<p>INB 315 Chinese Business and Management Lieberthal, Managing the China Challenge</p><p>How do we understand how the Chinese system works?</p><p>Using western or American assumptions about politics and economics won’t work</p><p>All people want to be free and eliminate government restraints</p><p>All people hate the government and want it to go away</p><p>Government leaders only want to make more money for themselves</p><p>What kinds of ideas have Chinese developed to direct their efforts to respond to the West after the 1840s?</p><p>Develop uniquely Chinese ideas and reject the West</p><p>Adopt western technology but reject western ideas</p><p>Adopt western ideas and technology completely – nothing Chinese is sacred</p><p>What are Chinese attitudes toward the West today?</p><p>Page 6</p><p>What are the major themes and directions of Chinese policy today?</p><p>Achieve wealth and power, security and prominence for the nation</p><p>Pragmatism, trial and error, experimentation</p><p>1) Preservation of Communist Party rule at all costs 2) Expand and deepen the social safety net 3) Existing economic strategy – labor intensive, light manufacturing based on FDI – must be changed to continue Chinese growth 4) Develop global technological leadership in through indigenous innovation such as green technologies 5) Expand modern urban areas inward </p><p>What are the specific actions China is taking?</p><p>Technology fast follower as path to indigenous development Encourage and support urbanization inland</p><p>Size of rural population is unchanged</p><p>Reduce and eliminate the hukou system</p><p>Expand middle class</p><p>Expand consumer system</p><p>Layers of the Chinese state</p><p>Center Province Municipality County Township</p><p>Party and Government at all levels – the party-state</p><p>CCP</p><p>75 million</p><p>Leninist in origin and operation</p><p>Nomenklatura system – appointment of top leaders at next lower level</p><p>Important national policies</p><p>Policy and implementation</p><p>Centralized? Flexible? Totalitarian? Authoritarian?</p><p>The “DEAL” that defines the relationships of the levels of the party-state</p><p>Fundamentally hierarchical – above directs below but allows considerable latitude to interpret specifics</p><p>Support initiative and even entrepreneurialism to achieve broad policy goals Leaders of the party-state at all levels have a direct stake in the success of policy and economy</p><p>Advancement increases the benefits of the system to leaders</p><p>Local leaders make most appointments at their level</p><p>Local leaders control local banks, courts and administrative agencies</p><p>Wide latitude to act entrepreneurially to achieve economic growth </p><p>Large role for market forces that provide incentives, information and constraints to entrepreneurs</p><p>Deep and complex party-state relations to firms at a micro and local level: land, licenses, capital, regulations, purchasing decisions, ownership</p><p>All business in China – foreign and domestic - is deeply connected to the party-state</p><p>Success within the party-state is a result of developing leaders who can creatively and effectively promote economic growth at a micro- level</p><p>Demonstrated entrepreneurial talent is the criteria for achievement and advancement in the party-state</p><p>Local official are deeply connected to the business enterprises in their area, high significant autonomy and operate as active and important partners in promoting business success</p><p>The CCP and the party-state is a dynamic, flexible, decentralized and internally competitive organization</p><p>The party-state is organized to promote economic growth</p><p>Problems with the party-state system</p><p>Local protectionism Fragments markets Undermines achievement of economies of scale</p><p>Poor intellectual property protectionism Long tradition of copying the best model Knockoffs Owners of best model want protection and profits Dangers from fake drugs, milk</p><p>Corruption Can corruption support economic growth?</p><p>Investment and infrastructure bias – local officials love new roads, buildings, fancy bridges</p><p>Misallocates investment</p><p>Lack of central government control</p><p>Environmental protection</p><p>Lack of an effective social safety net Retirement Health care</p><p>Major challenges to the Chinese system</p><p>Political coherence – Bo Xilai</p><p>Managing the effects of rapid change</p><p>Resource shortages and environmental destruction Water – 38, 40</p><p>The United States as supporter of or opponent of China’s growth?</p><p>China must manage its relationship to the US and Europe to preserve a favorable international environment.</p><p> is a wild card in this process – prone to reckless and counterproductive actions.</p><p>Economic outcomes in China are a result of a relationship among the party state, state and private (domestic and foreign) firms and domestic and global market forces.