Management and Organizations in the Chinese Context

Management and Organizations in the Chinese Context Edited by J.T. Li, Anne S. Tsui and Elizabeth Weldon MANAGEMENT A...

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Management and Organizations in the Chinese Context Edited by

J.T. Li, Anne S. Tsui and Elizabeth Weldon

MANAGEMENT AND ORGANIZATIONS IN THE CHINESE CONTEXT

Related title THE CHINESE ROAD TO HIGH TECHNOLOGY Xiaobai Shen

Management and Organizations in the Chinese Context Edited by

J. T. Li Associate Professor Hong Kong University of Science and Technology

Anne S. Tsui Professor Hong Kong University of Science and Technology

and

Elizabeth Weldon Associate Professor Hong Kong University of Science and Technology

First published in Great Britain 2000 by

MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 0–333–74411–X First published in the United States of America 2000 by ST. MARTIN’S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 ISBN 0–312–22841–4 Library of Congress Cataloging-in-Publication Data Management and organizations in the Chinese context / edited by J.T. Li, Anne S. Tsui and Elizabeth Weldon. p. cm. Includes bibliographical references and index. ISBN 0–312–22841–4 (cloth) 1. Management—China. 2. Organization—China. I. Li, J. T. II. Tsui, Anne S. III. Weldon, Elizabeth. HD70.C5M334 1999 658'.00951—dc21 99–41116 CIP Selection and editorial matter © J. T. Li, Anne S. Tsui and Elizabeth Weldon 2000 Individual chapters (in order) © J. T. Li and Anne S. Tsui; John Child; Andrew G. Walder; Jiing-Lih Farh and Bor-Shiuan Cheng; Pien Wang, Yunye Zhi and Kong Yam Tan; Mark Cannice and John D. Daniels; Xinping Shi and Robert I. Westwood; Anne S. Tsui, JiingLih Farh and Katherine R. Xin; John E. Butler, Brad Brown and Wai Chamornmarn; Xiangming Chen, James W. Bishop and K. Dow Scott; Haifa Sun and Michael H. Bond; Marshall W. Meyer; Ronnie Chan; Lily Chiang; William Overholt 2000 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 09

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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Contents List of Tables

vii

List of Figures

ix

Notes on the Contributors

x

List of Abbreviations

xv

Introduction

1

PART I MANAGEMENT IN THE CHINESE CONTEXT 1

2

3 4

Management and Organizations in the Chinese Context: An Overview J.T. Li and Anne S. Tsui

9

Management and Organizations in China: Key Trends and Issues John Child

33

China’s Transitional Economy Andrew G. Walder

63

A Cultural Analysis of Paternalistic Leadership in Chinese Organizations Jiing-Lih Farh and Bor-Shiuan Cheng

84

PART II JOINT VEvvNTURE MANAGEMENT AND NEGOTIATION IN CHINA 5

6

Control and Performance in Sino–Foreign Equity Joint Ventures Pien Wang, Yunye Zhi and Kong Yam Tan

131

Operating Modes and Performance: US High-Technology Ventures in China Mark Cannice and John D. Daniels

157

v

vi 7

Contents International Business Negotiation in the Chinese Context Xinping Shi and Robert I. Westwood

185

PART III CHINESE ORGANIZATIONAL BEHAVIOUR 8

9

10

11

12

Guanxi in the Chinese Context Anne S. Tsui, Jiing-Lih Farh and Katherine R. Xin

225

Guanxi and the Dynamics of Overseas Chinese Entrepreneurial Behaviour in Southeast Asia John E. Butler, Brad Brown and Wai Chamornmarn

245

Teamwork in China: Where Reality Challenges Theory and Practice Xiangming Chen, James W. Bishop and K. Dow Scott

269

Choice of Influence Tactics: Effects of the Target Person’s Behavioural Patterns, Status and the Personality of the Influencer Haifa Sun and Michael H. Bond

283

Productivity Cultures and Competition in the Global Marketplace: Cases from Hong Kong Marshall W. Meyer

303

PART IV MANAGERIAL PERSPECTIVES 13

14

15

Overseas Chinese Management Style: Some Reflections Ronnie Chan

325

Doing Business in China: Staying Ahead of Your Competitors Lily Chiang

337

Strategic Management: Critical Issues in the Hong Kong Business Environment William Overholt

344

Index

351

List of Tables 1.1 1.2 1.3 4.1 5.1 5.2 5.3 5.4 6.1 6.2 6.3 6.4 7.1 7.2 7.3

8.1 8.2 11.1 11.2 11.3

Number of China-related management and organization articles published by 17 leading journals, 1984–98 China-related management and organization research by topic: survey of 17 leading journals, 1984–98 China-related management and organization research by method: survey of 17 leading journals, 1984–98 Respect for authority and expectation of leader’s benevolence in the PRC, Taiwan and Hong Kong Current foreign equity status of Sino–Western, Sino–Japanese and Sino–overseas Chinese EJVs Satisfaction with performance of Chinese and foreign parents Rankings of control mechanisms’ importance by foreign equity status Percentage of foreign parents (with the largest ownership) with the right to appoint positions in EJVs Market valuation through options analysis Optimizing profiles Technology transfer strategies Adapted foreign-operating-mode contingency profile Chinese cultural traits and propositions on business negotiations Chinese macroenvironmental factors and propositions on business negotiations Chinese organizational/institutional framework and managerial roles, and propositions on business negotiations Guanxi bases and interpersonal relationships in the Chinese context Guanxi, demographic similarities and work outcomes in China Factor loadings of manipulation check items on feeling and task-oriented factors Factor loadings of tactics items on CC and GP in the whole sample The impact of status on CC and GP: univariate tests vii

11 12 14 110 144 145 145 146 163 164 168 172 192 201

206 231 237 289 291 293

viii 11.4 11.5 11.6 12.1

List of Tables Impact of the target’s behaviour on CC and GP: univariate effects Correlations among FFI and CPAI variables and with CC and GP Results of hierarchical regression of influence tactics on FFI and CPAI variables Comparison of GHB and GFS

294 295 296 320

List of Figures 1.1 1.2 1.3 1.4 2.1 4.1 4.2 4.3 4.4 6.1 6.2 7.1 8.1 9.1 10.1

13.1 13.2 13.3

China-related management and organization research; survey of contributions in 17 leading journals, 1984–98 Contributions of chapters in the book by topic Contributions of chapters in the book by research methods Possible research issues Four possible outcomes in the management of cultural diversity English translation of items that measure leader’s moral character Paternalistic leader behaviour and subordinate response Cultural roots of paternalistic leadership A preliminary model of paternalistic leadership Template of foreign-operating-mode decision model Adapted foreign-operating-mode decision model A framework for international business negotiations in the Chinese context A conceptual framework of guanxi and work outcomes in Chinese organizations Model of guanxi as a factor in entrepreneurial success Linkages among employee attitudes, teamwork orientation, organizational commitment and performance, as moderated by the Chinese culture and context Past success of overseas Chinese businesses: circumstances make heroes Established business formulas are no longer adequate to sustain success: reasons for pessimism In search of a Chinese management style: real heroes can stand the test of time

ix

13 15 16 18 55 96 98 108 120 159 171 189 227 256

275 327 330 335

Notes on the Contributors James W. Bishop, PhD, Associate Professor of Management at the University of Tampa, had 20 years in industry prior to receiving his doctorate. He has worked for a number of organizations, including Prudential and IBM. His research interests include commitment in the workplace, work teams and international human resource management. Michael H. Bond is a Canadian by birth and English Torontonian by formative socialization. Intellectually restless by nature, he completed his PhD at Stanford University in 1970 and subsequently lived in Japan where he studied Japanese non-verbal behaviour, and in Hong Kong where he has taught and researched Chinese social behaviour for the last 25 years at the Chinese University. Brad Brown (PhD, University of Washington) is an Associate Professor of Commerce at the University of Virginia. He has taught management courses in various degree programmes and for executive education around the world. His research interests are in corporate social performance and entrepreneurial networks. John E. Butler (PhD, New York University) is an Associate Professor of Management and Organization and Director of the Southeast Asia Center at the University of Washington. He has taught at universities in Hong Kong, Thailand, Vietnam and Laos. His research interests include business in Southeast Asia, entrepreneurship and environmental issues related to management. Mark Cannice is an Assistant Professor of Finance and International Business at the University of San Francisco McLaren School of Business. His research focuses on foreign investment strategies taken by Silicon Valley firms into China and the Asia Pacific. He holds a PhD from the Indiana University School of Business. Wai Chamornmarn (PhD candidate, Kyoto University) is an Associate Professor in the Department of Human Resources and Organization Management at Thammasat University in Bangkok, Thailand. He x


xi

has also taught in Japan and Laos, and has been involved in consulting projects with the Thai Ministry of Commerce. His research interests include entrepreneurship, Japanese management techniques and strategy. Ronnie Chan is Chairman of the Hang Lung Development Group of Hong Kong. The Group comprises three publicly traded companies with a total market capitalization of about US$6 billion. Mr Chan is a frequent speaker at international conferences and has been featured in many publications such as Newsweek, Business Week, The Wall Street Journal, Fortune, Institutional Investors and Forbes. Xiangming Chen is Associate Professor of Sociology and Research Fellow with the Innovation, Creativity, and Capital (IC2) Institute at the University of Texas at Austin. His research interests include urban and regional development and cross-cultural management issues in China and East Asia. He has published widely on these topics in social science journals and edited books including The China Business Review. Bor-Shiuan Cheng is Professor of Industrial/Organizational Psychology in the Department of Psychology, National Taiwan University. He received his PhD in psychology from National Taiwan University. His primary research interests include leadership, interorganizational networks and organizational culture in Chinese organizations. Lily Chiang is the Executive Director of Chen Hsong Holdings Ltd. She is the only female Chartered Mechanical Engineer in Hong Kong with a BSc in mechanical engineering from the University of Southern California, an MBA from the Chinese University of Hong Kong, and a PhD in manufacturing engineering from the Hong Kong Polytechnic University. John Child is the Guinness Professor of Management Studies at the University of Cambridge where he is also a Fellow of St John’s College. He is Distinguished Visiting Professor at the School of Business, University of Hong Kong, during 1998–2000. His recent books include Management in China during the Age of Reform (Cambridge University Press, 1994) and he is a regular writer on China and the operation of foreign companies there.

xii


John D. Daniels holds a PhD from the University of Michigan and is the E. Claiborne Robins Distinguished Chair at the University of Richmond. His speciality is international business strategy. He is a former President of the Academy of International Business and currently Dean of its Fellows. Jiing-Lih (Larry) Farh is Professor and Deputy Head of the Department of Management and Organizations, Hong Kong University of Science and Technology (HKUST). He received his PhD in organizational behaviour from Indiana University, Bloomington, in 1983. His current research interests focus on cultural analyses of work behaviours in Chinese societies. The specific behaviours he has studied include managerial networking, leadership, organizational justice, organizational citizenship behaviour and business ethics. J.T. Li is Associate Professor and Wei-Lun Fellow in Strategic Management at the Department of Management of Organizations, HKUST. He has published widely in leading management journals on issues related to international business strategy, corporate governance and joint venture success in China. Prior to HKUST, Dr Li was a management consultant with McKinsey & Company in Hong Kong, where he advised leading multinational and Asian companies on strategy, alliance and organizational issues for Greater China. Marshall W. Meyer is Professor of Management and Sociology at the Wharton Graduate School of Management, University of Pennsylvania. His research focuses on organizational design, organizational change and organizational performance, particularly in not-for-profit organizations. He has served as Associate Editor of Administrative Science Quarterly and on the editorial board of other journals. He earned his PhD from the University of Chicago. William Overholt has recently become an Executive Director of Nomura Bank in Hong Kong. He has been the Managing Director in Bankers Trust’s regional headquarters in Hong Kong, and the Director of Hudson Research Services. Dr Overholt received his BA (magna, 1968) from Harvard and his Master of Philosophy (1970), and PhD (1972) from Yale.


xiii

K. Dow Scott is a Professor of Human Resources and Industrial Relations at Loyola University Chicago. Dr Scott has taught classes in human resource management, pay and incentive systems, and employment planning and human resource development. He has over 70 publications in books, journals and conference proceedings to his credit. Professor Scott earned a Masters and PhD in Human Resources and Labor Relations from the School of Labor and Industrial Relations at Michigan State University. Xinping Shi is Assistant Professor of Decision Sciences and International Business Studies at Hong Kong Baptist University. He received a PhD in management studies at Middlesex University. He is a member of the Editorial Board of Journal of Management Systems. His major research interests include multiobjective decision making, international business negotiations, conflict management and international technology transfer. He has published articles in such journals as International Journal of Technology Management, Journal of General Management, Journal of Management Systems and Journal of Operational Research Society. Haifa Sun obtained his PhD from the Chinese University of Hong Kong. He studies conflict management, leadership, competition, power and influence, and other issues relevant to the building of cooperative teams in Chinese organizations. Kong Yam Tan is the Head of the Department of Business Policy at the Faculty of Business Administration, the National University of Singapore. Anne S. Tsui is Professor and Head of the Department of Management of Organizations at HKUST. She is the current editor of the Academy of Management Journal, a Fellow of the Academy of Management, and Founding Director of the Hang Lung Center for Organizational Research. Prior to HKUST, she has taught at the University of California, Irvine, and Duke University. Her PhD is from the University of California, Los Angeles, in 1981. Katherine R. Xin is an Assistant Professor of the Department of Management of Organizations at HKUST. Katherine received her PhD from the University of California, Irvine. She also holds an MA in

xiv


applied linguistics and an MBA. She was previously on the faculty of the University of Southern California, the Graduate School of the Chinese Academy of Sciences, Beijing, China, and has served as visiting scholar at the Chinese University of Hong Kong, and University College Dublin, Ireland. Andrew G. Walder is Professor of Sociology and Senior Fellow, Institute of International Studies, Stanford University. He has previously held faculty positions at Columbia, Harvard, and HKUST, where he was recently the Head of the Division of Social Science, and currently holds the title of Adjunct Professor. Pien Wang is an Assistant Professor at the Faculty of Business Administration, the National University of Singapore. Her research focuses on the areas of foreign direct investment in China, Sino–foreign joint ventures, human resource management of foreign-funded enterprises in China, and transfer of management and technological know-how from foreign parents to Chinese subsidiaries. Elizabeth Weldon is Associate Professor of Management at HKUST. She has taught Human Resource Management at Dalian University of Technology in the People’s Republic of China and served as a visiting scholar at Nankai University in Tianjin, PRC. Her research focuses on cultural differences in conflict management behaviour. Robert I. Westwood is a Faculty member and Director of PhD Programmes (Newtown Campus) at the Australian Graduate School of Management. Bob has published over 50 articles and book chapters on the Asia Pacific region and is the editor and chief contributor to Organizational Behaviour: Southeast Asian Perspectives. He is currently co-editing a book on language and organization to be published by Sage in 1999. Yunye Zhi is the Chief Financial Officer of IPACS Computer Services Shanghai Ltd.

List of Abbreviations CC CFB CPAI CPM FDI FFI GDP GFS GHB GP HRM ITP JVs LBDQ MNC MNM PL PLIS POIS SOE USIE WOFE WOS

Contingent Control Chinese Family Business Chinese Personality Assessment Inventory Character, Performance, Maintenance Foreign Direct Investment Five Factor Inventory Gross Domestic Product Global Financial Services Gung Ho Bank Gentle Persuasion Human Resource Management Influence Tactics Profile Joint Ventures Leader Behaviour Description Questionnaire Multinational Corporation Multinational Management Paternalism Perceived Leader Integrity Scale Profile of Organizational Influence Strategies State-Owned Enterprise United States Invested Enterprise Wholly-Owned Foreign Enterprise Wholly-Owned Subsidiary

xv

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Introduction

We have a simple reason for editing this book. We would like to see and stimulate more research on organizational and management issues in a context that has the potential of becoming the new millennium’s world economic power. In fact, all the economic indicators suggest that China is well positioned to become a major competitive force in the twenty-first century. China’s economic reform has reached a critical juncture. Some say there is no turning back now. China is moving full steam towards a market economy and its privately owned enterprises, which were unheard of less than 20 years ago, are now producing more than 30 per cent of the country’s economic outputs. The urgency is fuelled by China’s aspiration to be fully integrated into the world economy by joining the World Trade Organization. All these developments are creating great demand for knowledge on managing enterprises of all types, state-owned, private, collective and foreign-owned alike. Thus there is some urgency behind the drive to discover systematic knowledge of effective management and business practices in China. We as management researchers have an opportunity to play a meaningful role in the successful reform and restructuring of Chinese enterprises through producing relevant and timely knowledge. Our normal course of activities will not be sufficient to meet the needs of managers and executives who are leading the changes in Chinese enterprises of all types. We must do more and move more quickly. Seeing this development and realizing this as an opportunity to make a difference, we at the Hong Kong University of Science and Technology (HKUST) are committed to facilitating such research efforts. We began by developing a research centre dedicated to studying management and organizations in the Chinese context. The Hang Lung Center for Organizational Research was inaugurated on 15 January 1998, with a mission to promote, coordinate and stimulate research on China-related management and organization issues. A research conference was held as part of the inauguration of the Center on 15–17 January 1998. Over 40 scholars from around the 1

2

Introduction

world participated in the conference, along with over 20 presentations. We selected a subset of the papers presented and we invited several China experts to contribute additional papers to be part of this edited volume. We hope this volume will be the first of many. We believe China provides a rich context for studies of all types of challenges and issues in and about organizations. It is a country of experiments, and provides a valuable opportunity for management scholars to capture the learning as it unfolds. We hope this book provides some insight for researchers, scholars and students interested in China and in organizations operating in the Chinese context.

OVERVIEW OF THE VOLUME The next 15 chapters in this book address many of the critical management and organizational issues in China. The volume is organized into four parts. Part I includes four chapters, which together provide an overview of key management, organization and leadership issues in China’s transitional economy. In Chapter 1, J.T. Li and Anne S. Tsui provide an overview of management and organization research on China. In Chapter 2, John Child examines China’s approach to state enterprise reform, and describes the management and organization challenges now being faced. He believes that enterprise reform should focus on the strategic and operational needs of enterprises, rather than the leadership’s desire to retain political control and placements. He also examines key issues facing foreign firms operating in China, as they re-examine their strategies there. In Chapter 3, Andrew G. Walder considers the role of the government in reforming China’s transitional economy. He argues that government officials are economic actors and their behaviour can be understood if the incentives for their actions are considered. He calls upon management researchers to analyse the incentive structures that drive the behaviour of both government officials and enterprise managers and the way they work together. Chapter 4 focuses on paternalistic leadership in Chinese societies. In this chapter, Jiing-Lih Farh and Bor-Shiuan Cheng examine a leadership style that appears indigenous to the Chinese context, which they refer to as ‘paternalistic leadership’. They trace the cultural roots of this leadership style and discuss its relevance in contemporary China where many traditional cultural values are being replaced with modern ideas.

Introduction

3

Part II comprises three chapters exploring joint venture management and negotiation in China. In Chapter 5, Pien Wang, Yunye Zhi and Kong Yam Tan examine the relationship between the control mechanisms used in foreign joint ventures and joint venture performance. Their study of 174 Sino–foreign equity joint ventures suggests a positive relationship between a foreign parent’s control over the joint venture and its satisfaction with the venture’s performance. In Chapter 6, Mark Cannice and John D. Daniels examine the entry strategies of 15 US high-technology firms into China, and propose a conceptual model linking entry mode to venture performance. They suggest that matching entry strategy to critical resource concerns will improve joint venture performance in China. Chapter 7 presents a model of business negotiation in the Chinese context. In this chapter, Xinping Shi and Robert I. Westwood consider the ways that traditional Chinese values and the social, economic and political environments of contemporary China might influence negotiation processes and outcomes. They hope that researchers will use this model to develop an understanding of negotiation from an indigenous, Chinese perspective. Part III includes five chapters focusing on organizational behaviour in Chinese firms. In Chapter 8, Anne Tsui, Jiing-Lih Farh and Katherine R. Xin clarify the concept of guanxi by distinguishing different bases for guanxi relationships and describing the obligations those relationships imply. They also explain how guanxi contributes to business success and suggest an agenda for future research. Chapter 9 is concerned with the role that guanxi plays in the success of Chinese entrepreneurs working in Southeast Asia. In this chapter, John E. Butler, Brad Brown and Wai Chamornmarn explain how guanxi contributes to the formation of effective business networks. They also describe the impact of the local context on the value of guanxi and on the characteristics of the networks it is used to create. In Chapter 10, Xiangming Chen, James W. Bishop and K. Dow Scott present a model of teamwork in China. As these authors point out, many Western multinationals have organized their Western operations around self-managing teams, and many would like to transfer this practice to China. Their model describes the ways that Chinese culture might influence the successful transfer of teamwork to China an presents an agenda for future research. Chapter 11 examines the tactics used by Chinese managers to

4

Introduction

influence other people at work. Haifa Sun and Michael H. Bond report the results of a study testing the impact of the influencer’s personality, the status of the person to be influenced and the target’s interpersonal style on the influencing tactics used. In Chapter 12, Marshall W. Meyer compares a local bank and a global bank operating in Hong Kong to examine the impact of localization versus globalization on productivity management. He uses his analysis to assess the application of standardized productivity-management tools in local cultures such as Hong Kong where speed, efficiency and thrift are important values. As he points out, the transfer of standardized tools to these locations may be counterproductive. Part IV comprises three chapters contributed by three leading business executives in the region. In Chapter 13, Ronnie Chan reflects on overseas Chinese management styles from personal experience. He recounts the reasons for the past success of these businessmen and wonders whether and how the overseas Chinese can meet the challenges of modern times. In Chapter 14, Lily Chiang examines key issues in doing business in China, drawing on her extensive experience in managing joint ventures there. She explains how localization was the key to her company’s success. In Chapter 15, William Overholt examines critical issues in the Hong Kong business environment. He touches on issues of leadership style, strategic management and business ethics. These managerial perspectives offer a rich agenda to guide future research. Acknowledgements The preparation of this book benefited from the involvement and contribution of the many scholars and staff who participated in the inaugural research conference in January 1998. Almost 30 scholars from Hong Kong served as reviewers for the competitively submitted papers to the research conference. The Hang Lung Center provided the financial support for the conference and the preparation of this book. Iris Ng provided administrative, secretarial and editorial support throughout the entire project, from planning of the research conference to the completion of the book. We are indebted to all of these. To all scholars, whether you have a deep love for China or are curious observers, we hope your interest is heightened after reading this book.

