenge lies in gaining a detailed understanding of a still intricate and at times highly confusing ownership structure. China’s WTO accession has stipulated the implementation of a separation of ownership from regulation and management. While this is happening, the environment is not yet as transparent as could be hoped for. Specifically, I discovered over the course of field research and observations that some enterprises still tend to resist clarifying possible relationships with relevant government levels and/or the possible influence of government actors over the timing, breadth and scope of internationalization goals. Third, it is becoming increasingly difficult to receive informative briefings from Chinese companies. While there still remains a difference in willingness to grant interviews and briefing sessions between different enterprise structures as well as between enterprises in different industrial sectors, the general trend is one of drastically reducing overall access to enterprises. It is, of course, very likely that this policy reflects merely the reality of increasingly competitive market conditions and the correspondingly greater care taken against possibly divulging sensitive business information.7

University Press, 1974) and Richard F. Fenno, Jr., Home Style: House Members in Their Districts (New York, NY: HarperCollins, 1978). An illustrative example of deal politicization aimed at the domestic constituency is the reaction of Rep. Thaddeus McCotter (R-MI) to the proposed sale of 3Com to Bain Capital and China’s Huawei. In a statement circulated among fellow Congressmen, McCotter states, “America does not wish to face the reality that communist China is not a friendly nation to the United States…It’s the immediate rush of what people believe to be prosperity resulting from trade with China. But many of us in the Midwest have fund out this so-called ‘free trade’ with China is nothing more than an attempt by China to destroy our manufacturing base… We must tell the communist Chinese that America’s security is not for sale.” 7. Such concerns are likely to be more pronounced in certain types of state-owned enterprises.

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Fourth, it remains to be seen just how generalizable the claim that Chinese enterprise internationalization is largely perceived through a politicized and ideological lens truly is, given that many of the illustrative examples of enterprise internationalization discussed in the previous chapter pertain to investment and expansion attempts in the United States. In other words, it remains to be seen whether the resistance to Chinese internationalization by vested interests in the United States is similarly replicated in other advanced industrial economies. Owing to logistical difficulties as well as the relatively more widespread headline- grabbing effect of Chinese investments in the United States, this study has focused primarily on the reaction that Chinese enterprise internationalization has generated in the United States.

6.3. AREAS FOR FURTHER RESEARCH

The rather more conceptual focus of this study is intended to lay the foundation not just for theoretical extension of Chinese internationalization but also for a meaningful empirical analysis, as this phenomenon continues to attract increased attention in the international arena. I have identified a number of potential avenues for further expansion of Chinese enterprise internationalization research, some which will extend from the domestic political economy context into the international political economy and international relations spheres. These suggested research extensions also serve to overcome some of the acknowledged limitations of the current study.

1) Location, Location, Location? In the present study, the focus has been on enterprise internationalization’s effects on the institutional and interactional spaces of China’s domestic political economy. From the perspective of structural space (or geographical location) – another pillar of Ekiert and Hanson’s (2003) model – a pertinent inquiry would be to ascertain the locational origin of China’s contemporary internationalizing enterprises. If we assume that the inward stage was a prerequisite for “going out,” logic would suggest that most of the presently globalizing enterprises originate from China’s coastal areas. Or, are there already signs that location on China’s economic map is no longer a powerful determinant of which enterprises internationalize and when?

2) Is U.S. Reaction Unique? It would be an instructive exercise to compare and contrast the framing of Chinese enterprise internationalization in a range of advanced industrial economies. Such an analysis might shed light on whether the politicization in the U.S. case is primarily a reflection of the impending great power rivalry with China or whether it is part of a broader, intuitive reaction on the part of advanced industrial economies in general to the competitive challenges presented by emerging economy multinationals in an era of expanding globalization. Furthermore, (mis)perceptions of Chinese internationalization and disposition for or against it may differ between national, corporate and societal levels of a country. An empirically-driven quantitative study,

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based on opinion surveys, and structured interviews, could elucidate whether any given (mis)perceptions are shared by the government, business leaders and organizations and individual citizens or whether they are peculiar views of particular societal, economic and political segments. In addition to highlighting the reasons for these perceptions, such an analysis could also help to identify possible ways of addressing, and if necessary, changing them.

3) Developed vs. Developing Economies? Of the few contemporary publications on Chinese internationalization, none offers a comparison between Chinese investments in developed and developing economies. This is surprising, considering the vast opportunities for comparative assessments of differences with regard to strategic, business, and political motivations as well as to reactions to China’s business offensive.

4) 1980s Japan, Inc. vs. 21st Century China, Inc.: Given the political rhetoric and hysterical concerns that have surrounded Japan, Inc. in the 1980s and are currently re-emerging with the onset of the Chinese wave of internationalization, a comparison of the nature, scope, and motivation of the Japanese and Chinese business challenge would make for an insightful study. In other words, what are the main similarities and critical differences between these two waves of Asian enterprise internationalization?

6.4. CONCLUSION – No context, no right to assess

There is an unambiguous need for context to be brought back into the analysis of Chinese enterprise internationalization. At the same time, however, it may still be advisable to evaluate instances of enterprise internationalization on a contextual case-by-case basis, given the differences in constraints, conditions, and motivations for various industrial sectors and enterprise structures. Emotionally- and ideologically-driven interpretation and/or inaccurate appreciation of an increasingly complex Chinese political economy structure may well be counter-productive in the medium- to long-run. It may at best detract from valuable opportunities to deepen engagement with China on a global economic level and at worst undermine China’s commitment to a “peaceful rise” in the 21st century. Mao Zedong once said, “No investigation, no right to speak.” In a similar vein, in order to guard against such unintended consequences, contextualization is not merely a relevant but in fact a necessary analytical and conceptual prerequisite.

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