</p><p>Structure and Operation of the Party-State System</p><p>The basic arrangement of General Secretary as most powerful actor combined with a top governmental official as chief executive (premier, governor, mayor, county head) operates throughout the nation at all levels. A system of ranks defines the power relationships among the various units of the party-state – including party, government, SOE, media organization, publishing company, school, research institute, hospital, museum. These ranks are not published but are not secret.</p><p>Units cannot issue orders to another unit at the same or higher rank.</p><p>There are unusual ranks that affect power relationships:  Provinces have the same rank as ministries in Beijing, which means ministers cannot issue order to provinces.</p><p> Only the Communist Party – which stands above the highest governmental body, the State Council - can command the military. The Minister of Defense does not command the military.</p><p> Many large SOEs have the same rank as ministries and many others have a higher rank than the government of their city</p><p> In addition to the system of ranks, the effect of reforms has been to empower territorial governments to control their own specialized agencies. Occasionally, the central government has altered this relationship when excessive localism has developed.</p><p> It is very important to ascertain the nature of the power relationship: leadership relationship (lingdao quanxi) versus professional relationship (yewu guanxi).</p><p> The outcomes of the system are a product of the relationships among the division of labor system, the ranking system and the leadership/professional system.</p><p> Not all decision at the national level have the same operational implications: </p><p> o Orders – must be implemented precisely o Instructions – develop a plan that considers local considerations o Circulars – the issue is of concern but do not require operational decisions o Opinions – suggest thinking at the top but without decision</p><p>The consequence of the system of ranks, in combination with the various layers of government and party, results in a substantial distribution and even fragmentation of power in China. The system of power in China is far less centralized than most westerners realize. Local officials have considerable leeway an many issues of national policy as along as they do not directly contradict this policy. Policy is stated and defined in general terms and can be implemented based on local conditions.</p><p>This means decisions on substantial business operations require a consensus across different jurisdictions and no one person can command such a consensus. Higher- level official typically expect lower levels to work out a decision. This can frequently mean a determined opponent can veto a decision.</p><p>Laws and regulations can vary considerably across different jurisdictions. Decision latitude for one level is a negotiated arrangement with the next highest level. There is a lot of play in the system.</p><p>Lieberthal provides advice to TNCs operating in China.</p><p>Government relations are a strategic issue in China.</p><p>Governments at all levels must be seen as differentiated and complex</p><p>Understand the complex network of government-business relations - 107</p><p>Products that qualify for indigenous innovation: mean and effect of the catalogue</p><p>How Chinese reach conclusions about dealings with foreigners – 64</p><p>Understand the policy directions of the nation and make proposals that conform to these directions</p><p>Develop plans to take advantage of the urbanization of 2nd and 3rd tier cities</p><p>Local market research Chinese market is highly segmented Expect much lower price points for products Good enough products Decentralize product development to local units</p><p>What are the political risks associated with China?</p><p>Will the CCP be overthrown?</p><p>What is the nature of political unrest in China?</p><p>How does the Chinese government affect the choices on FDI? Can foreign firms participate in the creation of regulations that affect their operations?</p><p>Disputes in China are negotiated and are not settled in a rules-based or laws-based setting. 85-86 Resolve versus win Costs of going to court to enforce contracts against firms with important political supporters</p><p>What are the political risks associated with making corrupt payments?</p><p>Milkmaids</p><p>Foreign corrupts practices</p><p>Reputation for operating without corruption</p><p>Effects of US-China relations</p><p>Tiananmen Square consequences</p><p>Trade conflict on solar power panels</p><p>Managing issues of product safety and quality across supply chains</p><p>Ethical choices – 93-95</p><p>Cyber risks</p><p>Taxis in Shanghai – microphones</p><p>Large and sophisticated systems of penetrating corporate information systems</p>