Reviewers and Conference Participants Orlando Behling James W. Bishop

Marshall W. Meyer Raoul Nacamulli

Introduction Ingmar Bjorkman Max Boisot John E. Butler Brigitte Charles-Pauvers Xiangming Chen Xiao Ping Chen Bor-Shiuan Cheng Lily Chiang John Child Irene Chow John D. Daniels Timothy Devinney Jiing-Lih Farh Anne Marie Francesco Donald Hambrick Chun Hui Harry Hui John Hulpke Peter Hwang Gary Katzenstein Catherine Levitt C.M. Lau Kenneth Law Cynthia Lee Kwok Leung J.T. Li Yuan Lu Anne Lytle Alan Meyer

Stephen Nason William Overholt Douglas Park Madan Pillutla Richard Priem Waltraut Ritter Hellmut Schutte Douglas Sego Jan Selmer Margaret Shaffer Xinping Shi Sally Stewart Haifa Sun Joseph Sy-Changco Dean Tjosvold David Tse Anne S. Tsui James Walsh G.P. Walters Pien Wang Geoffery Waring Elizabeth Weldon Steven White Chi Sum Wong Katherine R. Xin Yanni Yan Jiawen Yang P.K. Yeung Kai Cheng Yu

5


Part I Management in the Chinese Context


1 Management and Organizations in the Chinese Context: An Overview J.T. Li and Anne S. Tsui

In this introductory chapter, we will provide an overview of the extant research on management and organizations in the Chinese context. This research focus is a relatively recent phenomenon since modern China was closed to the outside world until 1979. However, this overview goes beyond China as a location. We use the term ‘Chinese context’ deliberately so that our review is not confined to organizations in mainland China. The term ‘Chinese context’ refers to the location as well as to the social, cultural and institutional context within which firms are embedded or operating. Our literature review suggested that research in this context would extend beyond the People’s Republic of China (PRC) to include firms operating in Taiwan and Hong Kong and overseas Chinese firms in Southeast Asia. We refer to these areas as Greater China for convenience. Similarly, our definition would also include research on European firms in China or Chinese firms in Europe. Therefore, our review in this chapter will focus on different types of firms operating in the PRC as well as in other Greater China areas. A distinction is also made between Chinese firms (private or state-owned) and multinational corporations (MNCs) operating in the Chinese context. We first review the literature on China-related management and organization research over 15 years (1984–98), as published in 17 leading English-language academic journals. We characterize this literature along two dimensions: the subject of study and the research methods employed. We then map the contribution of the chapters in this volume along the same dimensions. From this overview, we identify current research issues and suggest some future research directions. 9

10

An Overview

A REVIEW OF THE CHINA-RELATED MANAGEMENT AND ORGANIZATION LITERATURE We surveyed the articles published in 17 English-language, primarily academic journals (in contrast to journals devoted to practising managers or professionals) over the 1984–98 period to identify articles addressing China-related management and organization issues. Our survey focused on journals that publish writing based on rigorous scientific methods. We chose 1984 as our starting point because management and organization research in China has only been possible since the economic reforms began in 1979, and it usually takes several years after research is done before a major research work is published. Our survey of 15 years of publications therefore allowed us to examine the evolution of China-related management research. The 17 journals surveyed include 16 leading discipline-based academic journals in management, applied psychology and sociology (for instance, the Academy of Management Journal, the Journal of Applied Psychology and the American Journal of Sociology), and one areastudy journal focusing on China (China Quarterly). All 17 journals selected are published in North America and Europe and, with the exception of China Quarterly, represent mainstream outlets for global organization and management research. We believe these are also the leading outlets for research on China-related management and organization issues. For the 1984–98 period, a total of 145 articles related to management and organization issues in the Chinese context were identified from the 17 journals, with 29 articles published from 1984 to 1989 and 116 articles from 1990 to 1998. Table 1.1 lists the number of articles in each of the 17 journals over the two time periods. The full list of the 145 articles can be found in the Appendix. Two observations can be made from Table 1.1, and the first concerns the publication outlets. Not surprisingly, the main outlets for China-related management and organization research have been journals with an international orientation (such as the Journal of International Business Studies and Organisation Studies) and area-study journals (China Quarterly). However, Table 1.1 also shows that the two leading discipline-based sociology journals (the American Journal of Sociology and the American Sociological Review) have been popular outlets for this research. The Journal of Cross-cultural Psychology has also been a popular outlet for research on China-related topics and research using China as its context. Overall, a major conclusion which can be drawn

J. T. Li and Anne S. Tsui Table 1.1

Number of China-related management and organization articles published by 17 leading journals, 1984–98 Subtotal

Academy of Management Journal Academy of Management Review Administrative Science Quarterly American Journal of Sociology American Sociological Review China Quarterly Human Relations Industrial and Labor Relations Review Journal of Applied Psychology Journal of Cross-cultural Psychology Journal of International Business Studies Journal of Management Studies Management Science Organisation Studies Organizational Behavior and Human Decision Processes Organization Science Strategic Management Journal Total

11

1984–89

1990–98

6 1 7 12 11 14 7 3 5 9 26 4 5 23 6

1 0 3 3 3 1 0 2 1 4 4 2 0 4 1

5 1 4 9 8 13 7 1 4 5 22 2 5 19 5

3 3

0 0

3 3

145

29

116

Note: All 145 articles are listed in the Appendix.

from Table 1.1 is that China-related organization and management research has appeared in every one of these leading academic journals, suggesting that the research area has become a legitimate field of inquiry among management scholars. A second and related observation drawn from Table 1.1 is that more recently, an increasing number of China-related articles have appeared in mainstream, prestigious management journals such as the Academy of Management Journal and Administrative Science Quarterly. This again indicates an increased interest in (and receptivity to) organizational issues in the Chinese context among management scholars and journal editors. With globalization and the continuing market transition in the Chinese economy, we believe this trend is likely to continue and that more high-quality China-related research will appear in leading management journals in the future. In Table 1.2, we further classify the 145 China-related articles by level of analysis and by focus on firms in the PRC and Greater China

12 Table 1.2

An Overview China-related management and organization research by topic: survey of 17 leading journals, 1984–98 Total

PRC Greater China MNC/JV Total

Psychological/micro

Institutional/macro

Subtotal

1984–89

1990–98

Subtotal

1984–89

1990–98

78 48

43 38

11 9

32 29

35 10

5 2

30 8

19

3

0

3

16

2

14

145

84

20

64

61

9

52

as opposed to focus on multinationals or joint ventures (JVs). There is a clear trend towards more articles in all areas. Of the 145 articles, 84 (58 per cent) are micro/psychological studies, and the remaining 61 (42 per cent) are macro/institutional studies. Over half of the studies (78, or 54 per cent) focus primarily on firms and employees in mainland China, and about one-third (48, or 33 per cent) focus on firms in other Greater China areas or on Chinese culture in general. The remaining 19 articles (13 per cent) focus on MNCs and JVs in the region. Interestingly, only three articles focus on micro or psychological issues in MNCs/JVs in China, suggesting a largely unexplored area for future research. Figure 1.1 provides a more extensive summary of the primary focus or the issues being studied in these articles, organized along the same lines as Table 1.2. Each article was coded as to the primary issue or issues (up to three) being addressed in the research question. Figure 1.1 shows that a variety of issues are being addressed by these 145 studies. Some of the issues are unique to the PRC, such as market transition and reform. Many studies have a cultural/cross-cultural or a comparative perspective. Studies at the micro level tend to treat ‘China’ as a social-cultural variable, a proxy for cultural values that may influence behaviour and decisions at the individual level. Studies at the macro level tend to treat ‘China’ as an institutional context implying a social, political and economic structure which may have an impact on the managerial decisions and behaviour of firms. As shown in Figure 1.1, the most studied micro issues for firms in the PRC and Greater China are similar. They are cultural/crosscultural, leadership and management style, and job satisfaction and career issues. The most studied macro issues for PRC firms are market

J. T. Li and Anne S. Tsui Psychological/Micro People’s Republic of China

13 Institutional/Macro

Total • • • • • • • • • • • • • • • • 138

Culture/Cross-cultural (14) Leadership and management styles (11) Job satisfaction and career (10) Motivation/Commitment (6) Psychological attributes (5) Negotiations/Bargaining (4) Social networks/Guanxi (4) Compensation/Incentives (3) Demographics/Gender (3) Human resources and capital (3) Values/Chinese values (2) Conflicts/Resolution (1) Face (1) Family business (1) Group dynamics (1) Research method (1) Sub-total: 70

• • • • • • • • • • • • •

Market transition/Reform (26) Strategy/Decision making (12) Organization structure and change (8) Firm performance (4) State-enterprise (4) Bureaucracy/Authority (3) Private business (3) Governance and control (2) Organizational theory (2) Culture/Cross-cultural (1) Foreign investment/Operations (1) Inter-firm relations (1) Learning/Knowledge transfer (1)

• • • • • • • • • • • • • • • • •

Culture/Cross-cultural (15) Leadership and management styles (7) Job satisfaction and career (6) Demographics/Gender (5) Values/Chinese values (5) Psychological attributes (4) Social networks/Guanxi (4) Human resources and capital (3) Negotiations/Bargaining (3) Compensation/Incentives (2) Conflicts/Resolution (2) Group dynamics (2) Motivation/Commitment (2) Business ethics (1) Justice/Procedural (1) Labor force/Employees (1) State-enterprise (1) Sub-total: 64

• • • • • • • • • •

Organization structure and change (8) Strategy/Decision making (6) Culture/Cross-cultural (5) Family business (3) Market transition/Reform (3) Learning/Knowledge transfer (2) Organizational theory (2) Bureaucracy/Authority (1) Governance and control (1) Inter-firm relations (1)

• • • • • • • • • •

• • • • • • • • •

Foreign investment /Operations (8) Governance and control (5) Strategy/Decision making (4) Firm performance (3) Organization structure and change (3) Culture/Cross-cultural (2) Country-of-origin (1) Inter-firm relations (1) Learning/Knowledge transfer (1)

42

Job satisfaction and career (3) Human resources and capital (2) Negotiations/Bargaining (2) Conflicts/Resolution (1) Culture/Cross-cultural (1) Justice/Procedural (1) Labor force/Employees (1) Leadership and management styles (1) Psychological attributes (1) Social networks/Guanxi (1) Sub-total: 14

276

Sub-total: 148

Greater China

96 MNC/JV

Sub-total: 68

Sub-total: 32

Sub-total: 28 Sub-total: 128

Note: The number in parentheses is the number of articles; each article is coded as addressing up to three key issues.

Figure 1.1

China-related management and organization research: survey of contributions in 17 leading journals, 1984–98

14

An Overview

transition/reform, strategy/decision making, and organization structure and change. For firms in the Greater China region, the macro issues studied most are often organization structure and change, strategy/decision making, and cultural/cross-cultural issues. Foreign investment and operations, as well as governance and control, are the primary issues examined in studies focusing on MNCs/JVs at the macro level. We also grouped the 145 studies according to the research methods used, including survey/quantitative studies, case-based/qualitative studies, and conceptual development/overviews (Table 1.3). Over half of the studies (89 articles, or 61 per cent) are survey-based, and twothirds of these examine micro/psychological issues. Some of these are descriptive studies of current trends, and others focus on hypothesis testing with quantitative analyses. There are 18 articles (about 12 per cent) that use a case-based approach. Finally, over 25 per cent (38 articles) are conceptual development or review papers, with almost twothirds of these (25 studies) addressing issues at the macro or firm level. These studies usually consider the effects of institutional environments when examining the strategy, structure and performance of firms operating in the Chinese context. In summary, the 145 China-related articles published in the 17 leading English-language academic journals over the past 15 years provide us with a snapshot of past and current research interests in China-related management and organization. This literature has burgeoned from a virtually non-existent body of work to a significant one, with contributions from a wide variety of disciplines and authors. The increasing appearance of such studies in prestigious management journals also suggests their value to scholarship in management. Table 1.3

China-related management and organization research by method: survey of 17 leading journals, 1984–98 Total

Survey/ Quantitative Case study/ Qualitative Conceptual/ Overview Total

Psychological/micro

Institutional/macro

Subtotal

1984–89

1990–98

Subtotal

1984–89

1990–98

89

63

12

51

26

4

22

18

8

2

6

10

1

9

38

13

6

7

25

4

21

145

84

20

64

61

9

52

J. T. Li and Anne S. Tsui

15

In the next section, we summarize the chapters in this volume, using the same organizing scheme we applied in our literature survey.

MAPPING THE CONTRIBUTIONS IN THIS VOLUME The contributions in this volume also cover a broad range of topics related to management and organization issues in the Chinese context. As noted in this book’s introduction, the aim of the seminal conference and of this volume was to highlight the quality research being done rather than to focus on any single area. This goal necessarily implies some fragmentation, but we hope that it also means that the current volume will be of greater value to anyone interested in China-related management and organization research. To help put the contributions in perspective, we first organize their subject focus by level of analysis (Figure 1.2). Nine chapters take a macro/institutional Psychological/Micro

People’s Republic of China

Greater China

Institutional/Macro

Chen, Bishop and Scott (10) Sun and Bond (11)

Child (2) Walder (3)

• Interpersonal cooperation • Commitment • Personality/influence

• Enterprise reform • Corporate governance • Privatization

Farh and Cheng (4) Tsui, Farh and Xin (8)

Butler, Brown and Chamornmarn (9) Meyer (12) Chan (13) Overholt (15)

• Paternalism/leadership • Guanxi/social networks

• • • • MNC/JV

Shi and Westwood (7) • International business negotiations • Chinese cultural context

Overseas Chinese entrepreneurship Corporate culture/productivity Family-owned business Strategic management thinking

Wang, Zhi and Tan (5) Cannice and Daniels (6) Chiang (14) • Mode of entry • Control and governance • Strategy and performance

Note: The number in parentheses is the chapter number in this volume.

Figure 1.2

Contributions of chapters in the book by topic

16

An Overview

perspective, addressing critical issues on enterprise reform and privatization (Child; Walder), control and governance (Wang, Zhi and Tan), family-owned businesses (Chan), corporate culture (Meyer), and JV management in China (Chiang). Five chapters take a micro/psychological perspective, addressing a wide range of issues on interpersonal cooperation and team commitment (Chen, Bishop and Scott), leadership styles (Farh and Cheng), and social networks in the Chinese context (Tsui, Farh and Xin). In the micro/psychological chapters culture is a primary factor of interest, and in the macro/institutional chapters the institutional environment, including the legal and economic context, is a key factor under consideration. As for the types of firms studied, four chapters examine firms in the PRC, six concern firms in the Greater China region (that is, they focus on Hong Kong, Taiwan or Chinese culture in general), and four focus on multinationals and foreign JVs in the Chinese context. The chapters also differ in their research methodologies (Figure 1.3). Two chapters (Sun and Bond,Wang, Zhi and Tan) report use of written surveys to collect data in China for hypothesis testing, and three chapters report a case-based approach to topics such as MNC entry mode choice (Cannice and Daniels), JV management (Chiang), and productivity culture (Meyer). The remaining nine chapters provide conceptual development and overviews on a number of issues, such as

Psychological/Micro

Survey/ Quantitative

Sun and Bond (11)

Case Study/ Qualitative

Conceptual/ Overview

Institutional/Macro

Wang, Zhi and Tan (5)

Cannice and Daniels (6) Meyer (12) Chiang (14)

Farh and Cheng (4) Shi and Westwood (7) Tsui, Farh and Xin (8) Chen, Bishop and Scott (10)

Child (2) Walder (3) Butler, Brown and Chamornmarn (9) Chan (13) Overholt (15)

Note: The number in parentheses is the chapter number in this volume.

Figure 1.3

Contributions of chapters in the book by research methods


17

leadership styles (Farh and Cheng), negotiations (Shi and Westwood), enterprise reform (Child; Walder), and the importance of guanxi in China (Tsui, Farh and Xin) and in overseas Chinese enterprises in Southeast Asia (Butler, Brown and Chamornmarn). Although these contributions clearly do not constitute a comprehensive treatment of all major issues related to management and organizations in the Chinese context, they represent some of the current research foci and interests. The patterns of interests and methods are quite consistent with those of the extant literature that we have reviewed. This volume includes more conceptual and overview chapters than data-based studies since we invited several authors to write overviews of issues that fell into their areas of expertise. A main conclusion from our review was that research on organizations in China and in the Chinese context is clearly at an early stage. While our literature review may not have been exhaustive and we have excluded many of important contributions published in books (e.g., Bond, 1996; Hamilton, 1996; Walder, 1996), a total of 145 articles in 17 journals over 15 years is still not a large number. However, over the past two decades, China-related research by management scholars has greatly expanded. Moreover, given the continuing development of China as a major economic power in the new millennium, we believe that further research about management and organization issues in this context is necessary and desirable.

FUTURE RESEARCH DIRECTIONS In this final section, we outline and suggest some future research directions, drawing on our review of the extant literature (which reflects scholarly interest) and our understanding of the critical issues confronting the various types of enterprises inside and outside China. We see two overall goals for this research. First, the economic reform in China over the past two decades has been phenomenal by most accounts, and its implications for enterprise reform and development are tremendous. Therefore, the key challenge for management and organization researchers is to understand the complexities and continuing changes in the institutional environment and the implications for organizing patterns of different types of business enterprises embedded in this environment. At the firm level, what factors will affect the success of some business enterprises (for

18

An Overview

instance, private, collective and foreign-owned) and the survival of others (for instance, state-owned enterprises, or SOEs)? With the continuing economic reform and restructuring in China, indigenous enterprises of all ownership types – perhaps with the exception of those in a few ‘strategic’ industries – will compete with each other, and with Western multinationals, for both resources and customers. Therefore, although they are in a unique and complex social and cultural environment, Chinese firms are increasingly facing the same global competitive forces as Western companies. Will the firms that succeed in the future – whether overseas Chinese or mainland Chinese – have organization and management structures that differ from a Western model, or even from other Asian models? What would be the key areas for future research on management and organization issues in the Chinese context? In Figure 1.4, we suggest a list of key research issues that might be unique to different types of firms in the PRC and other Greater China areas. For example, privatization is relevant to state-owned firms in China, and localization is a major concern to multinationals and JVs operating in the

Types of firms

Research Issues

PRC

• State-owned • Private • Township/collective

• • • • • • • • •

Restructuring Organization change and development Performance improvement Lay-offs/unemployment Management skills Incentive system HR development Corporate governance Survival strategy

Greater China

• Family-owned

• • • • •

Executive succession Professional management Leadership style Strategic management Growth and expansion

MNC/JV

• Wholly owned • Joint ventures

• • • • •

Control and governance Cross-cultural management Localization/retention Compensation structure Networks and partnerships

Figure 1.4

Possible research issues


19

region. In our view, these are critical issues facing these firms, and more systematic research is critically needed. Chinese-owned and foreign-owned firms are listed as two different categories because they face distinctive challenges in management and governance. It might also be interesting to study the comparative performance of MNCs/JVs and local firms in China. Local Firms in the People’s Republic of China The most critical issue here is the current economic reform and enterprise restructuring in China. The efforts are massive, affecting both state-owned and non-state firms. Issues such as improving corporate governance, developing management skills, and designing human resource and incentive systems will be critical for the performance and survival of local Chinese firms. The restructuring of many unprofitable SOEs has also led to large-scale downsizing and unemployment. This is a potential source of social problems in China given the huge role that organizations have played in the past in employees’ social and material well-being. At the same time, there is a critical shortage of skilled knowledge workers, especially managerial talent and professionals in functions such as marketing, finance and accounting (Xin, Zhao and Tsui, 1998). Also critical is developing a performance-based incentive system conducive to skill development and employee commitment. The rapid emergence of private enterprises in China is another fruitful area for systematic research. In addition, over a third of industrial outputs is now attributed to production by township and village enterprises, most of which are collectives in the towns and villages (China Statistical Yearbook, 1998). What accounted for their success, and what is the likelihood of their future survival, given increased competition from private firms and successfully restructured SOEs? Increasingly, Western multinationals are competing in many industries in China. What strategies should local firms develop in responding to MNC challenges to ensure survival in the future? For many local firms, knowledge acquisition, including management and marketing skills as well as technology, will be critical for growth and survival (Li and Shenkar, 1996). What would be the best approaches for knowledge development and transfer? Clearly, China is like a large experiment in process, and it is a fertile ground for longitudinal studies of management and organizational issues in all kinds of enterprises.

20

An Overview

Chinese Firms in the Greater China Region In areas of Greater China such as Hong Kong and Taiwan, familyowned businesses present important research issues, as illustrated by Ronnie Chan in his chapter. These include executive succession, professional management development, leadership style and growth strategy. The recent Asian financial crisis forced many overseas Chinese firms to re-evaluate the sustainability of their past strategies and management styles and suggested the need for strategic management thinking and management development (see Chapters 13 and 15 below). Farh and Cheng (see Chapter 4) describe a paternalistic leadership style that is typically found in Chinese family-owned businesses. This leadership style is relevant in settings where paternalism and submissiveness are the defining cultural characteristics. However, with global competition, further research is needed to shed light on the adaptations (if any) of these leadership styles to the new environment. With the management of many Chinese family businesses now in the hands of second- or third-generation descendants, many of whom are MBA graduates of leading Western business schools, the inevitable tension and potential conflicts between Western management thinking and traditional Chinese culture will probably create significant management challenges. How will these firms evolve? How should they ensure survival, if not prosperity, in the long term? Chan laments that most Chinese family businesses have not invested in their future growth and that few have achieved recognition as visible forces in the world market. What factors limit their growth? Clearly, much remains to be learned about these overseas Chinese-owned firms (cf. Redding, 1990). Multinationals and Joint Ventures in the Chinese Context For multinational companies doing business in Greater China, including the Chinese mainland, either through wholly-owned subsidiaries (WOS) or JVs with local partners, there are a variety of critical management issues and hence research topics. For example, the issue of the control and governance of JVs remains unresolved (see Chapter 5 below). Some researchers advocate wholly-owned operations as the only sensible solution to the issue of control and governance (e.g., Vanhonacker, 1997). Others (e.g., Li and Tsui, 1999) have observed that JVs tend to perform better when local partners have meaningful


21

equity stakes and are actively involved in the ventures. Sole foreign ownership may resolve the control issue, but foreign partners may not benefit from the complementary assets local partners could bring to the ventures, such as local market knowledge and relationships (that is, guanxi) with local governments. This tension between control and access to local networks is a significant issue for multinational firms. For many JVs, building an effective multicultural leadership team is critical for success (Li, Xin, Tsui and Hambrick, 1999). However, there are many human resources challenges. China has a severe shortage of local management talent, and this limits the speed with which an MNC can localize its management personnel for its China operations. At this point, many multinationals still deploy large numbers of expatriate managers for senior positions in their JVs, and inevitably there is a large disparity between expatriate and local JV managers in compensation and benefits. How should the incentive system be structured to provide sufficient attraction to expatriate managers while at the same time retaining high-performing local managers? Given the demographic and cultural diversity within JV management teams, what structures or processes are critical for turning this diversity into a productive resource for the team, avoiding emotional conflicts and political infighting? Although recent research has begun to address some of these critical issues (e.g., Li et al., 1999), much remains to be done. Overholt (in this volume) illustrates a number of challenges facing MNCs operating in the Chinese context. One challenge is cultural difference between expatriate and local managers. How much should expatriate managers adapt to the expectations and work style preferences of local employees? Should MNCs try to promote a worldwide corporate culture, or should they adopt an approach that has been referred to as ‘think globally and act locally’? Meyer (see Chapter 12) provides a case study of a global bank in Hong Kong attempting to build a corporate culture combining the advantage of a global organization with sensitivity to local culture to improve productivity. Can leading multinationals be successful in developing a ‘third culture’ that integrates the best features of the home country and the host country for their local operations (Hui and Graen, 1997)? What might be the defining characteristics of this third culture in the Chinese context? A wealth of research questions need to be examined to provide better understanding of the challenges for MNCs operating in the Chinese context.

