bs_bs_banner Strategic Entrepreneurship Journal Strat. Entrepreneurship J., 8: 16–36 (2014) Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1174 INSTITUTIONAL ENTREPRENEURSHIP IN THE INFORMAL ECONOMY: CHINA’S SHAN-ZHAI MOBILE PHONES CHUAN-KAI LEE* and SHIH-CHANG HUNG Institute of Technology Management, National Tsing Hua University, Taiwan During the last decade, Chinese shan-zhai mobile phones have steadily and deliberately evolved from an informal economy to a formal one. We draw on institutional entrepreneurship to study this evolution, focusing in particular on how informal Chinese entrepreneurs pursued change and the transition to a formal economy. We emphasize three strategies—framing, aggregating, and bridging—Chinese entrepreneurs employed to mobilize support, garner resources, and increase their amount and level of legitimacy. We also discuss implications for research on informal economies and institutional entrepreneurship. Copyright © 2014 Strategic Management Society. INTRODUCTION that gap in the literature, this study explores how China’s shan-zhai1 mobile phone sector developed Informal economies are pervasive, creative, and sig- during the period 1998 to 2008. Success among nificant to national development and entrepreneur- shan-zhai phones ultimately popularized ‘shan-zhai’ ship. According to Godfrey (2011) and Webb et al. methods of production for counterfeit, imitated, low- (2013, among others, informal economic activity cost, and do-it-yourself products in China and to ‘the accounts for as much as 10 to 20 percent of annual shan-zhai phenomena’ in general (Barboza, 2009; gross domestic product in developed countries and Epstein, 2009). as much as 50 to 60 percent in developing countries. Originally distributed within the stolen goods and Informal economies are often integrally bound up parallel imports markets, the shan-zhai mobile with, and complementary to, the formal economy, phone sector began as a typical informal economy: and they provide rich entrepreneurial opportunities illegal and yet accepted by certain social groups to new ventures. Despite a growing body of empiri- (Webb et al., 2009), especially those operating at the cal studies and cases about informal economies bottom (or base) of the economic pyramid (BoP) globally, little research exists on the informal (London and Hart, 2011; Prahalad, 2005). Over the economy in China, a nation where a strong and last decade, this sector has evolved from being bureaucratized state, coupled with a large and scorned for its opportunism and inferiority to being rapidly growing formal economy, has encouraged lauded as examples of entrepreneurship and innova- legions of informal entrepreneurs to seek opportuni- tion. This happened in large part because shan-zhai ties outside of state-sanctioned markets. To address entrepreneurs actively contested the state’s ‘national Keywords: informal economy; institutional entrepreneurship; 1 Shan-zhai—literally mountain (shan) fortress (zhai)—refers legitimacy-building strategies; Chinese mobile phones; case to the gathering of grassroots antigovernment rebels into for- study tresses located in remote, mountainous areas. The name shan- *Correspondence to: Chuan-Kai Lee, Institute of Technology zhai in Chinese mobile phones has a double meaning: the first Management, National Tsing Hua University, 101, Section 2, denotes that illegal phones originated from rebel strongholds, Kuang-Fu Road, Hsinchu 30013, Taiwan. E-mail: cklee@ namely the informal economy; the second implies that rebels mx.nthu.edu.tw gathered in numbers large enough to challenge the status quo. Copyright © 2014 Strategic Management Society China’s Shan-Zhai Mobile Phones 17 champion’ policy that restricted competition in the Our analysis of the Chinese shan-zhai sector mobile phone sector.2 In October 2007, after years uses qualitative procedures and emphasizes the of suppression, negotiation, and bargaining, the strategizing activities of institutional entrepreneur- Chinese state finally reached a compromise by aban- ship (Lawrence and Suddaby, 2006; Vaara and doning its license control over mobile phones. This Whittington, 2012). We examine in detail what regulatory change enhanced not only the legitimacy nascent Chinese entrepreneurs, manufacturers, and of shan-zhai economic activities, but also their legal vendors actually said and did during their interac- standing. The phenomenon is striking. The Wall tions with government policy, their mobilization of Street Journal heralded shan-zhai as ‘the sincerest collective actions, and their exploitation of outside form of rebellion in China’ (Canaves and Ye, 2009), resources and technologies. Our examination em- one that has spread with such vigor that, in the words