22

An Overview

Research Methods and Challenges in Conducting China-Related Management and Organizational Research Finally, we consider the research methods and related challenges in conducting management research on firms operating in the Chinese context. The research published to date in the 17 academic journals has mostly been conducted by scholars with Western training. Inevitably, these scholars analyse the issues with a Western perspective. To fully understand organizations in the Chinese context, it is insufficient merely to apply Western models. Instead, future studies should generate original theories from firms and managers in the region if they are to contribute to global management and organization knowledge. As we reviewed the literature, we were pleased to see an increasing number of young, well-trained China management scholars, including many of Chinese origin, making contributions. Many young Chinese scholars are working with more established Western scholars in the organization field. We see this intercultural collaboration as both desirable and necessary for a deeper understanding of the phenomenon in this region. In terms of research methods, we expect that deductive studies (hypothesis testing) using the survey method will continue to be popular. However, for studies conducted in the Chinese context, involving Chinese employees, the question of the ‘cultural equivalence’ of constructs and measures must be approached with a higher level of rigour and consistency than has been common in the past. We believe there is a need for more inductive studies (hypothesis generation) using various qualitative methods, such as ethnography or indepth case studies, to generate locally grounded theories. Therefore, we would like to see researchers give equal emphasis to deductive and inductive research to develop a more comprehensive understanding of the management and organization approaches of firms operating in the Chinese context. It is impossible to encompass research on China within the bounds of any single perspective. China is a particularly complex society by virtue of both its deeply embedded, multilayered cultural heritage and the rapid economic transformation it is undergoing (Child, 1994). Th complexity makes it extremely difficult to reach any adequate understanding of contemporary developments, even in the specific field of management and organizations in China. Therefore, an interdisciplinary approach is not only desirable but essential. We encourage interdisciplinary scholars to track the effects of the massive changes in


23

China over time, thereby providing insights into the outcomes of different management approaches. As we look forward to future research in this exciting area, we want to note several limitations in our survey of the literature. As mentioned earlier, we focused our survey on the 17 leading Englishlanguage academic journals in the fields of management, applied psychology and sociology. A similar review a decade or two in the future will no doubt include, or perhaps even focus on, Chineselanguage journals. In addition, every article in the group of 145 surveyed, as well as each chapter written for this volume, was originally written in English. There will doubtless be English-language studies of this type far into the future, but we expect that there will also be many Chinese-language counterparts, and hope that future surveys of the field can include these contributions as well.

CONCLUSION This volume and this chapter provide a partial review of the current status of organization and management research in the Chinese context. As we have shown, this literature is growing, and there are many interesting issues that are important to managers and management scholars. The term ‘Chinese context’ has a dual meaning: it is a location implying a unique institutional, legal and economic environment that directly affects firms and their operations, but it is also a cultural variable that transcends geographical boundaries. It means a pattern of behaviour, beliefs, assumptions and values that affect understanding, acceptance and interaction between employees of different cultural backgrounds. Therefore researchers examining management issues in the Chinese context must strive both to be clear about which meaning they are assuming and to incorporate this meaning into the theory and study. China’s particular characteristics point out certain limitations in currently influential Western theories of management and organization. Management research in the Chinese context therefore has the potential to refine these existing theories but, more importantly, has the potential to develop new theories to contribute to global management and organization knowledge. China’s path to modernization is quite distinctive, and an understanding of how China manages its economic activities is crucial to conducting business successfully in this context. This is a potentially exciting site for conducting academic

24

An Overview

research with significant practical impact. China is undergoing a huge social experiment. High-quality scholarship that can inform policy and shape the lives of over a billion people is welcome and urgently needed. We hope the chapters in this volume will serve our intended purpose of capturing some of this excitement and piquing the interest of more management scholars.

Note 1.

We thank Larry Farh, Madan Pillutla, Ellie Weldon and Katherine Xin for comments, and Angel Li, Angel Tam and Niya West for research assistance. We gratefully acknowledge support from Hong Kong RGC Competitive Earmarked Grant (HKUST6198/98H) and the Wei-Lun Foundation.

Appendix: Bibliography of China-Related Management and Organization Research Published in 17 Leading Journals, 1984–98 Adler, N. J., Brahm, R. and Graham, J. L. 1992. ‘Strategy implementation: A comparison of face-to-face negotiations in the People’s Republic of China and the United States’, Strategic Management Journal, 13: 449–66. Adler, N. J., Cambell, N. and Laurent, A. 1989. ‘In search of appropriate methodology: From outside the People’s Republic of China looking in’, Journal of International Business Studies, 70: 61–74. Aryee, S., Luk, V. and Stone, R. 1998. ‘Family responsive variables and retention-relevant outcomes among employed parents’, Human Relations, 51: 73–87. Aryee, S., Wyatt, T. and Stone, R. 1996. ‘Early career outcomes of graduate employees: The effect of mentoring and ingratiation’, Journal of Management Studies, 33: 95–118. Bailey, J. R., Chen, C. C. and Dou, S. G. 1997. ‘Conceptions of self and performance-related feedback in the U.S., Japan and China’, Journal of International Business Studies, 28: 605–25. Bian, Y. 1997. ‘Bringing strong ties back in: Indirect ties, network bridges, and job searches in China’, American Sociological Review, 62: 366–85. Birnbaum, P. H. and Wong, G. Y. Y. 1985. ‘Organizational structure: Multinational banks of Hong Kong from a culture-free perspective’, Administrative Science Quarterly, 30: 262–77. Birnbaum, P. H., Farh, J. L. and Wong, G. Y. Y. 1986. ‘The job characteristics model in Hong Kong’, Journal of Applied Psychology, 71: 598–606. Birnbaum-More, P. H., Wong, G. Y. Y. and Olve, N. G. 1995. ‘Acquisition of managerial values in the People’s Republic of China and Hong Kong’, Journal of Cross-cultural Psychology, 26: 255–75.


25

Black, J. S. and Gregersen, H. B. 1991. ‘Antecedents to cross-cultural adjustment for expatriates in Pacific rim assignments’, Human Relations, 44: 497–515. Black, J. S. and Porter, L. W. 1991. ‘Managerial behaviors and job performance: A successful manager in Los Angeles may not succeed in Hong Kong’, Journal of International Business Studies, 22: 99–113. Boisot, M. H. 1996. ‘Institutionalizing the labor theory of value: Some obstacles to the reform of state-owned enterprises in China and Vietnam’, Organisation Studies, 17: 909–28. Boisot, M. and Child, J. 1988. ‘The iron law of fiefs: Bureaucratic failure and the problem of governance in the Chinese economic reforms’, Administrative Science Quarterly, 33: 507–27. Boisot, M. and Child, J. 1996. ‘From fiefs to clans and network capitalism: Explaining China’s emerging economic order’, Administrative Science Quarterly, 41: 600–28. Boisot, M. H. and Liang, X. G. 1992. ‘The nature of managerial work in the Chinese enterprise reforms: A study of six directors’, Organisation Studies, 13: 161–84. Bond, M. H. 1987. ‘Chinese values and the search for culture-free dimensions of culture’, Journal of Cross-cultural Psychology, 18: 143–64. Bond, M. H. and Forgas, J. P. 1984. ‘Linking person perception to behavior intention across cultures: The role of cultural collectivism’, Journal of Cross-cultural Psychology, 15: 337–52. Boswell, T. E. 1986. ‘A split labor market analysis of discrimination against Chinese immigrants, 1850–1882’, American Sociological Review, 51: 352–71. Brown, M. and Philips, P. 1986. ‘Competition, racism, and hiring practices among California manufacturers, 1860–1882’, Industrial and Labor Relations Review, 40: 61–74. Casimir, G. and Keats, D. 1996. ‘The effects of work environment and in-group membership on the leadership preferences of Anglo-Australians and Chinese Australians’, Journal of Cross-cultural Psychology, 27: 436–57. Chang, H. C. and Holt, G. R. 1996. ‘An exploration of interpersonal relationships in two Taiwanese computer firms’, Human Relations, 49: 1489–517. Chen, C. C. 1995. ‘New trends in rewards allocation preferences: A Sino–U.S. comparison’, Academy of Management Journal, 38: 408–28. Chen, C. C., Meindl, J. R. and Hunt, R. G. 1997. ‘Testing the effects of vertical and horizontal collectivism: A study of reward allocation preferences in China’, Journal of Cross-cultural Psychology, 28: 44–70. Chen, D. and Faure, G. O. 1995. ‘When Chinese companies negotiate with their government’, Organisation Studies, 16: 27–54. Chen, H. and Chen, T. J. 1998. ‘Network linkages and location choice in foreign direct investment’, Journal of International Business Studies, 29: 445–67. Chen, X. P., Hui, C. and Sego, D. J. 1998. ‘The role of organizational citizenship behavior in turnover: Conceptualization and preliminary tests of key hypotheses’, Journal of Applied Psychology, 83: 922–31.

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An Overview

Cheung, C. K. 1998. ‘Impacts of class on Hong Kong people’s well-being’, Human Relations, 51: 89–119. Child, J. and Lu, Y. 1990. ‘Industrial decision-making under China’s reform, 1985–1988’, Organisation Studies, 11: 321–51. Child, J. and Lu, Y. 1996. ‘Institutional constraints on economic reform: The case of investment decisions in China’, Organization Science, 7: 60–77. Child, J. and Markoczy, L. 1993. ‘Host-country managerial behavior and learning in Chinese and Hungarian joint ventures’, Journal of Management Studies, 30: 611–31. Davis, D. 1992. ‘Job mobility in post-Mao cities: Increases on the margins’, China Quarterly, 132: 1062–85. Earley, P. C. 1989. ‘Social loafing and collectivism: A comparison of the United States and the People’s Republic of China’, Administrative Science Quarterly, 34: 565–81. Earley, P. C. 1993. ‘East meets west meets mideast: Further explorations of collectivistic and individualistic work groups’, Academy of Management Journal, 36: 319–48. Earley, P. C. 1994. ‘Self or group? Cultural effects of training on self-efficacy and performance’, Administrative Science Quarterly, 39: 89–107. Entwisle, B., Henderson, G. E., Short, S. E., Bouma, J. and Zhai, F. 1995. ‘Gender and family businesses in rural China’, American Sociological Review, 60: 36–57. Farh, J. L., Earley, P. C. and Lin, S. C. 1997. ‘Impetus for action: A cultural analysis of justice and organization citizenship behavior in Chinese society’, Administrative Science Quarterly, 42: 421–4. Farh, J. L., Tsui, A. S., Xin, K. and Cheng, B. S. 1998. ‘The influence of relational demography and guanxi:The Chinese case’, Organization Science, 9: 471–88. Field, R. M. 1992. ‘China’s industrial performance since 1978’, China Quarterly, 131: 577–607. Fligstein, N. 1996. ‘The economic sociology of the transitions from socialism’, American Journal of Sociology, 101: 1074–81. Frankenstein, J. and Gill, B. 1996. ‘Current and future challenges facing Chinese defense industries’, China Quarterly, 146: 394–427. Furnham, A. 1993. ‘Personality and occupational behavior: Myers–Briggs type indicator correlates of managerial practices in two cultures’, Human Relations, 46: 827–48. Gabrenya, W. K., Jr, Latane, B. and Wang, Y. 1985. ‘Social loafing on an optimizing task: Cross-cultural differences among Chinese and Americans’, Journal of Cross-cultural Psychology, 16: 223–42. Graham, J. L., Mintu, A. T. and Rodgers, W. 1994. ‘Explorations of negotiation behaviors in ten foreign cultures using a model developed in the United State’, Management Science, 40: 72–95. Guthrie, D. 1997. ‘Between markets and politics: Organizational responses to reform in China’, American Journal of Sociology, 102: 1258–304. Hall, R. H. and Xu, W. 1990. ‘Run silent, run deep – cultural influences on organizations in the Far East’, Organisation Studies, 11: 569–76. Hamilton, G. G. and Biggart, N. W. 1988. ‘Market, culture, and authority: A comparative analysis of management and organization in the Far East’, American Journal of Sociology, 94(Supplement): S52–S94.


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Hannon, J. M., Huang, I. C. and Jaw, B. S. 1995. ‘International human resource strategy and its determinants: The case of subsidiaries in Taiwan’, Journal of International Business Studies, 26: 531–54. Hassard, J. and Porter, R. 1990. ‘Cutting down the workforce: Eunuchs and early administrative management’, Organisation Studies, 11: 555–67. Hau, K. T. 1996. ‘Prediction of academic performance among Chinese students: Effort can compensate for lack of ability’, Organizational Behavior and Human Decision Processes, 65: 83–94. Helburn, I. B. 1984. ‘Human resources and industrial relations in China: A time of ferment’, Industrial and Labor Relations Review, 38: 3–15. Henley, J. S. and Nyaw, M. K. 1986. ‘Introducing market forces into managerial decision-making in Chinese industrial enterprises’, Journal of Management Studies, 23: 635–56. Hofstede, G. 1994. ‘Management scientists are human’, Management Science, 40: 4–13. Huang, Y. 1990. ‘Web of interests and patterns of behavior of Chinese local economic bureaucracies and enterprises during reforms’, China Quarterly, 123: 431–58. Hwang, K. K. 1987. ‘Face and favor: The Chinese power game’, American Journal of Sociology, 92: 944–74. Jiang, S. and Hall, R. 1996. ‘Local corporatism and rural enterprises in China’s reform’, Organisation Studies, 17: 929–52. Jin, P. 1993. ‘Work motivation and productivity in voluntarily formed work teams: A field study in China’, Organizational Behavior and Human Decision Processes, 54: 133–55. Johns, G. and Xie, J. L. 1998. ‘Perceptions of absence from work: People’s Republic of China versus Canada’, Journal of Applied Psychology, 83: 515–30. Keister, L. A. 1998. ‘Engineering growth: Business group structure and firm performance in China’s transition economy’, American Journal of Sociology, 104: 404–40. Kelley, L., Whatley, A. and Worthley, R. 1987. ‘Assessing the effects of culture on managerial attitudes: A three-culture test’, Journal of International Business Studies, 18: 17–31. Keown, C. F. 1985. ‘Foreign mail surveys: Response rates using monetary incentives’, Journal of International Business Studies, 16: 151–3. Kirkbride, P. S., Tang, F. Y. and Westwood, R. I. 1991. ‘Chinese conflict preferences and negotiating behavior: Cultural and psychological influences’, Organization Studies, 12: 365–86. Laaksonen, O. 1984. ‘The management and power structure of Chinese enterprises during and after the Cultural Revolution: Empirical data comparing Chinese and European enterprises’, Organisation Studies, 5: 1–21. Lecraw, D. J. 1984. ‘Bargaining power, ownership, and profitability of transnational corporations in developing countries’, Journal of International Business Studies, 15: 27–43. Lee, C. K. 1995. ‘Engendering the worlds of labor: Women workers, labor markets, and production politics in the South China economic miracle’, American Sociological Review, 60: 378–97.

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An Overview

Leung, K. and Bond, M. 1989. ‘On the empirical identification of dimensions for cross-cultural comparison’, Journal of Cross-cultural Psychology, 20: 133–51. Leung, K., Smith, P. B., Wang, Z. and Sun, H. 1996. ‘Job satisfaction in joint venture hotels in China: An organizational justice analysis’, Journal of International Business Studies, 27: 947–62. Li, P. P. 1998. ‘Towards a geocentric framework of organizational form: A holistic, dynamic and paradoxical approach’, Organisation Studies, 19: 829–61. Lin, N. and Bian, Y. 1991. ‘Getting ahead in urban China’, American Journal of Sociology, 97: 657–88. Lin, N. and Xie, W. 1988. ‘Occupational prestige in urban China’, American Journal of Sociology, 93: 793–832. Lin, X. and Germain, R. 1998. ‘Sustaining satisfactory joint venture relationships: The role of conflict resolution strategy’, Journal of International Business Studies, 29: 179–96. Liu, Y. L. 1992. ‘Reform from below: The private economy and local politics in the rural industrialization of Wenzhou’, China Quarterly, 130: 293–316. Liu, Y. L. 1994. ‘Guanxi and the allocation of jobs in urban China’, China Quarterly, 140: 971–99. Lockett, M. 1988. ‘Culture and problems in Chinese management’, Organisation Studies, 9: 475–96. Lowe, S. 1998. ‘Culture and network institutions in Hong Kong: A hierarchy of perspectives. A response to Wilkinson. Culture, institutions and business in East Asia’, Organisation Studies, 19: 321–43. Lu, Y. and Heard, R. 1995. ‘Socialized economic action: A comparison of strategic investment decisions in China and Britain’, Organisation Studies, 16: 395–424. Luo, Y. 1997. ‘Partner selection and venturing success: The case of joint ventures with firms in the People’s Republic of China’, Organization Science, 8: 648–62. Luo, Y. 1998. ‘Timing of investment and international expansion performance in China’, Journal of International Business Studies, 29: 391–407. McGuinness, N., Campbell, N. and Leontiades, J. 1991. ‘Selling machinery to China: Chinese perceptions of strategies and relationships’, Journal of International Business Studies, 22: 187–207. Merritt, A. C. and Helmreich, R. L. 1996. ‘Human factors on the flight deck: The influence of national culture’, Journal of Cross-cultural Psychology, 24: 5–24. Miner, J. B. 1991. ‘Theory testing under adverse conditions: Motivation to manage in the People’s Republic of China’, Journal of Applied Psychology, 76: 343–49. Naumann, E. 1993. ‘Organizational predictors of expatriate job satisfaction’, Journal of International Business Studies, 24: 61–80. Nee, V. 1989. ‘A theory of market transition: From redistribution to markets in state socialism’, American Sociological Review, 54: 663–81. Nee, V. 1991. ‘Social inequalities in reforming state socialism: Between redistribution and markets in China’, American Sociological Review, 56: 267–82.


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Nee, V. 1992. ‘Organizational dynamics of market transition: Hybrid forms, property rights, and mixed economy in China’, Administrative Science Quarterly, 37: 1–27. Nee, V. 1996. ‘The emergence of a market society: Changing mechanisms of stratification in China’, American Journal of Sociology, 101: 908–49. Oberschall, A. 1996. ‘The great transition: China, Hungary, and sociology exit socialism into the market’, American Journal of Sociology, 101: 1029–41. O’Brien, K. J. 1992. ‘Bargaining success of Chinese factories’, China Quarterly, 132: 1086–100. Pan, Y. 1996. ‘Influences on foreign equity ownership level in joint ventures in China’, Journal of International Business Studies, 27: 1–26. Pan, Y. 1997. ‘The formation of Japanese and U.S. equity joint ventures in China’, Strategic Management Journal, 18: 247–54. Pan, Y. and Tse, D. K. 1996. ‘Cooperative strategies between foreign firms in an overseas country’, Journal of International Business Studies, 27: 929–46. Parish, W. L. and Michelson, E. 1996. ‘Politics and markets: Dual transformations’, American Journal of Sociology, 101: 1042–59. Parish, W. L., Zhe, X. and Li, F. 1995. ‘Nonfarm work and marketization of the Chinese countryside’, China Quarterly, 143: 697–730. Peng, M. W. 1997. ‘Firm growth in transitional economies: Three longitudinal cases from China, 1989–96’, Organisation Studies, 18: 385–413. Peng, M. W. and Heath, P. S. 1996. ‘The growth of the firm in planned economies in transition: Institutions, organizations, and strategic choice’, Academy of Management Review, 21: 492–528. Peng, Y. 1992. ‘Wage determination in rural and urban China: A comparison of public and private industrial sectors’, American Sociological Review, 57: 198–213. Rademakers, M. F. L. 1998. ‘Market organization in Indonesia: Javanese and Chinese family business in the Jamu industry’, Organisation Studies, 19: 1005–19. Ralston, D. A. 1992. ‘Eastern values: A comparison of managers in the United States, Hong Kong, and the People’s Republic of China’, Journal of Applied Psychology, 77: 664–71. Ralston, D. A., Cunniff, M. K. and Gustafson, D. J. 1995. ‘Cultural accommodation: The effect of language on the response of bilingual Hong Kong Chinese managers’, Journal of Cross-cultural Psychology, 26: 714–27. Ralston, D. A., Gustafson, D. J., Cheung, F. M. and Terpstra, R. H. 1993. ‘Differences in managerial values: A study of U.S., Hong Kong and PRC managers’, Journal of International Business Studies, 24: 249–75. Ralston, D. A., Holt, D. H., Terpstra, R. H. and Yu, K. C. 1997. ‘The impact of national culture and economic ideology on managerial work values:A study of the United States, Russia, Japan, and China’, Journal of International Business Studies, 28: 177–207. Schroath, F. W., Hu, M. Y. and Chen, H. 1993. ‘Country-of-origin effects of foreign investments in the People’s Republic of China’, Journal of International Business Studies, 24: 277–90. Shan, W. 1991. ‘Environmental risks and joint venture sharing arrangements’, Journal of International Business Studies, 22: 555–78.

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Sharp, D. J. and Salter, S. B. 1997. ‘Project escalation and sunk costs: A test of the international generalizability of agency and prospect theories’, Journal of International Business Studies, 28: 101–21. Shenkar, O. 1984. ‘Is bureaucracy inevitable? The Chinese experience’, Organisation Studies, 5: 289–308. Shenkar, O. 1996. ‘The firm as a total institution: Reflections on the Chines state enterprise’, Organisation Studies, 17: 885–907. Shenkar, O. 1998. ‘The role structure of Chinese managers’, Human Relations, 51: 51–72. Shenkar, O. and Ronen, S. 1987. ‘Structure and importance of work goals among managers in the People’s Republic of China’, Academy of Management Journal, 30: 564–76. Shenkar, O. and von Glinow, M. A. 1994. ‘Paradoxes of organizational theory and research: Using the case of China to illustrate national contingency’, Management Science, 40: 56–71. Simon, D. F. 1996. ‘Charting Taiwan’s technological future: The impact of globalization and regionalization’, China Quarterly, 148: 1196–223. Smith, P. B., Peterson, M. F. and Wang, Z. M. 1996. ‘The manager as mediator of alternative meanings: A pilot study from China, the USA and U.K.’, Journal of International Business Studies, 27: 115–37. Snell, R. S. 1996. ‘Complementing Kohlberg: Mapping the ethical reasoning used by managers for their own dilemma cases’, Human Relations, 49: 23–49. Sohn, J. H. D. 1994. ‘Social knowledge as a control system: A proposition and evidence from the Japanese FDI behavior’, Journal of International Business Studies, 25: 295–324. Tam, O. K. 1992. ‘A private bank in China: Hui Tong Urban Co-Operative Bank’, China Quarterly, 131: 766–77. Tan, J. J. and Litschert, R. J. 1994. ‘Environment-strategy relationship and its performance implications: An empirical study of the Chinese electronics industry’, Strategic Management Journal, 15: 1–20. Tinsley, C. H. and Pillutla, M. M. 1998. ‘Negotiating in the United States and Hong Kong’, Journal of International Business Studies, 29: 711–27. Tremayne, B. and de Waal, P. 1998. ‘Business opportunities for foreign firms related to China’s environment’, China Quarterly, 15: 1016–41. Tse, D. K., Francis, J. and Walls, J. 1994. ‘Cultural differences in conducting intra- and inter-cultural negotiations: A Sino-Canadian comparison’, Journal of International Business Studies, 25: 537–55. Tse, D. K., Pan, Y. and Au, K. Y. 1997. ‘How MNCs choose entry modes and form alliances: The China experience’, Journal of International Business Studies, 28: 779–805. Unger, J. 1996. ‘ “Bridges”: Private business, the Chinese government and the rise of new associations’, China Quarterly, 147: 795–819. Walder, A. G. 1989. ‘Factory and manager in an era of reform’, China Quarterly, 118: 242–64. Walder, A. G. 1991. ‘Workers, managers and the state: The reform era and the political crisis of 1989’, China Quarterly, 127: 467–92. Walder, A. G. 1992. ‘Property rights and stratification in socialist redistributive economies’, American Sociological Review, 57: 524–39.


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Walder, A. G. 1995. ‘Career mobility and the communist political order’, American Sociological Review, 60: 309–28. Walder, A. G. 1995. ‘Local governments as industrial firms: An organizational analysis of China’s transitional economy’, American Journal of Sociology, 101: 263–301. Walder, A. G. 1996. ‘Markets and inequality in transitional economies: Toward testable theories’, American Journal of Sociology, 101: 1060–73. Warner, M. 1986. ‘Managing human resources in China: An empirical study’, Organization Studies, 7: 353–66. Warner, M. 1987. ‘Industrialization, management education and training systems: A comparative analysis’, Journal of Management Studies, 24: 91–112. Weber, E. U. 1998. ‘What folklore tells us about risk and risk taking: Cross-cultural comparisons of American, German, and Chinese proverbs’, Organizational Behavior and Human Decision Processes, 75: 170–86. Weber, E. U. and Hsee, C. 1998. ‘Cross-cultural differences in risk perception, but cross-cultural similarities in attitudes towards perceived risk’, Management Science, 44: 1205–17. Westwood, R. 1997. ‘Harmony and patriarchy: The cultural basis for ‘paternalistic headship’ among the overseas Chinese’, Organisation Studies, 18: 445–80. Whitley, R. D. 1990. ‘Eastern Asian enterprise structures and the comparative analysis of forms of business organization’, Organisation Studies, 11: 47–74. Whitley, R. D. 1991. ‘The social construction of business systems in East Asia’, Organisation Studies, 12: 1–28. Wilkinson, B. 1996. ‘Culture, institutions and business in East Asia’, Organisation Studies, 17: 421–47. Wong, G. Y. Y. and Birnbaum-More, P. H. 1994. ‘Culture, context and structure: A test on Hong Kong banks’, Organisation Studies, 15: 99–123. Xie, J. L. 1996. ‘Karasek’s model in the People’s Republic of China: Effects of job demands, control, and individual differences’, Academy of Management Journal, 39: 1594–618. Xie, J. L., Song, X. M. and Stringfellow,A. 1998.‘Interfuntional conflict, conflict resolution styles, and new product success: A four-culture comparison’, Management Science, 44(12): S192–S206. Xin, K. R. and Pearce, J. 1996. ‘Guanxi: Connections as substitutes for formal institutional support’, Academy of Management Journal, 39: 1641–58. Yan, A. and Gray, B. 1994. ‘Bargaining power, management control, and performance in United States–China joint ventures:A comparative case study’, Academy of Management Journal, 37: 1478–517. Yates, J. F., Lee, J. W. and Shinotsuka, H. 1996. ‘Beliefs about overconfidence, including its cross-national variation’, Organizational Behavior and Human Decision Processes, 65: 138–47. Yates, J. F., Lee, J. W., Shinotsuka, H., Patalano, A. L. and Sieck, W. R. 1998. ‘Cross cultural variations in probability judgment accuracy: Beyond general knowledge overconfidence?’, Organizational Behavior and Human Decision Processes, 74: 89–117. Yates, J. F., Zhu, Y., Ronis, D. L., Wang, D. F., Shinotsuka, H. and Toda, M. 1989.

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‘Probability judgment accuracy: China, Japan, and the United States’, Organizational Behavior and Human Decision Processes, 43: 145–71. Yeh, R. and Lawrence, J. J. 1995. ‘Individualism and Confucian dynamism: A note on Hofstede’s cultural root to economic growth’, Journal of International Business Studies, 26: 655–69. Zhou, M. and Logan, J. R. 1989. ‘Returns on human capital in ethic cnclaves: New York City’s Chinatown’, American Sociological Review, 54: 809–20. Zhou, X., Tuma, N. B. and Phyllis, M. 1997. ‘Institutional change and job-shift patterns in urban China, 1949 to 1994’, American Sociological Review, 62: 339–65. Zveglich, J. E. Jr, Rodgers, Y. M. and Rodgers, W. M. III. 1997. ‘The persistence of gender earnings inequality in Taiwan, 1978–1992’, Industrial and Labor Relations Review, 50: 594–609.

References Bond, M. H. (ed.) 1996. The Handbook of Chinese Psychology. Hong Kong: Oxford University Press. Child, J. 1994. Management in China during the Age of Reform. Cambridge: Cambridge University Press. China Statistical Yearbook 1998. Beijing: China Statistics Press. Hamilton, G. G. (ed.) 1996. Asian Business Networks. Berlin and New York: de Gruyter. Hui, C. and Graen, G. B. 1997. ‘Guanxi and professional leadership in contemporary Sino-American joint ventures in mainland China’, Leadership Quarterly, 8: 451–65. Li, J. T. and Shenkar, O. 1996. ‘In search of complementary assets: Cooperative strategies and knowledge seeking by prospective Chinese partners’, in J. Child and Y. Lu (eds), Management Issues for China in the 1990s – International Enterprises: 52–65. London: Routledge. Li, J. T. and Tsui, A. S. 1999. ‘Final report on international joint venture leadership teams in China’, paper presented at the PDI Global Research Consortia Asia Conference, Hong Kong, 4 March. Li, J. T., Xin, K., Tsui, A. S. and Hambrick, D. 1999. ‘Building effective international joint venture leadership teams in China’, Journal of World Business: in press. Redding, S. G. 1990. The Spirit of Chinese Capitalism. New York: de Gruyter. Vanhonacker, W. 1997. ‘Entering China: An unconventional approach’, Harvard Business Review, 75: 130–40. Walder, A. G. (ed.) 1996. China’s Transitional Economy. Oxford: Oxford University Press. Xin, K., Zhao, S. and Tsui, A. S. 1998. ‘Supply and development of executives and middle managers in China’, in J. C. Bartels (ed.), Evolution of Business Practices: China Opportunity and Risk: 182–97. Murray Hill, NJ: Dun and Bradstreet.

2 Management and Organizations in China: Key Trends and Issues John Child

China has embarked on a further major phase of enterprise reform in which the promotion of giant enterprises, new forms of corporate governance, entrepreneurship and internationalization all play key parts. This evolution will have an impact on foreign-invested firms in China, many of which are already in the process of re-evaluating China as an investment environment and their policies on partnership with domestic firms in that country. This chapter examines key issues for management and organizations arising within this context, first for Chinese SOEs and then for foreign firms. This is a particularly critical time for management and organizations in China. The post-Deng Xiaoping era is witnessing fundamental institutional changes aimed at completing China’s transition to a market economy and a modern industrial society. Although this new phase of reform is guided by China’s long-term development goals, it is also directed at the more immediate need to invigorate a stagnant state enterprise sector and a banking system paralysed by a mountain of bad debt, largely owed by loss-making enterprises. The reform of enterprises and intermediary business institutions has become all the more pressing because of increasing competition within the economy, the slowing down of economic growth and the Asian financial crisis. Yet, paradoxically, the external pressures on China’s export-led growth imposed by the very same crisis could threaten the country’s ability to sustain the growth it needs to ease the pain of the transitions required by its further reforms. China’s Ninth 5-Year Plan for the years 1996–2000 and its 15-Year Perspective Plan set out the principles and priorities for economic policy into the next century. The plans envisage transitions from a planned to a market economy and from extensive growth based on increases in inputs to intensive growth based on efficiency improvements (World Bank, 1997). The 15th Communist Party Congress, held 33

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in September 1997, called for an accelerated reform of SOEs and identified new ownership structures as a basic requirement for achieving the desired strengthening of the economy. Zhu Rongji has announced an ambitious goal of completing the new reforms within the three years following the start of his premiership in March 1998 (Zhu, 1998). These institutional reforms, together with ongoing trends in the Chinese economy, provide the contest within which a number of key trends and issues for management and organizations in China can be identified. This chapter begins by outlining the context of China’s long-term development aims and current economic trends. It then examines the issues for management and organizations arising within this contest, first for Chinese SOEs and, second, for foreign firms.

CHINA’S DEVELOPMENT AIMS China’s development aims encompass three key transitions. The first is the transition from a predominantly rural society to an industrial society. In 1996, 50.5 per cent of China’s employment was still in agriculture, a proportion that the World Bank expects to drop to one-quarter by 2020, with services accounting for most of the corresponding increase in the non-agricultural labour force (World Bank, 1997; State Statistical Bureau, 1998). The second transition, under way since the mid-1980s and still continuing, is the move from a planned economy to a market economy. China’s objective here is officially described as the attainment of a socialist market economy with Chinese characteristics. This signifies a growing role for market forces in an economy where, however, the state will continue to play an active role in the direction of key economic sectors and in the governance of their major enterprises. The third transition has not received as much attention from commentators as the other two. It has considerable significance, however, for the science and technology sectors where it is taking place, and for other sectors as well. This transition amounts to a selective leapfrogging from an industrial to a post-industrial society, over and above the ongoing transition from a predominantly rural society. It involves the active promotion of new science and technology enterprises in sectors such as electronics and biotechnology. Although these enterprises remain predominantly state-owned, they have benefited from an evolution in managerial autonomy and practice that enables them to

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exploit commercial opportunities (Lu, 1997). This experience of fostering business initiative within the ambit of governmental sponsorship provides a precedent for enterprise reform in other parts of the economy. Taken together, these three transitions provide the impetus for major changes of fundamental significance for the study of management and organizations in China. They require the building of modern enterprises, the acceptance of new work disciplines by employees and managers alike, a shift away from traditional personnel practices, and the massive provision of training. For them to survive in a competitive market regime, the governance structures of Chinese enterprises will need to be reformed to permit more adequate financing, introduce greater accountability for the use of assets, and allow more scope for entrepreneurship. The government has designated five ‘pillar’ industries which, together with certain ‘strategic’ industries such as aeronautics, will spearhead the core state-owned part of the economy. Pillar enterprises are intended to reach international quality standards quickly, to increase their shares in international markets, and to be profitable. The pillar industries – motor vehicles, construction, electronics, machinery and petrochemicals – were chosen as sectors in which China is seen to possess a potential advantage. The presence in these industries of substantial scale economies, together with scope for significant vertical integration advantages, has led the authorities to encourage the building-up of large enterprises within them (Chen, 1998). This building-up involves development of about 1000 of the largest industrial SOEs, out of a total of about 118 000. Taken together, these larger enterprises account for over twothirds of state-sector output. This policy has been described as that of ‘grasp the strong and let go of the small’. In the short term, the move towards larger scale enterprises is being realized primarily through the formation of horizontal enterprise groups, of which there were over 3000 by the end of 1996, and through mergers: 1192 had taken place in 18 experimental cities (Chen, 1998). Decisions about such issues as managing assets, funding investment, internal structure and foreign trade have been decentralized to the new groups. China’s development plans also carry implications for foreign companies. The government has defined a further phase in the development of Sino–foreign business collaboration in which it seeks to direct inward foreign investment towards the transfer of advanced

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technologies, and the development of priority sectors such as sciencebased industry, infrastructure, agriculture and the inland regions. To promote these goals, it has announced a more selective policy on the approval of foreign direct investment (FDI) projects, though the downturn in inward investment at the time of writing has led to a softening in its application. Partnership with foreign companies is regarded as a means of accelerating the transformation of domestic enterprises through the transfer to the latter of ‘creative investment’: namely, ideas, technology, and management and marketing expertise. It is recognized that the potential benefits have to be balanced against the dangers of foreign economic domination, already apparent in sectors such as electronics and telecommunications equipment. For this reason, some senior Chinese commentators are concerned at the increase in solely foreign-owned enterprises, in which the lack of Chinese equity participation may limit the absorption of advanced technology and the strategic experience of management (e.g., Wang, 1998). It is clear that China will progressively attempt to reduce its competitive disadvantage vis-à-vis foreign companies, and this could well mean tightening its policies towards them. One of its intentions in strengthening the top 1000 SOEs is, indeed, to make them internationally competitive with MNCs. This is a necessary objective, given China’s desire for further integration into the world economic order and consequent acceptance of further trade liberalization.

ECONOMIC TRENDS China’s development aims and policies are shaping the long-term context for management and organizations in that country. In the meantime, two economic trends are having a more immediate impact: the slackening of economic momentum, and the growth of competition. China’s annual rate of growth in real gross domestic product (GDP) averaged 8.0 per cent between 1978 and 1995 according to official statistics (World Bank, 1997). It has, however, declined steadily from a high of 14.2 per cent in 1992 to 8.8 per cent in 1997, with a further fall to 7.8 per cent in 1998. More dramatic still has been the decline in annual investment growth from a rate of 61.8 per cent in 1993 to only 8.9 per cent in 1997, though this was pushed up to 15 per cent in 1998 by a considerable increase in government countercyclical infrastruc-

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tural investment. The annual level of contracted FDI fell by 44 per cent between 1995 and 1997, stabilizing in 1998 with a small rise of 2.2 per cent (State Statistical Bureau, 1998, Beijing Review, 1999). Investment from other Asian countries such as Japan, South Korea, Indonesia and Thailand has fallen particularly sharply (China Economic News, 1998). This fall in inward investment impacts significantly on the domestic economy because it is estimated that investment in foreign-funded enterprises may have provided between 20 and 30 per cent of China’s economic growth in recent years (O’Neill and Miller, 1998). The Asian economic crisis is one of two sources of China’s economic slowdown. Approximately four-fifths of FDI into China comes from Asian sources, and this has been seriously reduced by the region’s financial crisis. Reports also suggest that low-value-added sectors and those most dependent on Southeast Asian markets and/or exposed to competition from the region are the worst hit. Such sectors include textiles, shoes and low-end electronics (Ridding, 1998). The second major cause of the slowdown lies in China’s rising unemployment, which was estimated to have reached 8 per cent by April 1998, with much higher levels in northeastern and inland cities. Unemployment has reduced discretionary incomes and reduced the willingness to spend (Johnson, 1998). These increasing pressures on China’s economy emphasize the need for speedier reform and an improved regime for foreign investment. In practice, however, they may well slow down the pace of reform because the government also regards it as imperative to minimize social disruption and unrest. Growing competition within China threatens domestic employment, and the effects could be drastic if the government at the same time withdraws its protective underwriting of Chinese firms. At the time of writing, Premier Zhu Rongji’s timetable for fast-track reform of the banking system and reduction of subsidies to loss-making SOEs was being slowed down, with new encouragement to banks to increase their provision of working capital to those firms which still had saleable products (Melloan, 1998). Overinvestment in production capacity by both domestic and foreign firms has contributed to the growth of competition within China. There is considerable overproduction in areas such as cars, personal computers, colour televisions, video cassette recorders, microwave ovens and other consumer durables. In 1996 industrial capacity utilization was below 25 per cent in the electrical power equipment, personal computers and microwave oven industries;

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between 25 and 37.5 per cent in air conditioners, photocopiers, cars and colour televisions; between 37.5 and 50 per cent in tape recorders, washing machines, bicycles, sugar and cameras; and between 50 and 60 per cent in refrigerators and cooking-oil products (The Economist, 1997). Competition and low capacity utilization are taking their toll on Chinese domestic enterprises, thus adding to the pressures for further reform. Many SOEs have been loss-making for some time, but the proportion had risen in 1997 to over 50 per cent. The previously fastgrowing collective enterprises, including township and village enterprises, which account for over 40 per cent of China’s urban industrial output, are also experiencing increasing difficulties, selling under 90 per cent of their production in 1997. Collectively-owned enterprises are disadvantaged by the increasing proportion of new loans that have gone to SOEs (Harding, 1998). China’s competitive exposure has become increasingly international. China has reduced its tariffs in preparation for World Trade Organization membership. The devaluation of Southeast Asian currencies has eroded the competitiveness of China as an exporting base both for domestic and foreign-funded firms. There has been increasing competition from foreign firms operating in China. This has resulted from the fact that since 1992 China has been the world’s second largest recipient of FDI; there were as many as 240 447 registered foreign-funded enterprises in 1996. Many foreign firms have not been satisfied with the returns they have obtained from their investment in China. For example, more than half the firms in a survey of MNCs in China conducted by The Economists’s Intelligence Unit expressed such disappointment, and a study by the Taiwan Ministry of Economic Affairs found that only 38 per cent of Taiwanese investments in China were profitable (The Economist, 1997). Increasingly tough competition features prominently among the explanations being offered for this disappointing performance. Local producers have, for instance, been increasing their share of the domestic market vis-à-vis foreign companies in computers, consumer electronics and white goods (The Economist, 1998). Other explanations being offered include the unreliability of Chinese joint venture partners, the cost of expatriate managers, and the uncertainty created by unpredictable government actions such as the imposition of regulatory and tax changes, sometimes retrospectively, at short notice (Yatsko, 1997). These circumstances are leading many foreign companies to rethink their policies on control and partnership

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and to question whether it is necessary to have Chinese partners at all (Meier, Perez and Woetzel, 1995; Vanhonacker, 1997; Johnstone, 1998; Smith, 1998).

CHINESE ENTERPRISE REFORM Guided by its development aims, and faced with a steadily tightening economic situation, the Chinese government has its sights set upon building up a strong and competitive core industrial base. It is travelling down a number of paths in the search for ways to achieve this. They include the creation of large-scale enterprises in key sectors, the encouragement of new forms of corporate governance, the fostering of entrepreneurship and the favouring of internationalization. Each path promises potential benefits, but each also raises new questions. Formation of Giant Enterprises The government is targeting key ‘strategic’ sectors and industries critical for national defence and strength. Large SOEs are being encouraged to form conglomerates in the belief that giant enterprises will reap economies of scale and be able to compete with MNCs. Several factors favour the success of the policy to promote giant enterprises. First, they are in sectors where economies of scale and scope are present. Many of the selected key industries are upstream ones and can benefit from economies of scale. Second, most of the 1000 large enterprises selected are already operating on a sound basis, partly because they have so far faced limited competition and have had favourable access to capital. Most large SOEs have experienced sustained output growth and have modernized their technologies. Third, these enterprises have enjoyed considerable support from municipalities such as Shanghai, and public bodies such as the People’s Liberation Army in their capacity as investors. Fourth, the devolution of autonomy under China’s economic reform has allowed for the emergence of entrepreneurship within SOEs (Nolan, 1997). The promotion of giant enterprises via the conglomerate route nevertheless raises a number of unresolved issues. The assumption that achieving large scale through mergers and cooperative agreements will lead to more competitive enterprises begs the question of how successfully the sought-after synergies will be achieved. Will the

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managerial and organizational diseconomies of scale that are likely to arise be outweighed by the technological economies of scale that are sought? Such diseconomies are amplified when large scale is achieved through unrelated diversification rather than through expansion which permits existing commercial, managerial and technological competencies to be applied (Rumelt, 1974; Donaldson, 1985). Indeed, the pursuit of growth through the conglomerate route flouts the recent strategic management emphasis on companies building upon their core competencies and floating off or subcontracting other activities wherever possible (Barney, 1991; Hamel and Prahalad, 1994). Some of the new Chinese enterprise groups encompass a great deal of unrelated activity, a prime example being the Shougang (Capital) Iron and Steel Group, which has taken over more than 200 other enterprises. Moreover, some profitable SOEs have, at the government’s bidding, taken over failing enterprises in order to maintain their employment. A recent example is the Handan Iron and Steel Group’s absorption of two unprofitable steel mills. This has added to its production capacity at a time of oversupply and has led it to divert its use of capital. It is relevant to note how the South Korean government has concluded that recovery of the ailing giant chaebol conglomerates requires both the divestment of loss-making subsidiaries and the swapping of others so as to enable each corporation to increase its industrial focus (Lee, 1998). Another consideration is that Chinese industry is characterized by strong subcultures. People identify closely with particular work units, regions and municipalities (Child, 1994). These subcultures, generally stronger than those found within less diversified and less traditional societies, challenge the cohesion of any large Chinese conglomerate. The fact that most Western MNCs have grown through organic expansion and related diversification, and that for them competitiveness was the source of growth rather than vice versa, should cause Chinese policy markers to reflect. Indeed, granting favoured companies ‘soft budgetary constraints’, such as guaranteed government credit, and other privileges, such as domestic monopoly rights, could lessen their impetus to get fit enough to face international competition (Chang, 1998; Gilley, 1998). The organization of the new ‘big business’ corporations presents challenges both externally, with respect to systems of accountability, and internally, with respect to management structures. There is a keen debate over which organizational model to apply. One issue is whether to adopt a foreign model or develop an indigenous one. The chaebol