phasizes three kinds of strategic action—framing, of a New Yorker columnist, ‘all of China is a knock- aggregating, and bridging—and discusses how off’ (Osnos, 2009). This remarkable evolution Chinese vendors used these strategies to bring about prompted us to consider as our primary research innovation and institutional change. Each of the question how China’s shan-zhai mobile phone sector strategies operates on a different logic, yet each developed, grew, and interacted with the state. allows institutional entrepreneurs to pursue change To address this question, we draw on the concept and innovation effectively. Framing offers explana- of institutional entrepreneurship (Battilana, Leca, tions and justifications that appeal to the public; and Boxenbaum, 2009; Hardy and Maguire, 2008), aggregating offers collective actions to draw which emphasizes the importance of skillful and support; and bridging offers alternative rules and effortful agency by institutional entrepreneurs who practices with potentially novel applications. leverage resources for achieving institutional change The article proceeds as follows: first, we discuss and innovation. Institutional entrepreneurship’s the nature of informal economies and briefly review account of embedded agency and change process the literature on institutional entrepreneurship, resonates with the challenges faced by informal focusing in particular on the range of strategies avail- entrepreneurs aspiring to reach beyond their institu- able to informal entrepreneurs intent on decriminal- tional boundaries and act in concert with the formal izing or legalizing their activities. Second, we institutions of the state. We consider Chinese shan- explain our methodology and introduce our case. zhai entrepreneurs to be institutional entrepreneurs Third, we outline the strategies of framing, aggregat- who proactively sought to enhance their legitimacy ing, and bridging by which Chinese shan-zhai to generate momentum for regulatory change. As mobile phone entrepreneurs managed their transition argued by Deephouse and Suchman (2008: 62), to the formal economy. We conclude by discussing ‘legitimacy can appear continuous . (and) vary in the implications of our study for research on infor- its certainty and security’ (emphasis in original). As mal economies and institutional entrepreneurship. informal entrepreneurs become more firmly legiti- mate and become legitimate to more audiences, a state can eventually agree to confer legality or ‘regu- latory legitimacy’ (Deephouse and Suchman, 2008; THEORETICAL ORIENTATION Scott, 2001). From this point, the transition from Informal economy informal economy to formal economy, although not yet complete, progresses rapidly enough so as to The informal economy refers to ‘the set of illegal yet seem inevitable. legitimate (to some large groups) activities through which actors recognize and exploit opportunities’ (Webb et al., 2009: 492). Activities are considered 2 The most important state regulation was the ordinance legal if they are defined and governed by formal ‘Certain Opinions Concerning Accelerating the Development institutions, including laws and regulations. Informal of the Mobile Telecommunication Industry’ (also called Docu- economy activities are illegal because they take ment No. 5), released by the State Council on January 1, 1999. This ordinance aimed to ‘put mobile phone production in the place outside of formal institutions, but they can state-guided plan’by controlling the licenses for production, the be legitimate to the extent that their products, import of equipment, components, and parts, and the export of methods, and practices are accepted by certain social final products. The key to shan-zhai’s contestation was to remove this regulation (and its associated policies) and thereby groups, including, for example, immigrants, low- create a level playing field in the mobile phone sector. income people, ethnic neighborhoods, and religious Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J., 8: 16–36 (2014) DOI: 10.1002/sej 18 C.-K. Lee and S.-C. Hung minorities. Thus, at its inception, the Chinese shan- are characterized by ambiguous jurisdiction and con- zhai mobile phone sector was a typical informal eco- flicting interests among different levels of govern- nomy: it was not supported by established state ment, as well as by weak ownership protection, poor power but, instead, grew steadily through the black enforcement, and arbitrary corruption (Estrin and market for counterfeits, clones, and smuggled or Prevezer, 2011; Tsai, 2006). stolen goods. Groups that supported this economy It is worth noting that regulators could move to included (but were not limited to) poor workers, shut down informal entrepreneurs