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approach would retain a close relationship between the state and business leadership, although the Asian economic crisis has exposed the dangers inherent in this model’s lack of transparency. Is the arm’slength MNC a more suitable model? If the MNC model is preferred, Chinese firms will need to learn how to combine financial and technical controls with business and operational autonomy, applying styles of management and structures which would be quite novel for them (cf. Ghoshal and Westney, 1993; Qin, 1999). The internal organization of these giant enterprises will need to be designed to cope with the task contingencies they face. Large scale in itself poses the challenge of how to avoid the cost and potentially stultifying impact of extended hierarchical levels. The control and coordination requirements presented by the highly complex network of activities and competencies in a large diversified company raise questions about the best configuration of product and regional units. There are, moreover, fundamental dilemmas, heightened by growth and diversification, arising from the need to reconcile requirements such as control and flexibility, standardization and diversity, indigenous and foreign staffing. The response to these issues will determine the character of the new giant enterprises: a hierarchical mode would follow more naturally from their state-owned inheritance and large scale. A network, loosely coupled mode, with quasi-autonomous multinational operating units would, however, be more flexible in response to the turbulence and uncertainty of the increasingly ‘hypercompetitive’ world economy that large Chinese enterprises aspire to enter (Ilinitch, D’Aveni and Lewin, 1996). There is a major opportunity for researchers to monitor and evaluate the development of new organizational forms for the large SOEs, and to draw constructively on lessons from the experience of MNCs and other large diversified firms. Corporate Governance From a broad social perspective, a more fundamental criterion against which to judge the new organizational forms adopted by Chinese enterprises is whether they ensure effective corporate governance. Now that the managements of SOEs have been granted a considerable degree of decision-making autonomy (see the Appendix), clarifying their accountability and governance constitutes the natural next step in China’s economic reform. A number of new developments are under way. They involve a diversification of ownership

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forms, the creation of more joint stock companies, the opening of new avenues for capital financing, and a devolution to enterprises of the responsibility for their own survival. The 15th Communist Party Congress, held in September 1997, gave prominence to the development of new ownership structures as a key component in the reform of ‘public sector’ enterprises, and also cases in which such ownership is mixed with private investment. In his ‘Report to the Congress’, President Jiang Zemin stated that it was China’s intention: to retain a dominant position for public ownership and to develop diverse forms of ownership side by side . . . Public ownership can and should take diversified forms . . . the joint stock system is a form of capital organization of modern enterprises, which is favourable for separating ownership and management and raising the efficiency of the operation of enterprises and capital. (Beijing Review, 1997: 18–19) The new policy is to retain a dominant state share of industrial capital and control only in the pillar and strategic industries. The rest of industry is now open to experiment. As senior economist Dong Fureng is reported as saying, ‘Other sectors should introduce the free competition of diversified ownership’ (Han, 1998: 19). Jiang Zemin acknowledged that ‘there have appeared a large number of diverse forms of joint stock partnerships in the urban and rural areas’, and urged that ‘we should support them, give them guidance, constantly sum up their experience and improve them’ (Beijing Review, 1997: 19). Experiments along these lines have been under way for some years, and the number of domestic joint stock companies in China is reported to have risen from 3600 in 1995 to 9000 by the end of 1997 (Han, 1998). One line of experimentation has seen the transformation of the property rights of many smaller SOEs into shareholding and cooperative systems, usually through a sale of shares to employees.The guidelines laid down by the central authorities for such a transfer include the provision that shares should always be retained among those working within the enterprise and that an employee shareholding conference, reminiscent of the former ‘workers’ congresses’, assumes final authority over the enterprise. This conference elects members of the enterprise board and supervisory council (Li, 1997). The underlying objective is to explore new ways of combining business autonomy with a changed role for government. This poses an

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acute challenge in the science and technology sectors, where enterprises rely on scientific inputs from public-sector research institutes but also require significant investment for new product development; they must seize new commercial opportunities entrepreneurially in a fast-moving, highly competitive market. The institutional need here is to bring together the technological strength that has developed within public research institutes with the opportunity-seeking, flexible entrepreneurship that characterizes the traditional Chinese model of doing business. This requires an accommodation between the cultures of bureaucracy and enterprise. Highly successful enterprises in the information technology industry – particularly the Founder Group, the Legend Group and the Stone Group – point to an evolving form of governance which has been able to meet these requirements. These enterprises are officially categorized as collectively owned or state-owned, but they have considerable strategic decision-making autonomy (Lu, 1997). This autonomy has in effect turned state support into a business asset rather than a liability. The transfer of scientific staff and advanced technology from public institutions such as the Chinese Academy of Sciences and Beijing University has given these science-based enterprises a competitive edge. The public scientific institutions claim fees rather than ownership rights over the enterprises, which has helped the enterprises to develop with a high level of autonomy.Their collective public ownership has ensured the investment of surpluses in building their capabilities. Most of their after-tax profits have been held as retained earnings, and their assets are largely the product of accumulated earnings. Their managers have been given the right to allocate financial resources. They can therefore make investment decisions on the basis of close market and technological knowledge and without lengthy bureaucratic delays. In addition to the right to retain surpluses for reinvestment, managers have had the freedom to raise capital from sources outside the state budgetary system, including foreign financial markets. Legend, for example, has established a foreign holding company which will probably provide the main vehicle for its international expansion and could in time effect a reverse takeover of the domestic units. Science-based companies such as Founder, Legend and Stone have thus evolved a new form of corporate governance which renders their official ownership status rather nominal. In return for their special legal status, the government obliges these companies to meet certain requirements, including new product innovation, export and technology staffing targets, but it refrains from direct intervention in their

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business. This arrangement offers a model of evolution towards managerial autonomy and non-bureaucratic practices within SOEs that other sectors may emulate.It is consistent with the new culture of entrepreneurship that has also emerged in some SOEs, as noted below. These are bold experiments, but there nevertheless remain grounds for concern over the evolution of corporate governance in China. One is that, despite the listing of some enterprises on foreign stock exchanges, corporate governance among the majority of SOEs seems to be evolving towards control by insiders, managers and local state holding companies, rather than by external stockholders and other providers of capital. This would appear to offer only slight assurance against the featherbedding, wasteful investment and diversion of state assets to other sectors that has hitherto characterized much SOE management (Huchet and Richet, 1998; Wu and Chiu, 1998). Second, despite decentralization, property rights over SOEs remain ambiguous. Government agencies often continue to claim such rights. With so many administrative entities still able to claim ownership rights over SOEs, including state asset management companies, affiliated companies belonging to local administrations and supervisory councils and managers, no party can be held responsible for any losses they incur and for the risk of investing in them. Huchet and Richet (1998) pointed out that lessons drawn from the reforming Eastern European economies and from the debate over corporate governance in the West could prove valuable to China. This debate is bringing to the surface many of the issues that are involved in aligning accountability with the necessary degree of managerial autonomy. For instance, evidence from different countries suggests that both legal protection of investors and some form of concentrated ownership are essential to ensure managerial accountability (Shleifer and Vishny, 1997). There is also a rich foundation to the study of corporate governance in the literatures on ownership and control (Berle and Means, 1932), agency theory (cf. Eisenhardt, 1989), and institutional analysis (Hawley and Williams, 1996). Such work can, at the very least, raise issues pertinent to corporate governance in China, even if solutions have to be devised with reference to that country’s specific context. Entrepreneurship2 The focus of research on entrepreneurship in modern China has been on the private and small collective sectors which have operated with

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fewer institutional constrains than the SOEs (Kraus, 1991; Young, 1995). However, a more remarkable phenomenon, with important implications for the progress of economic reform, has been the recent emergence of entrepreneurs in the state-owned sector. Examples are Liu Han Zhang, Director of the Handan Iron and Steel Works, Wang Jianming, Director and later Chief Executive Officer (CEO) of the Yuchai Diesel Company, and Li Ming, Chairman of Baosteel (Baoshan Iron and Steel Group). To operate successfully, these industrial leaders have had to establish the same features through which large corporations outside China have prospered: a management system that enables the business to respond to demand, raise capital, produce better and cheaper products than the competition, achieve technical progress, and pressure suppliers to improve quality and lower prices. State-sector entrepreneurs have secured commercial freedom and the ability to formulate their own strategies through complex negotiations with the government bureaucracy. Moreover, at the same time as they are trying to operate in a market environment, they continue to have responsibility for their employees’ welfare. Arguably, therefore, the entrepreneurial achievement of senior managers of China’s large enterprises is even greater than that of the leaders of large capitalist firms. As Nolan commented, the industrial reforms in China ‘have revealed great business capability dormant within the old Maoist system’ (1997: 9): People whose lives have been spent in military and political struggle have often adjusted skilfully to the market economy, possessing the strategic and human resource management skills necessary to build a large business successfully. The Chinese approach towards reform has also sustained personal networks from the command economy period. These networks are an important part of any economy, but are especially so in East Asian economies. (Nolan, 1997: 9) The reforms introduced by these new entrepreneurs include increased attention to the market, heightened awareness of the customer, accounting standards and strong cost controls, and an emphasis on financial incentives, usually achieved through aligning bonus systems with performance criteria and allowing them freer range to reflect achievement. For example, it is reported that in Handan Iron and Steel, annual wages ranged in 1996 between 4500

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and 40 000 yuan (Walker, 1996). Also notable has been the modernization of technology. To facilitate this investment and the transfer of technology, firms such as Yuchai Diesel have established foreign joint ventures and raised capital overseas. In fact, Yuchai was the first Chinese firm to float on the New York stock market (Nolan and Wang, 1997); by 1998, eight Chinese companies were listed in New York, plus another nine Chinese-funded companies. The introduction of foreign capital has required a significant increase in the transparency of the SOEs concerned, and it is thus a force for the reform of their corporate governance. The remarkable emergence of entrepreneurship in what was previously the most heavily government-controlled sector of Chinese business raises several issues deserving further investigation. An obvious policy-relevant question is why entrepreneurs have succeeded in some firms but not in others, even within the same sector. Is this difference primarily a matter of serendipity, whereby some enterprises have been fortunate enough to have leaders who have the right ability, personality and experience? Or is a supportive institutional environment also fundamental, especially a local government sympathetic to entrepreneurial aspirations, as exemplified by the Guangxi provincial government in the case of Yuchai Diesel? Another issue of great interest is whether successful state-sector Chinese entrepreneurs adopt a distinctive approach and style, given the circumstances in which they operate. How do they compare to non-mainland Chinese business people (cf. Redding, 1990)? This question offers the prospect of teasing out cultural and non-cultural influences on business leadership behaviour. The interplay between these two sets of influences is also of vital concern for China’s continued economic development. How can the cultural capital of Chinese managers – their innate business acumen, negotiating skill and facility in constructing networks and operating through guanxi – be reconciled constructively with the political, social and other institutional factors which constrain initiative in mainland China and breed cautious, self-protective attitudes? Internationalization The internationalization of Chinese organizations is a two-way process. It is proceeding, in the one direction, through the growing overseas investment of mainland Chinese firms. It is promoted, in the

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other direction, by the inward investment of foreign companies and the reduction in China’s tariffs and trade barriers. The level of FDI by mainland Chinese enterprise groups has been rising (United Nations, 1998). So far, this investment has been directed primarily at securing and exploiting sources of raw material. It is the government’s intention, however, that its new breed of ‘superenterprises’ will compete internationally and probably simultaneously expand their overseas production and distribution in search of new markets. The international expansion of Chinese enterprises raises a further set of important issues. One concerns choosing forms of investment: acquisitions, alliances or greenfield ventures. In the case of alliances, a dominant, shared or minority ownership strategy has to be chosen (cf. Young, Huang and McDermott, 1994). To what extent does the apparently active role of the Chinese government in controlling this investment development path inhibit the ability of enterprises to devise their own internationalization strategies (Zhang and van den Bulke, 1996)? Firms need competitive advantages to succeed in international markets and establish successful operations abroad (Caves, 1996). Therefore, another key issue for the internationalization of Chinese enterprises is whether they can develop the necessary skills and capabilities to meet the accompanying managerial and organizational challenges which internationalization will bring. Such firms will be expanding from a domestic environment that differs in its culture, philosophy and institutions from the environments they are entering. This difference may have profound consequences. One adjustment concerns the ability of these enterprises to blend their best practices with local conditions and local staff, an ability which is likely to depend on how successfully they manage multicultural teams and reconcile the different identities of their Chinese and foreign staffs, as well as the organizational forms they choose for facilitating these adjustments (Child, Markóczy and Cheung, 1994; Drummond, 1997). A further organizational challenge concerns the way in which the new generation of Chinese super-enterprises will configure their overseas managerial networks as they expand internationally. Although tempered by the special features of Chinese bureaucracy, China’s state sector has nevertheless relied heavily on social networking, formerly in order to compensate for the deficiencies in central planning and latterly as a channel for domestic expansion and the formation of

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enterprise groups. This reliance on social networking, together with the largely tacit understanding on which it runs, is sufficiently singular to have led Boisot and Child (1996) to label it ‘network capitalism’. Yet, despite the international Chinese diaspora that one writer has called the new Chinese Commonwealth (Kao, 1993), this network cannot be relied upon in all regions to staff and coordinate internationalizing Chinese enterprises. The international Chinese network is not strong in Latin America, Africa or many parts of Europe. Chinese enterprises are therefore likely to assume an increasingly corporate character as they diversify. Their penchant for centralized, personal decision making, hierarchical relationships, vertical communication channels and external networking based on implicit norms will come under strain when internationalization brings growth in scale, spatial diversification and the introduction of non-Chinese staff who hold different norms of business and managerial practice. Insofar as they join forces with foreign MNCs to facilitate their international market entry and investment in capacity overseas, this transformation will be accelerated. In other words, the kind of participation that Chinese firms will come to have in the international division of labour has profound implications for the forms of management and organization they are likely to adopt. These considerations, plus the growing significance of large foreign corporations as direct investors, raise the question of the future role of MNCs in China’s economic development. This is the other side of the internationalization process.There are alternative models China could prefer. The ‘partnership’ model, in which both inward and outward investment are generally shared with MNCs through joint ventures, allows the Chinese party a measure of joint control and tends to open up channels for the transfer of technology and management expertise. Trade and investment are subject to some restrictions, especially in strategic sectors. Another model is the ‘Singaporean’ one, in which inward investment is more likely to take the form of sole MNC ownership, though outward investment may be through joint ventures. In this model, trade and investment are relatively free of restrictions. A third possibility is the ‘Japan/Korea’ model, in which foreign MNCs are either excluded or given a limited role in both inward and outward investment. Trade is also carefully controlled, with inputs restricted by tariff and non-tariff barriers and export strategies devised in close consultation with the home government. Each model has different strengths. The partnership model is likely to be particularly effective for the transfer of technology and exper-

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tise to domestic enterprises. It should also improve transparency in respect to transfer prices and other charges made by foreign firms on the domestic economy. The Singaporean model has proved effective in attracting large amounts of FDI, and the reduced fear of leakage that should accompany its high level of foreign control may encourage the transfer of the latest technologies. The transfer of managerial expertise may, however, be more limited. The Japan/Korea model promises the highest level of domestic economic autonomy. Whichever model China prefers will have important implications for the control rights enjoyed by foreign firms within its economy. MNCs will also have their own views about partnership, and these are already being expressed forcefully with respect to China.

FOREIGN FIRMS IN CHINA: STRATEGIC AND OPERATIONAL ISSUES The restructuring of large SOEs and their strengthening into competitive enterprise groups is an important contextual development for foreign firms. First, it adds to the growing competitiveness of the Chinese market and exerts a downward pressure on the returns available to foreign firms. It is no longer so easy to do well in China simply on the basis of possessing a foreign brand and/or supplying a want not yet catered for by domestic firms. Second, the strengthening of key Chinese enterprises raises the question of whether or not they will be partners or rivals to MNCs, both within and outside China. At the same time, China continues to present a highly complex environment for most foreign firms. In particular, a widely held perception persists among foreign managers that the conditions for doing business in China are highly unpredictable. This perception applies both to the reliability of transactional partners and to the ways that legal and regulatory behaviour in China is subordinated to short-term political ends in matters such as administrative charges, taxation and environmental regulation. These complex contextual conditions raise strategic and operational questions. Strategic Issues For foreign firms wishing to invest, China presents an environment that exhibits both ‘crude’ and ‘effective’ complexity, to use GellMann’s (1995) terminology. Crude complexity is a function of the

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number of elements in a system and the number of connections among them. It is in these terms that most management and organization theorists have referred to ‘complex’ environments. Modern knowledge management and information technologies now provide considerable assistance in coping with this kind of complexity, which does not therefore in principle pose a major problem for firms. Effective complexity, by contrast, is a function of the irregularity and therefore unpredictability of a system. Labelled ‘variability’ or ‘turbulence’ (Child, 1972), this is a much more potent source of uncertainty. China exhibits high levels of both forms of complexity. Different industrial ownership systems and varying degrees of marketization (Nee, 1992), regions which contrast in culture, infrastructure and other business-relevant conditions (Child and Stewart, 1997), and significant intergenerational differences (Ralston, Stewart and Terpstra, 1995) are all significant aspects of China’s crude complexity. These are, however, relatively predictable. It is the ambiguities in, and negotiability of, many regulations and property rights in China, and the general lack of transparency in the system that foreign managers find much more challenging and frustrating. These characteristics create uncertainty, and they constitute significant aspects of China’s effective complexity. One particular lack of transparency that many foreign managers perceive and complain about is the ‘unreliability’ of their Chinese joint venture partners (Vanhonacker, 1997). For instance, Chinese partners may not make their true economic circumstances clear to foreign investors before establishing joint ventures with them; the troublesome Citroen/Dongfeng car venture is a recently reported example (Seidlitz and Murphy, 1998). There are broad strategic choices as to how to handle effective complexity. One choice is to try to negotiate, or even impose, greater predictability. The other alternative is to absorb external complexity by keeping a number of options open and building the capability to modify routines. These alternatives require organizational learning of different kinds. The complexity reduction strategy requires learning how to reduce environmental variability through negotiation, whereas the complexity absorption strategy requires learning how to adapt and prosper under high environmental variability. The complexity reduction strategy does not favour working with local partners in the hope of gaining their assistance in adapting to the Chinese environment; rather, it entails channelling foreign corpo-

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rate resources, in finance, products and technology, to influence the environment. A foreign investor might coopt government support through employment creation and local economic development programmes, or apply advanced technologies for local benefit. A foreign firm may also aim to reduce external uncertainty by building a dominant market position through strong promotion of internationally recognized brands and corporate reputations. Coca-Cola provides a good example of this approach (Nolan, 1995). It is clearly easier for an MNC to pursue a complexity reduction strategy than it is for a smaller and less internationally recognized firm to do so. This strategy also holds out more promise in sectors in which products have high brand equity. In such sectors, partnership with domestic firms and their superordinate government agencies is not essential for access to the market, and there are usually no comparably strong domestic competitors with which it may be essential to form partnerships. The complexity reduction strategy is therefore likely to be particularly attractive to MNCs that attach high value to global product standardization and have products which generate their own demand rather than needing to be highly responsive to taste and other local conditions. The complexity absorption strategy, by contrast, entails a high level of learning from, and working with, local Chinese partners.These partners are viewed as a potential source of knowledge and social credit that can help foreign companies learn how to adapt to the Chinese environment. Although the ability and willingness of Chinese partners to deliver such benefits is often questioned, the emergence of the new large, effective SOEs and the greater accountability to which they will become subject as they seek financing from foreign and other private sources may in the future offer foreign countries more attractive strategic allies for the pursuit of complexity absorption and other benefits of partnership. Indeed, as local producers become more competitive, cooperation will become a more attractive option than price wars. Coping with complexity in China is thus closely tied in with foreign investor policy on local partnerships. By the mid-1990s, there had clearly been a marked shift in foreign investor preference away from JVs with Chinese partners and towards wholly-owned foreign enterprises (WOFEs), as well as towards securing a controlling majority of shares in the equity of already established JVs. In 1997, the number of WOFEs exceeded the number of Sino–foreign JVs for the first

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time (Li, 1998). One influence on this shift was a 1991 taxation law change which removed advantages previously enjoyed by equity joint ventures (EJVs). But is this trend based on sound economics or on the desire to simplify management and extend MNC-style corporate control? In taking the apparently easier path, what benefits from working with a local partner are lost? Are the higher costs of the consequently more intensive expatriate involvement worthwhile and sustainable? Research on this issue presents conflicting results and clearly requires further attention. Evidence on the performance consequences of partnership as opposed to dominance or whole-ownership has been mixed for both China and other parts of the world. In the case of China, Wang, Zhu and Tan (1998) found that foreign partner rights to key managerial appointments in JVs were associated with greater satisfaction with JV performance among both foreign and Chinese managers. A large-scale survey using data from the 1995 industrial census concluded that although WOFEs on average achieved a higher market share than did EJVs, they had an inferior level of profitability (Pan, Li and Tse, 1999). Child and Yan (1998) found that the Sino–foreign JVs rated as more profitable tended to be those in which the foreign partner did not dominate decisions, especially those on strategic issues. This observation is consistent with a study which found that Chinese JVs with a minority foreign equity stake were more profitable (Andersen Consulting, 1995). It is not yet clear, however, which contributes most to superior profitability: the benefits of partnership, or the cost advantages of lower expatriate staffing. The jury would appear to still be out, but the evidence does not entirely support the common presumption among foreign managers that it is no longer worth pursuing partnership in China. Future research should compare the relationship between performance and the model of organizational governance employed by foreign investors in China with reference to different contingencies, such as sector, investor’s experience in China, and the strategic importance of applying globally standardized policies to China. A further strategic issue for foreign firms wishing to invest in China concerns the level of resources they commit, whether equity capital, or contracted or informal transfers of non-capital resources such as technology and training (Child, Yan and Lu, 1997). This issue ties in with the question of governance in that wholly-owned subsidiaries normally entail greater commitment in all three categories than do

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JVs. Resource dependence may provide the lever for control, but it is also expensive (Pfeffer and Salancik, 1978). Yan and Gray (1996) focused on parent company resource provision to Sino–US JVs primarily as a lever for bargaining power and control, and they found no direct relationship between provision and performance. By contrast, Child and Yan (1998) focused on resource provision as a source of competitive strength for a JV in China’s resource-scarce environment. Using more direct measures of resource provision, they found that the level of resourcing, especially by the foreign parents, predicted 45 per cent of the variance in reported JV performance. So once again, research has so far failed to provide a clear verdict on a central policy issue for foreign firms in China. Another major decision for foreign firms is where to locate their operations in China. The Chinese authorities are now encouraging new foreign investment to go to the central and western regions, in order to redress the imbalance in development between them and the prosperous coastal provinces. The combination of distance and underdeveloped transportation services, however, means that inland investment attenuates communications between a foreign company and its JV or subsidiary. The foreign parent’s ability to provide a direct technical and managerial presence through frequent visits is thus constrained (Child and Stewart, 1997). This personal support is likely to be even more necessary for inland locations than for coastal ones because relevant expertise and experience are generally more limited inland. China’s 1995 industrial census in fact showed that foreign firms in the central and western regions had secured lower market shares and returns on assets than those in the coastal regions, especially Shanghai and Guangdong (Pan, Li and Tse, 1997). Operational Issues Several operational issues arise from the contrast between local and international managerial practices. The way the consequent tensions are resolved bears upon the extent and speed with which foreign firms can contribute to China’s managerial competence. Prominent among these issues are human resource management (HRM) and cultural accommodation. MNCs frequently adapt some aspects of HRM to regional or country-level labour market conditions, regulations and cultural norms. These aspects are primarily terms of employment and rates of basic pay. Recent studies suggest that traditional Chinese HRM

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practices, such as job security and formal systems of worker representation, remain embedded in foreign-invested JVs as well as in SOEs (Goodall and Warner, 1997). Nevertheless, there is evidence of reform. Standardized MNC policies on promotion and performance appraisal have frequently been introduced, and pay is sometimes linked to performance. The traditional Chinese practices that tend to be retained are primarily a low differential between managerial and non-managerial pay and the provision of extensive benefits (Ding, Fields and Akhtar, 1997; Lu and Björkman, 1997). In general, the degree of integration between Chinese and foreign HRM practices is low. HRM practices amount to an institutionalization of cultural values and sociopolitical ideology. For example, the provision of housing and other benefits by Chinese enterprises combines the high cultural value placed upon community and the socialist value placed upon welfare. Integrating foreign and Chinese management practices is therefore part of a wider issue: namely, what options are available for addressing the underlying cultural and institutional differences. There are two choices here. The first is whether a single approach, international or local, should dominate, or whether a balance of contributions from each approach should be sought. The second is whether or not to attempt an integration of the two approaches with the aim of drawing the best out from each and even achieving a degree of synergy between them. The alternative would be to segregate their application within a Chinese venture, with the aim of minimizing intra-organizational conflict. These two dimensions of choice give rise to four possible outcomes. The first three offer different bases for achieving some fit between Chinese and foreign cultures or, more precisely, between the practices which reflect them. They do not, however, extract the same level of benefit from the experience and knowledge offered by the different cultures. The fourth case, by contrast, amounts to an operational failure. These four possible outcomes are represented in Figure 2.1. Synergy aims at cultural integration based on melding partners’ cultures and associated management practices. Domination aims at cultural integration based on dominance by one partner’s culture. Segregation aims at balance between partners’ cultures, allowing each to prevail in different areas of activity. Breakdown results from one partner’s seeking domination but failing to secure the other partner’s

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Yes

No

No

Synergy

Segregation

Yes

Domination

Breakdown

Domination by one partner

Figure 2.1

Four possible outcomes in the management of cultural diversity Source: Adapted from Tung (1993).

acceptance. It is not a viable policy option and is therefore the exception in this schema. The ideal of synergy is that the whole is greater than the sum of its parts. The key principle of this policy is that the ‘positive aspects of the various cultures are preserved, combined, and expanded upon to create a new whole’ (Tung, 1993: 465). Some foreign firms in China may, however, reject synergy in the belief that they possess technical and managerial know-how and that it would therefore be beneficial to apply their approach wholesale; thus they prefer domination. Domination gives rise to cultural fit to the extent that both Chinese and foreign parties accept it and are prepared to work within its terms. Situations in which Chinese cultural domination is acceptable can often be found where the foreign partner invests limited capital, perhaps regarding royalties from technology transfer as a more secure future income stream. The foreign partner may be quite content for its Chinese partner to manage the alliance according to its cultural norms, subject perhaps to certain technical standards. These standards and associated training do introduce the foreign culture to a limited extent. The Pilkington–Shanghai Yaohua Glass JV provides a successful example of this form of accommodation. However, domination can prove to be fragile basis for intercultural accommodation over the long term. Cultural dominance by one party

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may be accepted by the weaker party as a basis on which to get a JV up and running, but it can cause resentment once those initial requirements have been achieved. Resentment is particularly likely to arise if the culturally dominated party perceives that it is thereby subordinate. The Chinese partner and its personnel may be all the more sensitive to perceived subordination to a foreign partner in the light of historical national sensitivities, whereas the foreign partner is likely to be more concerned about the financial and technical risks of having inadequate control. Segregation aims at an acceptable balance between Chinese and foreign cultural inputs but does not attempt any integration or synthesis between them. An example would be a foreign partner’s introducing its systems for production and quality control, while the Chinese partner manages external transactions in its customary manner. This form of intercultural accommodation does not offend either partner but can clearly be a suboptimal solution in other respects. Segregation entails a corresponding separation of the tasks each partner will manage and thus reduces the opportunities for mutual learning to a very low level. It is, moreover, likely to lead to inefficient management, with continuing problems due to limited communications and a sense of rivalry between different functions within the alliance. For instance, quality standards might be established by one partner but not conveyed effectively to suppliers by the other partner. Segregation is a policy of differentiation without the corresponding integration. Segregation is also liable to give rise to personal problems for the people who are seconded to work in a JV, especially expatriates. It can make it difficult for an expatriate to acquire the local language or understand local behavioural norms. The expatriate and his or her family will tend to be isolated, possibly in a foreign ghetto, and will suffer a high chance of family stress and personal failure.

CONCLUSION It is apparent that in the debate on management and organizations in China, contingencies reflecting that country’s stage of development and the condition of its industries are competing against ideologically and culturally informed policy preferences. The macro question is whether the logics of efficiency and economic rationality will guide Chinese enterprise reform, rather than embedded political and insti-

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tutional norms. This conflict essentially comes down to how the concept of a socialist market economy with Chinese characteristics is to be interpreted. At the micro level, the question is whether the future direction of enterprise reform will reflect strategic and operational needs rather than a desire to retain political control and placements. Current developments in state enterprises suggest that the first option may prevail, but with difficulty. There is much for scholars of management and organization to do, if they are to inform these large and important issues. Future research on management and organizations in China needs to satisfy two important requirements if it is to make a valid and useful contribution. The first is to improve the quality and consistency of the information that is collected. It is not so much the range of data sources – from officially run surveys to intensive case studies – that present a problem as the lack of operational comparability between studies ostensibly using similar research methods and addressing similar issues. Some of the lack of convergence between research findings has undoubtedly arisen because of this inability to offer precise comparisons and hence to accumulate knowledge. Mixed and conflicting research findings may, however, also have arisen because of researchers’ failure to take due account of context and contingencies. This problem draws attention to the second requirement for improving China-related research. A key to reaching a better understanding of the issues facing both indigenous and foreign firms in China lies in the adoption of a frame of analysis that is more sensitive to that country’s context. It is not particularly fruitful, for instance, to address the question of which governance systems the new breed of large Chinese enterprises should adopt without reference to the strong conditioning features arising from recent Chinese history, the country’s political and institutional structures, and the availability of intermediate systems for auditing and legal regulation. It is also necessary to take the context into account when furnishing advice to foreign managers about the policies to pursue in China. This chapter suggests that decisions on control and partnership need to be informed by contextual factors such as the relative significance of global integration and sensitivity to local conditions, the role Chinese partners can play in delivering the market, and the stage that a foreign company has reached on its China learning curve. In a similar vein, Lu and Björkman concluded that ‘HRM practices in

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the international business context are a configuration of various approaches and contexts in which IJVs [international joint ventures] operate’ (1997: 625). These contexts include the industry, the MNC’s home country, and its share of joint venture ownership. In short, the organizational researcher is introduced in China to momentous issues which are being played out on a grand scale and with far-reaching consequences for the whole world. What China has embarked upon through its economic reform, and is now taking forward into a new phase, is a huge social and economic experiment. It is located within what will soon become the world’s largest economy. Events on such a scale attract both academic and political dogma. This review suggests that it is constructive to eschew such dogma in favour of framing issues carefully. Academic research can inform the policy options for management and organizations in China by identifying specific political and task contingencies that have to be satisfied, weighing these against each other, and considering how they can be reconciled through innovative solutions.

Appendix: Increases in State-owned Enterprises’ Decision-making Autonomy* Area

1993

1995

1997

Purchasing materials Production Sales Internal organization Wages and bonuses Pricing Use of retained profits Manage personnel Hiring of labour Investment Disposal of assets Establish mergers, acquisitions, JVs Import and export Refuse non-regulated government charges

91 89 89 79 70 76 64 54 44 39 39 44

98 97 96 94 93 85 88 84 75 73 68 60

98 98 97 97 96 92 91 90 84 83 77 61

15 7

41 17

54 35

* The percentage of enterprises declaring complete decision-making autonomy in each area is shown. Source: Chinese surveys cited in Chen (1998).

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Notes 1.

2.

The author wishes to thank the organizers of and participants in two research conferences, ‘Management and Organizations in China’, held at HKUST in January 1998 and the ‘Conference on Emerging Economies’, held at ESSCA, Angers, France, in April 1998, for their helpful comments on presentations from which this chapter derives.Appreciation is also due to the Economic and Social Research Council and the Leverhulme Trust, which have funded research informing the analysis offered here. This section draws on Nolan (1997) and unpublished case studies written by Nolan and his colleagues.

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Child, J., Yan, Y. and Lu, Y. 1997. ‘Ownership and control in Sino–foreign joint ventures’, in P. W. Beamish and J. P. Killing (eds), Cooperative Strategies: Asian Pacific Perspectives:181–225.San Francisco,CA:New Lexington Press. China Economic News. 1998. ‘Report on foreign funds’, 8 June: 3–4. Ding, D., Fields, D. and Akhtar, S. 1997. ‘An empirical study of human resource management policies and practices in foreign-invested enterprises in China: The case of Shenzhen’, International Journal of Human Resource Management, 8: 595–613. Donaldson, L. 1985. In Defence of Organization Theory: A Reply to the Critics. Cambridge: Cambridge University Press. Drummond, A. Jr. 1997. ‘Enabling conditions for organizational learning: A study in international business ventures’, unpublished doctoral thesis, University of Cambridge, February. The Economist. 1997. ‘The China syndrome’, 21 June: 79–80. The Economist. 1998. ‘Chinese companies: Silicon Valley, PRC’, 27 June: 88, 93. Eisenhardt, K. M. 1989. ‘Agency theory: An assessment and review’, Academy of Management Review, 19: 57–74. Gell-Mann, M. 1995. The Quark and the Jaguar: Adventures in the Simple and the Complex. London: Abacus. Ghoshal, S. and Westney, D. E. (eds). 1993. Organization Theory and the Multinational Corporation. London: Macmillan. Gilley, B. 1998. ‘The bigger, the better: Man with the plan’, Far Eastern Economic Review, 21 May: 13. Goodall, K. and Warner, M. 1997. ‘Human resources in Sino–foreign joint ventures: Selected case studies in Shanghai compared with Beijing’, International Journal of Human Resource Management, 8: 569–94. Hamel, G. and Prahalad, C. K. 1994. Competing for the Future. Boston, MA: Harvard Business School Press. Han, G. 1998. ‘Joint stock system: A way to invigorate state enterprises’, Beijing Review, 23 March: 19–21. Harding, J. 1998. ‘Chinese collectives’ pace checked’, Financial Times, 6 January: 6. Hawley, J. and Williams, A. T. 1996. Corporate Governance in the United States: The Rise of Fiduciary Capitalism. A review of the literature prepared for the Organization for Economic Co-operation and Development, Paris. Huchet, J. F. and Richet, X. 1998. ‘China in search of an efficient corporate governance system in a globalized world economy: international comparison and lessons for China’, paper given at the conference on Chinese Economic Reform: Comparative Perspectives, University of Hong Kong, March. Ilinitch,A.Y., D’Aveni, R.A. and Lewin,A.Y. 1996.‘New organizational forms and strategies for managing in hypercompetitive environments’, Organization Science, 7: 211–20. Johnson, I. 1998. ‘China’s economic growth is off target’, Asian Wall Street Journal, 22 April: 1. Johnstone, H. 1998. ‘Foreign partnerships head for the rocks’, South China Morning Post, China Business Review, supplement on foreign investment, 9 April: 8.

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3 China’s Transitional Economy Andrew G. Walder

China’s management reforms have not proceeded via a prior blueprint for privatization that aims to remove government from a direct role in the economy. Instead, a gradual and steady process of increasing competition, incentives and budgetary pressures on firms has occurred over a two-decade period that has seen rapid changes in economic growth and in the ways that enterprises operate. Government has not been stripped of its economic roles; instead regional and local governments have transformed the roles they play in an increasingly competitive economy. This chapter seeks to describe and explain this pattern of institutional change. For two decades, China’s post-Mao economic reforms have generated rapid and sustained economic growth and unprecedented rises in real income and living standards and have transformed what was once a country with one of the world’s most insular economies into a major trading nation. The contrast between China’s record and that of the former Soviet Union, where reform began much later and did not get seriously under way until the Soviet state was on the verge of collapse, could not be more striking. Where Russia has struggled for more than a decade with severe recession, financial crisis and declining living standards, China by contrast has looked more like the East Asian ‘tiger’ economies of the 1980s. The realization in the 1990s that China’s reforms would continue along their gradual course despite the political setback of 1989 has made China a subject of interest far outside the confines of the China studies community. For many, China’s transitional economy represents an intriguing anomaly: a transition heralded as difficult and painful has sparked an economic boom. In following a gradual and piecemeal rather than a rapid and coordinated path of reform, in which formal privatization programmes of the type originally urged upon Russia have been avoided as long as possible, China has confounded the initially widespread and deeply held belief that gradual reform and public ownership simply cannot work, not even as a transitional strategy 63

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China’s Transitional Economy

(Kornai, 1990b; Peck and Richardson, 1992; Blanchard, Dornbusch, Krugman, Layard and Summers, 1991; Blanchard, Boycko, Dabrowski, Dornbusch, Layard and Shleifer, 1993; Sachs, 1993). A decade ago, there was broad agreement about the general direction of change: the state’s assets should be privatized; state agencies should withdraw from direct economic management; and government should retreat to the role of providing neutral institutions for enforcing contracts and property rights (the institutional foundations of a market economy: Blanchard et al., 1993). Yet in recent years, authors have pointed with evident irony to the fact that China has succeeded precisely by ignoring the advice widely offered early on to the postCommunist nations of eastern Europe (Nolan, 1993, 1994; Rawski, 1994a, 1994b). The main way in which China has confounded the expectations of many experts is in the continuing role played by government at all levels in the management of enterprises and the guidance of local economies. This government role has been very active and multifaceted, and it has evolved continuously during the 20-year history of reform. Carefully considered analyses of the flaws of the earlier centrally planned economies, in which government did indeed play a central and highly counterproductive role in economic management, were the basis for well-established scepticism about gradual reform within the confines of the existing state structure. Yet China’s national and regional governments have not behaved in the ways that these former analyses led us to expect, and in my opinion this is perhaps the single most important reason why China’s economy has performed differently. How, exactly, did the Chinese government confound the initial expectations of so many? To understand how China has confounded these predictions, we have to understand the analyses of the flaws of central planning out of which such predictions grew. By far the most influential and coherent of such analyses is that of Janos Kornai (1980, 1991). Kornai counterposed the economic mechanisms of central planning and those of a market economy. Production proceeded according to planners’ preferences, not aggregate demand. Production in firms was therefore resource constrained, not demand constrained, so firms would produce to meet production targets until they ran out of materials (which they did habitually); they did not have to worry about finding customers for their products (or improving products in order to maintain their sales). Firms responded to their resource constraints by stockpiling materials (the ‘Kornai ratio’ of inventory over output was

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a revealing measure of this), engaging in barter trade, and seeking higher investments to produce their own parts and supplies, rather than relying on specialized suppliers. The result was wasteful investment and lack of product innovation and an economy that excelled in early stages of growth, when the mobilization of capital matters, but lagged in subsequent stages, when organizational and technological innovation increase productivity and drive growth (Kornai, 1980, 1991; cf. Winiecki, 1990). To Kornai and other reformers of the 1950s and 1960s, the only remedy for these defects of central planning was to introduce market mechanisms: evaluate managers and allocate investment according to profit criteria, not plan fulfilment; make them find their own customers and compete for sales; and allow prices for products to fluctuate so that they could better reflect relative scarcities. After more than a decade of experimentation in Kadar’s Hungary after the reforms of 1968, however, Kornai concluded that such a partial reform was doomed to failure and that a market economy could not be grafted successfully on to socialist stock (Kornai, 1990b). Kornai’s analysis of why this was so is most memorable and persuasive: market mechanisms were defeated by the redistributive practices of public ownership. The state and the firm were locked into a position of mutual dependence: the state depended on the firm to produce goods for other enterprises, to maintain employment, fund social services and contribute tax revenues. At the same time, the firm depended on the state to create conditions that would greatly influence its success and prosperity, such as setting marginal tax rates, granting investment loans and setting rates of repayment, and providing exceptions to price guidelines. Constant bargaining between the state and the firm led to countless exceptions to tax and financial regulations, resulting in a fiscal system that continued to redistribute revenue and opportunity from the more profitable to the less profitable. Publicly-owned firms facing market conditions therefore still had a ‘soft budget constraint’; bargaining undercut the incentives that were to be induced by market competition. The conclusion: public ownership is responsible for bargaining and soft budget constraints, and therefore the only feasible course of reform is to cut the ties of dependency between supplicant firms and the indulgent state by privatizing firms (Kornai, 1990a). A related analysis of the flaws of central planning highlighted the fiscal structure of the state. The Communist state of years past was once a formidable machine for the extraction of surplus and its

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mobilization for industrial investment. Its coercive structures and monopolistic markets separated farmers from their produce at artificially low prices and kept the prices for their inputs relatively high; wages and consumption patterns were kept low, investment in ‘wasteful’ consumer goods and ‘unproductive’ investments such as housing, roads and telecommunications (except for national defence) were also kept low. Savings rates determined by central planners were kept high; massive investment rates were biased towards heavy industry. The bias in the price structure – undervaluing raw materials, agriculture, commerce and services in relation to manufactured products – reinforced the tendency to overinvest in manufacturing by making government revenues highly dependent on industrial production (Winiecki, 1990). As a model of economic development, this fiscal structure reaped admirable successes in the first decades of Communist rule. Its ability to enforce austerity and mobilize massive investment in key industries led to remarkable growth rates in the USSR and later China. Yet the centralized fiscal structure was behind the flaws of central planning identified by Kornai and others. It permitted planners’ preferences to reign over aggregate demand; the vast surpluses accumulated at the centre were the foundation for bailouts and soft budget constraints. But, for the reasons we have just seen, the fiscal structure supported a system of industrial administration that stifled innovation and productivity growth, causing these economies to fall further behind the market economies. It also put resources into the hands of government agencies and officials that were the foundation of their privileges. So long as this fiscal structure mobilized surpluses into the hands of government bureaucrats rather than the managers and entrepreneurs who generated them, a more market-oriented economy had little hope of success. These very well-founded analyses of central planning yielded clear implications regarding economic reform. Such reform cannot go very far, and cannot be very successful, so long as the Communist Party holds a monopoly of political power (see the extensive literature reviewed in Goldstein, 1996). Market reform will be undermined by soft budget constraints on firms so long as public ownership is maintained. Market reform cannot succeed under a fiscal structure that concentrates capital in the hands of government bureaucrats. Despite these persuasive arguments, the Chinese Communist Party has presided over a strategy of partial reform that has produced extraordinarily rapid economic growth. Such an outcome varies widely from

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the predictions that one would draw from these analyses and leads us to wonder why our earlier understandings have proved such a poor guide to Chinese developments. Research on the role of the state in China’s economic reforms has progressed to the point where we can now look back and evaluate our earlier analyses. Our understanding of the role of the state, it turns out in retrospect, assumed circumstances that were never clearly specified, and these circumstances proved to be variables. As a result, analyses of incentives for realworld state agencies and officials lagged far behind the analyses of incentives for firms.

THE ROLE OF THE CHINESE STATE Although it is certainly true that the fiscal structure of the Communist state was highly centralized, and that revenue collection was focused heavily upon industry by the price system, the extent of this centralization varied significantly across regimes. The most obvious reason for such variation was the size and scale of the economies. In a small economy, such as that of Hungary (and there were many such small Communist nations), the central government owned and operated most of the industrial base. A relatively small number of large industrial plants contributed their revenues directly to the central budget and received their investment and financing from the same source. It therefore made sense to model the state as a single centralized machine for revenue collection. On the much vaster scale of the Soviet Union, with subordinate republic and regional governments below the centre, such a high degree of fiscal decentralization was not feasible. The subordinate republics had large budgets of their own, with enterprises lodged under them and contributing to republic revenues. None the less, compared to China, the Soviet Union’s revenue system was more centralized, with a relatively small number of large industrial complexes providing revenues directly to the central government, and with revenues collected by republic and regional governments being turned over to the centre and subsequently reallocated to them in budgets. China differed from these Soviet-style counterparts in two ways: first, in its scale of population and administrative complexity, it dwarfed not only Hungary but also the Soviet Union. Many of its 30 provincial governments were the size of large nations, two of them having populations of more than 100 million. Below these were

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some 340 subprovincial districts and cities, and some 2600 counties and smaller cities. The fact that China’s population was still 80 per cent rural meant that a great deal of economic activity – not solely in agriculture, but also in subsidiary production and small-scale industry closely tied to agriculture – was lodged under even lower government jurisdictions (especially the 48 000 communes, which later emerged as rural town and township governments). Each of these levels of government had their own production plans and their own revenue bases. Second, the degree of decentralization in China’s planning and fiscal system was greater than that in either the Soviet Union or the smaller Communist regimes, even taking into account these differences in scale and complexity (Qian and Xu, 1993). Khrushchev’s 1957 effort to decentralize the Soviet economy failed. Mao, no friend of central planning, in fact began his own decentralization drives that same year, following Khrushchev’s lead, and continued to decentralize the economy into the 1970s. Far fewer industrial goods were allocated by central government planners in China than in the Soviet Union. Materials balances were handled at each level of China’s government hierarchy. Provincial and county governments had their own plans. Over two decades, this approach affected industrial investment decisions in such a way that China developed towards regional autarky, with large numbers of relatively small industrial enterprises located in regions in order to promote local self-sufficiency (Wong, 1986, 1987; Granick, 1990). Hundreds of subnational governments were to a considerable extent ‘redistributive economies’ on a scale similar to Hungary’s. By 1985, there were over 100 000 state industrial enterprises in China, only 3835 of which were under central government planning, contributing revenues directly to the centre. These central enterprises produced only 20 per cent of public sector industrial output in that year (Walder, 1995a: 275). Therefore China was not so much a centrally planned redistributive economy as a coordinated hierarchy of well over a thousand entities, each collecting revenues from industries under their jurisdiction. The relationships between these redistributive economies essentially involved bargaining over fiscal transfers between jurisdictions. Because of the location of vast numbers of industrial enterprises in lower levels of the government hierarchy, local governments collected the bulk of state revenues. The only question was how much of these revenues a local government was able to retain. The typical redistributive practice was to extract more from jurisdictions that had

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surpluses and to subsidize jurisdictions whose revenues fell below local needs. In the early 1980s, these fiscal relationships changed. Fiscal contracts, or ex ante agreements, were fixed so that the division of revenues could be predicted. Rights to flows of revenues were clarified, and new incentives were built in. Provinces were allowed to retain a specified proportion of revenues collected over a targeted amount. The provinces in turn set such agreements with districts and large cities; these jurisdictions in turn made agreements with counties and small cities, and they in their turn with townships and small towns. Moreover, revenues from private industry were not to be included in the base for redivision. Government jurisdictions down to the township level now had, in theory, clearer fiscal incentives with which to encourage local industry. The faster industry grew, the faster local revenues would grow. No longer would increased revenues be seized for redistribution by higher levels (Wong, 1987, 1988; Oi, 1992; Walder, 1992).

THE ECONOMIC ROLE OF GOVERNMENT AS A VARIABLE At this point one might ask, as many did, whether this kind of piecemeal reform, essentially tinkering with the old system, would have much impact. Would the result of this fiscal decentralization not simply be a hierarchy of thousands of smaller redistributive economies, each of which would replicate the fundamental problems of soft budget constraints that plague all public industry administered by economic bureaucracies? The answer to that question is a qualified, but firm, no. Why? The short answer is competition among government jurisdictions for market share and revenue; the long answer requires working through the implications of more than one ‘redistributive’ state and the bureaucratic incentives created by decentralizing fiscal reform. The central flaw of strategies for reform under Communist Party rule, as analysed so lucidly by Kornai, is that the state has the capacity to redistribute financial resources among firms thereby softening budget constraints and undermining the incentives of market competition between them. Surpluses from profitable firms are skimmed off at higher rates to subsidize firms that are less profitable or operating at a loss. This practice weakens incentives for the profitable to perform

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even better and for the unprofitable to cut losses. Under partial reform, a ‘regime of bargaining’ is recreated in which bargaining over financial terms replaces the traditional bargaining over production quotas, plant capacity, tax rates and material supplies. The fundamental flaws of the system are not overcome (Kornai, 1990a). Two assumptions undergird this analysis, neither of which receives the same kind of attention as the relationship between the state and the enterprise, which is the centrepiece of the argument. The first is that the budget constraints on the state itself are relatively weak: the state can manipulate the money supply or the price structure, run a foreign trade deficit or borrow internationally to cover any shortfalls (this of course cannot work in the long run, as East European economies found in the 1980s). The second is in fact the reason why the state bothers to bargain with firms at all: why can they not just say no? The reason is structural: While some enterprises may provide crucial inputs for other national firms that would otherwise have to purchase their supplies abroad, all enterprises meet central nonfinancial needs for the state: they maintain full employment and fund housing and social services for large numbers of employees. As a result, very few firms are ever closed, and the large industrial complexes (often among the biggest money losers) are virtually never closed. To do otherwise would be to create severe social problems. The nonfinancial interests of the state in public firms prevent the imposition of hard budget constraints and therefore lead partial reforms into an impasse of constant bargaining with concealment of financial resources as the central strategy: a reproduction of the central flaws of the system. If we conceive of the state not as a single redistributive system (a not unreasonable assumption for Hungary) but as a hierarchy of thousands of such redistributive systems, and if we consider the effects of fiscal decentralization on revenues and bureaucratic incentives across levels of this hierarchy, we can see the possibility of different results. Instead of processes that merely shift the system into a new and yet unsatisfactory equilibrium, we see the processes that can lead to the dynamic yet gradual transformation of the behaviour of bureaucrats and thereby the premises of the entire system. Although systematic econometric evidence pertaining to some aspects of this transformation has only recently appeared, interview studies and field observations suggest strongly that this is precisely what is happening in China.

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First-Order Consequences of Fiscal Reform The first step in the analysis of this dynamic process is to examine the impact that fiscal reforms have across the levels of a system in which only the few higher jurisdictions had the features posited by Kornai. At the pinnacle of this hierarchy was the central government, a redistributive economy of 3800 large industrial enterprises (in 1985), each of which employed an average of 2270 people. The revenues of the central government came directly from these large firms, which produced 20 per cent of public sector industrial output, and from the taxes remitted by lower levels of administration. At the next lower level were 30 provinces and, below them, another 320 cities and districts, which together owned 83 000 public industrial enterprises (an average of 235 per jurisdiction). Together, these firms produced 52 per cent of the national output in 1985. Below the cities and districts were 2000 largely rural county governments, which owned another 68 000 public enterprises (an average of only 33 per jurisdiction), producing 13 per cent of national output. Below the rural counties were 91 000 townships and towns with an average of less than two public enterprises each, and below these townships were another 80 000 villages with less than one enterprise on average. The fiscal reforms of the 1980s gave each of the 93 000 government jurisdictions above the village level clearer residual rights to increases in revenues (Walder, 1995a: 275). It is evident that the scale of the economy, the size of its revenue base and the degree of industrialization dropped dramatically as one moved from the centre down to the smaller cities, counties and townships. It is less immediately evident that as a result, the centrally defining features of redistributive economies disappeared as one moved down in the hierarchy. The rest of this subsection condenses an earlier account of this process (Walder, 1995a). The Intensity of Fiscal Incentives for Governments The lower the level of the government jurisdiction, the more its revenues rely on agriculture rather than industry, and therefore the lower its per capita revenues. Economic growth has a disproportionate impact upon the revenues of less industrialized jurisdictions. Kornai’s analysis of redistributive economies assumed a centralized system that itself already depended heavily on a developed national industrial

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base.The fiscal incentives for the smaller cities, counties, and especially townships and villages (where there is still a significant agricultural population) are much stronger than this model assumes. Additions to the industrial bases of these lower jurisdictions have a larger proportional impact on revenues, and therefore fiscal decentralization created more intense fiscal incentives in the lower reaches of the government hierarchy (Byrd and Gelb, 1990; Oi, 1992). The Capacity to Redistribute within an Industrial System The vast majority of China’s (mainly small) industrial enterprises are held by these lower jurisdictions, but the number of enterprises per jurisdiction drops dramatically as one moves down the hierarchy. There are almost 4000 firms at the centre, but an average of only 350 at the province and city level (with wide variations around this mean), some 33 at the county level, and less than a handful on average in townships and villages. The lower-ranking jurisdictions therefore cannot redistribute revenues among firms with the ease assumed in the basic model. The smaller the number of enterprises, the more likely the industrial base is to be specialized in related lines of production (for instance, textiles and foodstuffs), and the more likely it is that all firms will be similarly hit by a downturn in business. In the small jurisdictions, where one or two firms might contribute well over half of local revenues, there quite literally is no other source of revenue to compensate. The losses of a firm create havoc with local government finances, and government spending must be slashed immediately. The Budget Constraint on Government itself If a jurisdiction below the centre suffers a revenue shortfall and cannot meet its fiscal targets set by the next higher level of government, will that government jurisdiction not have its ‘debt’ forgiven by the higher level, and in fact receive a subsidy? Should disaster strike, certainly. Should the shortfall be due to decisions for which government officials can be held accountable, only with pain and difficulty. But the temporary covering of shortfalls, or the provision of subsidies, creates severe fiscal problems, for it cuts completely any discretionary spending in the budget and halts all capital construction and industrial investment. The opportunity costs, absent in the old revenue system, in which any budgetary surpluses were automatically absorbed by the higher levels, are now very large. Yes, subsidies just

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enough to cover necessary welfare expenditures are possible. The jurisdiction will be subsidized just to the point of stagnation and poverty. The budget constraint might therefore be soft – you cannot close down a county – but the fiscal consequences of a shortfall are immediate and painful. The Non-Financial Constraints upon Government in its Bargaining with Firms Non-financial constraints also decline markedly as one moves to lower jurisdictions. Only large public firms provide a full range of benefits, housing and other social services for employees. The smaller firms that dominate the counties, towns, townships and villages provide few (if any) such benefits. In rural jurisdictions, employment does not present the same constraint that it does in the larger cities. Local residents who are laid off will usually still have a family farm to return to, or they can migrate to other regions in search of wage labour. In the highly industrialized rural regions along the coast, where demand for labour outstrips local supply, you simply fire the temporary migrant workers first and they leave your jurisdiction.These non-financial constraints drop dramatically in the rural jurisdictions, and local governments are much less constrained in enforcing financial discipline – or in closing down firms – than the basic model allows. Competition among Jurisdictions for Sales and Revenue The implications of what I have said so far for the thousands of government jurisdictions below China’s centre and its 30 provinces are quite profound, for they imply that local government officials compete with one another for revenues by having their firms compete with one another in regional and national product markets. These thousands of local ‘redistributive systems’ may operate in ways that echo the basic model’s assumptions, but these are not the self-contained redistributive economies posited in that model. The industrial enterprises of small cities, counties, towns, townships and villages do not constitute balanced input–output planning systems. These jurisdictions must purchase their supplies outside and sell their products far outside their boundaries. True, public officials intervene deeply in the main business decisions of firms, including decisions to start new product lines, invest in one plant or another, or assemble capital and loans for one venture while deciding against another. But if local industry fails to thrive, local government revenues stagnate. Local officials

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must actively promote local industry, by gathering information, making connections with potential customers, pulling in production subcontracts from cities and using their connections and knowledge to acquire loans in the provincial capital, or their jurisdiction becomes a backwater. Under these conditions, the universal desire of officials to command larger budgets and build up local resource bases forces local officials to become market-oriented agents who actively promote local industry. The hard reality of competition forces constant adjustments in local economic arrangements, and it has turned the interests of local officials towards the market economy (and, as we shall see below, towards the private sector as well). Second-Order Consequences of Fiscal Reform The second step in this two-decade process began with the fiscal pressures put upon the higher levels by competition for sales and profits between their large firms and the vast numbers of smaller firms responsible to lower levels of government. During the first decade of China’s reforms, industrial growth was fastest in the lower government jurisdictions in rural areas, such as counties, townships, and villages. This growth came at the expense of the large SOEs responsible to the centre, provinces and large cities. The share of output produced by this traditional state sector shrank from almost 80 per cent to less than 50 per cent over this period. As the large-scale state sector has lost its traditional monopoly, its profit performance has suffered steady declines due to competition with the newer small firms (Naughton, 1992). And as profits and sales suffer, and growth moves to the lower jurisdictions, the fiscal pressures on higher government jurisdictions increase in ways neither apparent in the first-order impact of fiscal reform nor anticipated by the unitary models of the past. At the same time that revenues from the earnings of public industry decline, the proportion of revenues received by the higher jurisdictions from the lower jurisdictions in contracting agreements also declines. Higher proportions of national tax revenues are retained at lower levels of government. Partly this is due to the increased rights over revenue residuals enshrined in the reformed fiscal contracting system, but more importantly it is due to the rapid rise of ‘extrabudgetary funds’ that come from new local taxes on industry, extratax levies and revenues from private industry. The centre’s share of total government revenue shrank from an average of 50 per cent in the decade prior to 1978 to an average of only 28 per cent in the decade after (Wang, 1995: 104).

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The growing evidence of budgetary shortfalls at the centre and the steady drop in the profitability of the large state enterprises have set alarm bells ringing among conservative national politicians, and have been cited by some scholars as evidence that China’s strategy of partial reform is failing. But as Naughton (1995) and others have argued, these shortfalls are also evidence of the systematic introduction of competition into the Chinese economy, competition that hits the formerly monopolistic large-scale state sector and the largest and most self-sufficient redistributive systems at the top of the hierarchy especially hard. It is therefore not at all clear that these central difficulties are evidence of a failing reform; they may in fact be the primary evidence that reform is succeeding. This is the argument of a number of economists who emphasize the positive effects of fiscal pressures on government and financial pressures on firms (Jefferson and Rawski, 1994; Rawski, 1994a, 1994b; Naughton, 1995). A poor central government with large numbers of firms losing money finds it much more difficult to bail out loss-making firms than it did in the past and is constantly pushed to devise strategies to sell these firms to foreign investors, use them as parts of JVs, or begin to transfer their employees to other firms and sectors. Large state firms with falling profits, facing a government increasingly unable to bail them out, must push themselves to reorganize and innovate to an unprecedented degree (Rawski, 1994a, 1996). Several researchers are now finding evidence that falling profits coincide with increasing factor productivity. Long stagnant in the Mao era, according to these researchers, factor productivity began a slow rise in the mid-1980s and has increased at an accelerating rate since then (Jefferson, Rawski and Zheng, 1992). Incentives for managers are increasingly being linked to performance, failing firms are more likely to innovate, and investment is increasingly going to profitable enterprises and sectors (see the evidence reviewed in Walder, 1996). The second-order effects of fiscal reform in a decentralized economy therefore place mounting competitive pressures and budgetary constraints upon even the highest levels of government.

THE INTERESTS AND ROLES OF GOVERNMENT OFFICIALS The impact of these changed incentives and budget constraints on the behaviour of government officials has been observed and amply documented for more than a decade. Government officials, party sec-

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retaries and government agencies have exhibited behaviours that contrast markedly with the behaviours, typical of conservative rent seekers with interests tied firmly to the planned economy, that were portrayed in earlier analyses. From a growing body of descriptive field studies, a number of distinct new roles can be discerned. All of them indicate the ways in which the interests of officials and agencies have become tied to the development of a market economy. Moreover, they illustrate the ways in which government officials in this transitional economy are themselves pivotal economic actors. Officials as Entrepreneurs In many of the smaller rural jurisdictions in which there are only a few public enterprises in a village or township, or in which there is one that is much larger in scale than the others, village heads or party secretaries will directly manage the firm that is their main source of revenue. To be sure these enterprises have hired managers, but they work under the close direction and supervision of the government officials, who make virtually all major business decisions, deciding on product lines, procuring contracts outside the locality, and securing investment loans. The role of government officials in these rural jurisdictions has rightly been described as entrepreneurial (Oi, 1986, 1990; Byrd, 1990; Nee, 1992). Government Officials as a Corporate Management Team A team management form of involvement has been observed in smaller cities, counties, towns and townships and in villages that have a large number of public industrial enterprises. In this situation there are too many firms to monitor closely, and officials cannot take the same kind of active and direct role in management that they can in smaller and less developed local economies. Instead, local officials govern their firms in a way analogous to what the top management team of a diversified company or small corporation would do. Major business decisions are made by the village or township committee or by a subgroup of county officials involved in industrial administration. The hired managers of firms may originate proposals to change product lines or innovate, but the top officials make the final decision. Once these decisions are made, government officials on the management team are responsible for arranging financing with banks outside their jurisdiction and for making connections with state purchasing

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agencies, other large institutional customers, or foreign investors. In this situation, which appears to apply to a broad range of political jurisdictions from small cities down, party and government officials in effect manage a diversified portfolio of assets whose value depends on their market performance (Byrd, 1990; Nee, 1992; Walder, 1994, 1998; Oi, 1998). Local Developmental States In addition to playing this direct managerial role, party secretaries, heads of governments and the heads of local economic commissions or departments of finance also behave in ways typically found in the ‘developmental states’ elsewhere in East Asia. And they play this role not only in relation to local public enterprise but, increasingly, they also play it in relation to household, private and foreign firms. This second type of firm can also have a major positive impact on local revenues, and there is the additional advantage that they are not burdens on the local government if they fail. After a relatively slow start, these non-public enterprises have grown very rapidly since 1990, often with the active encouragement and concrete assistance of local government (Walder, 1998). Local government officials travel outside their jurisdictions to gather technical information to assist the development of local firms, both for manufacturing technology and, especially, for product specifications. They help local firms market their products outside the jurisdiction; they attempt to arrange sales contracts for local firms with large state agencies in the provincial capital or along the coast; and they try to make contacts with potential foreign investors and compete with other jurisdictions to create favourable conditions for attracting such investment (Zweig, 1991; Oi, 1996). Silent Partners in Private Enterprise As part of an effort to secure their property by cultivating protectors in local governments, some private entrepreneurs seek to make silent partners out of government officials or agencies. Officials will be hired as ‘consultants’ or appointed to a firm’s board of directors and will receive compensation for no work; or they might be issued with share certificates in a company without having to pay for them; or relatives of the official will be hired for important positions (Liu, 1992; Solinger, 1992; Wank, 1995). These kinds of practices are common from the

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centre down to the small cities and towns, and are often attacked as a form of corruption; but they do open up sources of personal income that far outstrip those from official urban salaries and alter the interests of these officials regarding the private economy. Such ties can be institutional rather than personal, and they need not involve arrangements that are corrupt. Many government agencies own assets that are potentially quite valuable in a market economy: real estate, buildings and street-front offices that can be converted to retail shops (Nee and Su, 1993). These assets can be allocated to private entrepreneurs in return for a share of the profits of the enterprise. Government agencies therefore become silent partners in a variety of real estate developments and retail and service establishments (Solinger, 1992; Wank, 1995). Land and real estate that had little value under the planned economy thereby provide a windfall for local government agencies, who may retain these proceeds as ‘extrabudgetary funds’ (and who may also decide to use some of them for personal compensation, housing and so forth). Government Agencies as Investors in the Private Economy It is evident to government officials from the centre down to the rural counties that the returns to private enterprise often outstrip those from the traditional state sector, large parts of which give meagre returns or, in fact, are a drain on the budget. This fact, in combination with the fiscal pressures on government agencies that we have described above, means that agencies hard strapped for cash must develop alternative sources of extrabudgetary revenue, and they do this increasingly by investing in the market economy. Examples of such investment are legion, and it is one of the most underresearched dimensions of China’s economy. The state security agency, for example, is part-owner of a luxury hotel in Beijing, having created a partnership with one of Hong Kong’s wealthiest real estate tycoons. The private companies spun off from China’s military establishment have become actively involved in the export of arms and in the import of sensitive military-related technology, both of which have created highly publicized strains in US–China relations. Ministries in Beijing create spin-off high-tech companies in the city’s Haidian district (China’s silicon valley), making state planning ministries investors in highly profitable joint stock companies (Francis, 1999). Large state enterprises facing losses or declining profits invest in other lines of business by opening up associated collective or JV enterprises. In these enterprises, they can reap greater returns than their core busi-

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nesses provide, in large part because the new enterprises face more favourable tax regulations and do not have to bear the same social welfare burdens as the core plants (Lin and Zhang, 1999). And finally, thousands of state agencies, government jurisdictions and state enterprises find ways to place funds overseas and bring them back into China as ‘foreign investment’, again entailing more favourable tax and labour regulations. Lardy (1996) estimated that this circular flow of funds rivals the magnitude of genuine foreign investment. The arrangements I have just described would obviously not pass muster under US federal anti-trust regulations, and they grossly violate US legal norms regarding conflict of interest. Government in China is far from being an impartial enforcer of contracts and property rights, the kind of legal and regulatory regime that so many observers of Eastern Europe insist is a prerequisite for a thriving market economy. Reformers in Eastern Europe whose goal is to have Poland ‘return to Europe’ (Sachs, 1993) or to create the foundations for a free society in Hungary (Kornai, 1990b) would find little to emulate in these practices, and I have no quarrel with their cultural and institutional preferences. Yet the long-observed roles of government officials as economic actors in China does demonstrate fairly conclusively that earlier analyses which saw Communist elites as defined by, and unshakeably tied to, their privileges in the planned economy were a better description of past Soviet realities than a defensible general model of the state. Partial reforms have created a dynamic process of change and of rapid economic growth that earlier analyses would not have deemed possible (see especially Nee and Lian, 1994). Indeed, the above passages imply that this continuing economic transformation is naturally transforming the state itself, for a state whose agents have all developed sources of revenue other than those provided by their superiors, as well as strong interests in the maintenance of a market economy, is also a central state that is progressively unable to contemplate a return to the status quo ante (Walder, 1995b).

CONCLUSIONS Despite this caveat, China’s development over the past 20 years has shown that earlier understanding of the role of the state in a reforming planned economy contained many background assumptions that are less general and less persuasive than was originally thought. What were once thought to be defining and stable features of state

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structures that were relatively impervious to partial reform measures turn out to have been variable characteristics sensitive to seemingly small initial changes in incentives for bureaucrats. A case in point is the long-delayed process of privatization that has gained momentum in China in the past few years. Like the response to new fiscal incentives, this is beginning at the bottom of the hierarchy and spreading upward. Local government officials who manage a portfolio of market-oriented public enterprises have come to see the less profitable or loss-making enterprises as troublesome burdens, not worth the scarce time and resources that they want to devote to their successful ventures (Oi, 1998; Walder, 1998; Kung, 1999; Ruf, 1999; Whiting, 1999); Far from wanting to preserve these public enterprises at all costs, officials now actively seek to divest themselves of these dead assets by leasing them or selling them off at a discount. This long and slow process of privatization has grown naturally out of a process of fiscal change and increased competition. It did not require a preconceived and coordinated central plan or a central-state-induced recession. Instead, the motivations to privatize have emerged gradually among officials themselves, as a result of the altered incentives created by this evolutionary process of reform. To understand this process of change, we need to view the state as an ensemble of economic actors and to place the incentives for their actions at the centre of our analyses, for it is not enough to point out that the state can play a major and important role in a transitional economy, or that an evolutionary process of transformation is possible. We need to understand why and to specify the conditions under which this might be true. One of the key goals of management research on China – and one of its potential contributions to the understanding of real-world economies around the globe – is to explain the unexpected roles of government officials as economic actors and the incentives that drive both them and the managers of enterprises with whom they enjoy multifaceted relationships.

References Blanchard, O., Boycko, M., Dabrowski, M., Dornbusch, R., Layard, R. and Shleifer, A. 1993. Post-Communist Reform: Pain and Progress. Cambridge, MA: MIT Press.

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Blanchard, O., Dornbusch, R., Krugman, P., Layard, R. and Summers, L. 1991. Reform in Eastern Europe. Cambridge, MA: MIT Press. Byrd, W. A. 1990. ‘Entrepreneurship, capital, and ownership’, in W. A. Byrd and Q. Lin (eds), China’s Rural Industry: Structure, Development, and Reform: 189–218. New York: Oxford University Press. Byrd, W. A. and Gelb, A. 1990. ‘Why industrialize? The incentives for rural community governments’, in W. A. Byrd and Q. Lin (eds), China’s Rural Industry: Structure, Development, and Reform: 358–87. New York: Oxford University Press. Francis, C. B. 1999. ‘Bargained property rights: The case of China’s high technology sector’, in J. C. Oi and A. G. Walder (eds), Property Rights and Economic Reform in China: Forthcoming. Stanford, CA: Stanford University Press. Goldstein, S. M. 1996. ‘China in transition: The political foundations of incremental reform’, in A. G. Walder (ed.), China’s Transitional Economy: 143–69. Oxford: Oxford University Press. Granick, D. 1990. Chinese State Enterprises: A Regional Property Rights Analysis. Chicago: University of Chicago Press. Jefferson, G. H. and Rawski, T. G. 1994. ‘Enterprise reform in Chinese industry’, Journal of Economic Perspectives, 8(2): 47–70. Jefferson, G. H., Rawski, T. G. and Zheng, Y. 1992. ‘Growth, efficiency, and convergence in China’s state and collective industry’, Economic Development and Cultural Change, 40: 239–66. Kornai, J. 1980. The Economics of Shortage (2 vols). Amsterdam: NorthHolland. Kornai, J. 1990a. ‘The affinity between ownership forms and coordination mechanisms: The common experience of reform in socialist countries’, Journal of Economic Perspectives, 4(3): 131–47. Kornai, J. 1990b. The Road to a Free Economy: Shifting from a Socialist System – the Example of Hungary. New York: Norton. Kornai, J. 1991. The Socialist System: The Political Economy of Communism. Princeton, NJ: Princeton University Press. Kung, J. 1999. ‘The evolution of property rights in village enterprises: The case of Wuxi county’, in J. C. Oi and A. G. Walder (eds), Property Rights and Economic Reform in China: Forthcoming. Stanford, CA: Stanford University Press. Lardy, N. 1996. ‘The role of foreign trade and investment in China’s economic transformation’, in A. G. Walder (ed.), China’s Transitional Economy: 103–20. Oxford: Oxford University Press. Lin, Y. and Zhang, Z. 1999. ‘Backyard profit centers: The private assets of public agencies’, in J. C. Oi and A. G. Walder (eds), Property Rights and Economic Reform in China: Forthcoming. Stanford, CA: Stanford University Press. Liu, Y. 1992. ‘Reform from below: The private economy and local politics in the rural industrialization of Wenzhou’, China Quarterly, 130: 293–316. Naughton, B. 1992. ‘Implications of the state monopoly over industry and its relaxation’, Modern China, 18 (January): 14–41. Naughton, B. 1995. Growing out of the Plan: Chinese Economic Reform, 1978–1993. New York: Oxford University Press.

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Nee, V. 1992. ‘Organizational dynamics of market transition: Hybrid forms, property rights, and mixed economy in China’, Administrative Science Quarterly, 37: 1–27. Nee, V. and Lian, P. 1994. ‘Sleeping with the enemy: A dynamic model of declining political commitment in state socialism’, Theory and Society, 23 (April): 253–96. Nee, V. and Su, S. 1993. Local Corporatism and Informal Privatization in China’s Market Transition. Working Paper on transitions from state socialism No. 93-2, Einaudi Center for International Studies, Cornell University, Ithaca, NY. Nolan, P. 1993. ‘China’s post-Mao political economy: A puzzle’, Contributions to Political Economy, 12: 71–87. Nolan, P. 1994. ‘The China puzzle: “Touching the stones to cross the river” ’, Challenge, 37 (January–February): 25–31. Oi, J. C. 1986. ‘Commercializing China’s rural cadres’, Problems of Communism, 35 (September–October): 1–15. Oi, J. C. 1990. ‘The fate of the collective after the commune’, in D. Davis and E. Vogel (eds), Chinese Society on the Eve of Tiananmen: The Impact of Reform: 15–36. Cambridge, MA: Harvard University Press. Oi, J. C. 1992. ‘Fiscal reform and the economic foundations of local state corporatism in China’, World Politics, 45 (October): 99–126. Oi, J. C. 1996. ‘The role of the local state in China’s transitional economy’, in A. G. Walder (ed.), China’s Transitional Economy: 170–87. Oxford: Oxford University Press. Oi, J. C. 1998. ‘The evolution of local state corporatism’, in A. G. Walder (ed.), Zouping in Transition: The Process of Economic Reform in Rural North China. Cambridge, MA: Harvard University Press. Peck, M. J. and Richardson, T. J. 1992. What is to be done? Proposals for the Soviet Transition to the Market. New Haven, CT: Yale University Press. Qian, Y. and Xu, C. 1993. ‘Why China’s economic reforms differ: The M-Form hierarchy and entry/expansion of the non-state sector’, Economics of Transition, 1: 135–70. Rawski, T. G. 1994a. ‘Chinese industrial reform: Accomplishments, prospects, and implications’, American Economic Review, 84(2): 271–75. Rawski, T. G. 1994b. ‘Progress without privatization: The reform of China’s state industries’, in V. Milor (ed.), Changing Political Economies: Privatization in Post-Communist and Reforming Communist States: 27–52. Boulder, CO: Lynne Rienner. Rawski, T. G. 1996. ‘Implications of China’s reform experience’, in A. G. Walder (ed.), China’s Transitional Economy: 188–212. Oxford: Oxford University Press. Ruf, G. 1999. ‘Collective enterprise and property rights in a Sichuan village: The rise and decline of managerial corporatism’, in J. C. Oi and A. G.Walder (eds), Property Rights and Economic Reform in China: Forthcoming. Stanford, CA: Stanford University Press. Sachs, J. D. 1993. Poland’s Jump to the Market Economy. Cambridge, MA: MIT Press. Solinger, D. 1992. ‘Urban entrepreneurs and the state: The merger of state and

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society’, in A. L. Rosenbaum (ed.), State and Society in China: The Consequences of Reform: 121–42. Boulder, CO: Westview Press. Walder, A. G. 1992. ‘Local bargaining relationships and urban industrial finance’, in K. G. Lieberthal and D. M. Lampton (eds), Bureaucracy, Politics, and Decision Making in Post-Mao China: 308–33. Berkeley, CA: University of California Press. Walder, A. G. 1994. ‘Corporate organization and local government property rights in China’, in V. Milor (ed.), Changing Political Economies: Privatization in Post-Communist and Reforming Communist States: 53–66. Boulder, CO: Lynne Rienner. Walder, A. G. 1995a. ‘Local governments as industrial firms: An organizational analysis of China’s transitional economy’, American Journal of Sociology, 101: 263–301. Walder, A. G. 1995b. ‘The quiet revolution from within: Economic reform as a source of political decline’, in A. G. Walder (ed.), The Waning of the Communist State: Economic Origins of Political Decline in China and Hungary: 1–24. Berkeley, CA: University of California Press. Walder, A. G. 1996. ‘China’s transitional economy: Interpreting its significance’, in A. G. Walder (ed.), China’s Transitional Economy: 1–17. Oxford: Oxford University Press. Walder, A. G. 1998. ‘The county government as an industrial corporation’, in A. G. Walder (ed.), Zouping in Transition: The Process of Economic Reform in Rural North China: Forthcoming. Cambridge, MA: Harvard University Press. Wang, S. 1995. ‘The decline of central state fiscal capacity in China’, in A. G. Walder (ed.), The Waning of the Communist State: Economic Origins of Political Decline in China and Hungary: 87–113. Berkeley, CA: University of California Press. Wank, D. L. 1995.‘Bureaucratic patronage and private business: Changing networks of power in urban China’, in A. G. Walder (ed.), The Waning of the Communist State: Economic Origins of Political Decline in China and Hungary: 153–83. Berkeley, CA: University of California Press. Whiting, S. 1996. ‘The regional evolution of ownership: Shareholding cooperatives and rural industry in Shanghai and Wenzhou’, in J. C. Oi and A. G. Walder (eds), Property Rights and Economic Reform in China: Forthcoming. Stanford, CA: Stanford University Press. Winiecki, J. 1990. ‘Why economic reforms fail in the Soviet system: A property rights-based approach’, Economic Inquiry, 28: 195–221. Wong, C. P. W. 1986. ‘Ownership and control in Chinese industry: The Maoist legacy and prospects for the 1980s’, China’s Economy Looks toward the Year 2000, vol. 1: 571–603. Washington, DC: US Government Printing Office. Wong, C. P. W. 1987. ‘Between plan and market: The role of the local sector in post-Mao China’, Journal of Comparative Economics, 11: 385–98. Wong, C. P. W. 1988. ‘Interpreting rural industrial growth in the post-Mao period’, Modern China, 14: 3–30. Zweig, D. 1991. ‘Internationalizing China’s countryside: The political economy of exports from rural industry’, China Quarterly, 128: 716–41.

4 A Cultural Analysis of Paternalistic Leadership in Chinese Organizations Jiing-Lih Farh and Bor-Shiuan Cheng1

Paternalistic leadership, which combines strong discipline and authority with fatherly benevolence and moral integrity couched in a ‘personalistic’ atmosphere, has been found to be prevalent in overseas Chinese family businesses (CFBs). After critically reviewing the extant literature, we identify three constituent elements of paternalistic leadership (PL): authoritarianism, benevolence and moral leadership. We trace the deep cultural roots of each element and explore their relevance to organizations in contemporary Chinese societies. We then identify key research issues and propose a preliminary PL model for future studies on leadership in Chinese organizations.

INTRODUCTION Leadership as a social influence process is a universal phenomenon that transcends national borders, but conceptions of it and the styles and practices associated with it have been found to vary widely across cultures. After all, leaders cannot choose their styles at will and what works for a leader depends to a large extent on the cultural context. Despite cautionary notes to this effect by cross-cultural researchers (Hofstede, 1980b, 1994), contemporary theories and models of leadership continue to be dominated by the formulations of US researchers. In the Chinese context, much of the empirical research on leadership has relied on translated Western instruments to test the generality of popular Western leadership models to Chinese organizations (e.g., Cheng, 1990; Huang and Wang, 1980). Although this research strategy is useful for identifying the boundary conditions of Western leadership theories as applied to non-Western societies, it is not fruitful for providing a profound understanding of the leadership 84

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phenomenon in Chinese organizations. As many writers have noted (Hsu, 1981), the cultural differences between the East and the West (China and the USA in particular) are probably the deepest in the world. An indiscriminate use of the Western leadership models and research tools inevitably misses the unique aspects of Chinese leadership. In recent years, the rapid rise of Asian economies that are dominated by overseas Chinese in Hong Kong, Singapore, Taiwan and much of Southeast Asia has drawn researchers’ attention to the management philosophy and practices of overseas Chinese businesses (Wong, 1988; Redding, 1990; Whitley, 1992). Building on Silin’s work (1976), several researchers have studied executive leadership in overseas CFBs in Hong Kong, Indonesia, Singapore and Taiwan using an emic approach (Redding, 1990; Cheng, 1995a, 1995b, 1995c). This stream of research has identified a distinct leadership pattern called paternalism or PL. Broadly defined, PL is a fatherlike leadership style in which clear and strong authority is combined with concern and considerateness and elements of moral leadership (e.g., Westwood and Chan, 1992). Elements of this leadership style have also been found to be pervasive in other Asian societies (Pye, 1981, 1985). The purpose of this chapter is to review the literature on PL in Chinese business organizations. Specifically, we seek to answer the following questions. 1. What are the distinct characteristics of this brand of leadership? 2. What are its cultural roots? 3. Is it a relevant leadership strategy in contemporary Chinese societies? 4. What are the key issues for future research on paternalistic leadership? Finally we propose a preliminary PL model to guide future research.

PATERNALISTIC LEADERSHIP IN OVERSEAS CHINESE FAMILY BUSINESSES: IDEOGRAPHIC EVIDENCE Behavioural science investigation of indigenous leadership in Chinese organizations is a relatively recent phenomenon. The work done so far includes several qualitative studies examining executive leadership in CFBs (Silin, 1976; Redding, 1990; Cheng, 1995a, 1995c) and

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Cultural Analysis of Paternalistic Leadership

theoretical elaborations by Westwood and his colleagues (Westwood and Chan, 1992; Westwood, 1997). Silin’s Study (1976) In the late 1960s, Robert Silin went to Taiwan to study large private enterprises controlled by single individuals. After a year-long study involving 100 hours of interviews with the CEOs (these may also be referred to as the ‘boss’, ‘leader’ or ‘owner/manager’), middle managers and workers, he provided a detailed account of the leadership philosophy and behavioural patterns of the owner/managers of these enterprises (Silin, 1976). Silin identified the essential characteristics of PL, although he did not label them as ‘paternalistic’ in his work. Silin’s description is outlined below; in this outline and in subsequent discussions of CFB leaders, masculine pronouns are used because these owner/managers were generally men. Moral Leadership Leaders are recognized by subordinates as ‘morally’ superior individuals who lead because of an overwhelming superiority (Silin, 1976: 62). This superiority is manifested in two ways: (1) through a leader’s ability to translate abstract ideas about financial and commercial success into concrete reality, and (2) through a leader’s ability to reject his egocentric impulses for a higher moral good (Silin, 1976: 128). Didactic Leadership The primary role of the leader is to convey to subordinates the methods by which he has achieved success. These methods are normally contained in the leader’s thoughts, which, when understood, explain how to convert abstract theory into practical success (Silin, 1976: 128). Centralized Authority Management is highly centralized, and decision making often appears arbitrary. The boss’s authority is not easily shared or delegated. There is a formal denial of the leader’s dependence on subordinates to carry out actions. All initiative is understood to flow outward from him (Silin, 1976: 63).


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Maintaining Social Distance with Subordinates The leader prefers to maintain a distance between himself and subordinates, both in terms of interpersonal contact and work routine. The leader, for his part, must be properly dignified (zun-yan). The character zun conveys the idea of honour, and yan connotes stern, strict, dignified and, interestingly enough, father (Silin, 1976: 66). Keeping Intentions Ill-Defined The boss tries to hide his intentions from subordinates to maintain his authority and control. This is done in three ways. First, he tends to give written instructions in short, frequently opaque terms. Second, job descriptions are often lacking in these organizations. Third, although the boss’s goals and the general attitudes necessary to achieve them (such as hard work, loyalty and frugality) are known, policies, or the manner in which his ideas are to be translated into action, frequently change. Because of such ambiguities, subordinates must spend considerable time keeping abreast of the boss’s inner thoughts or ideas. The highest criterion for judging the trustworthiness of a subordinate is his or her ability to produce or verbalize the boss’s inner thoughts or ideas in advance (Silin, 1976: 75). Implementing Control Tactics Control takes precedence over operational flexibility. The boss directly controls a wide range of people and activities. Silin noted four specific control tactics used by CFB owner/managers. First, in public, the boss rarely expresses confidence in subordinates, thus maintaining an imbalance of power between the boss and the subordinates. In private, the boss may express faith in subordinates’ ability and loyalty. Second, the boss adopts divide-and-rule tactics, encouraging subordinates to compete with each other to achieve group goals and sometimes even exploiting friction between subordinates. Third, the boss never allows any one executive to be too well informed about his plans, thus preventing anyone from gaining enough power to be in control. Finally, the boss appoints loyal subordinates to several positions concurrently so that he can oversee sensitive areas of the business (Silin, 1976: 73). How are subordinates expected to behave under the above leadership style? According to Silin, they are generally expected to be obedient and depend on the leader. They should express complete trust in the

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boss and his judgement. They must remember that the boss cannot be wrong, and they should not publicly express alternative ideas, which may be construed as a sign of lack of confidence in the boss. They must also show deep respect for the boss. Given the large power distance between boss and subordinates, the latter should show their respect for the boss by expressing fear of being fired and by regarding the boss with awe. How effective is this style of leadership in terms of subordinate satisfaction and performance? Silin did not address this question directly, but he did make three interesting observations. First, subordinates’ loyalty to leaders is rationally determined primarily through a belief in the superior ability of the boss, not through interpersonal affection. In fact, there is a lack of affective commitment to the boss and little identification with the firm on the part of the subordinate. Second, the boss’s divide-and-rule tactics and the resulting competition among subordinates make it difficult to obtain internal cooperation from different areas within these firms. This situation overburdens the boss with coordination tasks.Third, the subordinates’ general sense of powerlessness depresses morale and stifles individual initiative and innovation. Overall, Silin was critical of this brand of authoritarian leadership and thought it to be an obstacle to Taiwanese firms’ moving forward to modern (Western) forms of organization. Since Silin came from a cultural background in which egalitarianism, individualism and democracy were dominant, his view is understandable. It is also worth noting that in the late 1960s Taiwan’s economy was still in the doldrums, and Silin could not foresee that the enterprises he studied would become dynamos. Redding (1990) In the late 1980s, inspired by the phenomenal success of overseas CFBs in the 1970s and 1980s, Redding began an intense study of management practices in such firms in Hong Kong, Singapore, Taiwan and Indonesia. Through in-depth interviews with 72 owner-managers, he identified a distinct brand of economic culture he called Chinese capitalism, in which paternalism is a key element. Building on works by Silin (1976), Deyo (1978, 1983) and Pye (1985), Redding broke down PL into seven themes (Redding, 1990: 130). 1. Dependence of the subordinate as a mind-set. 2. Personalized loyalty, leading to subordinates being willing to conform.


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3. Authoritarianism modified by sensitivity to subordinates’ views. 4. Authority not divisible when it has become clearly identified with a person. 5. Aloofness and social distancing within the hierarchy. 6. Allowance for the leader’s intentions to remain loosely formulated. 7. The leader as exemplar and ‘teacher’. Redding’s interview study confirmed the existence of these themes in executive leadership in the CFBs he studied. This is a significant finding because his study was conducted some two decades later than Silin’s and included CFBs from several countries and regions. Therefore, we have some evidence that PL is prevalent in overseas CFBs. Although Redding’s depiction of PL is similar to Silin’s in that both recognized elements of authoritarian and moral leadership, they are not identical. Redding noted a benevolent component, which he described as ‘fatherly concern or considerateness for subordinates’ and ‘sensitivity to subordinate views’. This benevolence was not apparent in Silin’s (1976) observation of Taiwanese leadership, although it stood out in Pye’s (1985) work on Asian politics. Since the leader’s benevolence is practised in the context of authoritarianism, it is inevitably expressed in a patronizing manner. Redding also correctly noted that Chinese societies have a strong legacy of ‘personalism’, a tendency to allow personal factors to be included in decision making. Therefore, the leader’s authoritarianism and benevolence may not be extended to all subordinates uniformly but to different subordinates in varying degrees. Is PL an effective leadership style for CFBs in terms of subordinate satisfaction and performance? Redding did not provide a clear answer to this issue either, as his study looked at the overall functioning of CFBs in their context. Writing in the late 1980s, when the economies of Hong Kong, Singapore and Taiwan were the envy of the world, Redding had a balanced assessment of CFBs. He noted their many strengths (for instance, strategic flexibility, fast response, easy implementation of the boss’s personal vision, stable key relationships, subordinates’ compliance, diligence, and perseverance) as well as some weaknesses (the danger of factions and cliques, lack of innovation and initiative from below and limitations on how far legitimate authority can stretch). Although it is improper to attribute all these strengths and weaknesses to leadership alone, executive leadership inevitably plays a significant role in the management of CFBs.

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Westwood’s Model of Paternalistic Headship (Westwood and Chan, 1992; Westwood, 1997) Building on the work of Silin (1976) and Redding (1990), Westwood proposed a model of paternalistic headship for CFBs (Westwood and Chan, 1992; Westwood, 1997). He substituted headship for ‘leadership’ on the grounds that the basic assumptions pertaining to the leadership construct in the Anglo–American literature were so different from those implicit in CFBs that they should be labelled differently. We agree with Westwood that there are fundamental differences between the cultural assumptions of the West (individualism, egalitarianism, universalism, justice, rights) and the East (familism, submission to authority, particularism, duties and obligations), but we see no compelling reason to confine use of the term leadership to the Western context. Leadership as a social influence process is a ubiquitous phenomenon in human societies and need not be wedded to Western cultural assumptions. In fact, the Chinese have been fascinated by the art of leadership for millennia, as writings from as early as 500 bc demonstrate (e.g., Sun Tzu’s Art of War). According to Westwood’s model, paternalistic headship is made manifest in a general structural context characterized by centralization, low formalisation and non-complexity, and in a general relational context characterized by harmony building, relationship maintenance, moral leadership and personalism. He identified nine stylistic elements of paternalistic headship: (1) didactic leadership, (2) non-specific intentions, (3) reputation building, (4) protection of dominance, (5) political manipulation, (6) patronage and nepotism, (7) conflict diffusion, (8) aloofness and social distance, and (9) dialogue ideal. Most of these are similar to Silin’s and Redding’s descriptions, but conflict diffusion and dialogue ideal need some explanation. First, according to Westwood, social harmony is a paramount social value in Chinese societies; therefore, one of the key activities of the head of an organization is to be alert to potential conflicts and to work to prevent and diffuse them. Although we agree that social harmony is a general value in Chinese social philosophy, we note that it is not necessarily an urgent or salient goal for business owners/managers. Furthermore, conflict can be prevented and diffused in numerous ways (e.g., avoidance, compromise, collaboration), and, thus conflict diffusion by itself does not describe a specific type of leader behaviour. Second, dialogue ideal, a term borrowed from Thompson’s


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(1989) account of Thailand, describes a business head’s apparent concern for the dignity and personhood of subordinates. To what extent dialogue ideal is relevant to leadership in CFBs remains to be determined. While the prior studies by Silin (1976), Redding (1990) and Westwood (1997) have accomplished much, the following questions are not answered. 1. What specific tactics do paternalistic bosses use, and how do subordinates respond to them? 2. How do Chinese bosses categorize subordinates into in-group and out-group members? 3. In what ways do bosses treat different subordinates differently, and how do subordinates respond to such treatment? Cheng has discussed these issues (Cheng, 1995a, 1995b, 1995c). Cheng’s Studies (1995a, 1995b, 1995c) In the late 1980s, Cheng (1995c) began to use the case study approach to examine the leadership style of owners/managers of Taiwanese family-owned businesses. In an in-depth case study of a paternalistic CEO, Cheng found that the CEO’s leadership pattern shared many of the features reported by Silin (1976) and Redding (1990). In 1993–4, he conducted in-depth interviews with 18 CEOs of family-owned businesses in Taiwan and 24 of their first-line managers (Cheng, 1995a).The results of this study provided detailed behavioural examples of the CEOs’ PL as well as subordinates’ responses to it. According to Cheng (1995a, 1995c), PL in Taiwanese family businesses consists of two broad categories of behaviour: shi-en (grant favours) and li-wei (inspire awe or fear). For each category of leadership behaviour, Cheng identified specific behavioural patterns as well as corresponding subordinate responses. Li-wei consists of leader behaviours that stress a leader’s personal authority and dominance over subordinates. The leader’s li-wei includes control and domination, underestimating subordinate ability, building a lofty image for the leader and instructing subordinates in a didactic style. Subordinates respond to the leader’s li-wei with compliance, obedience, fear and a sense of shame. For each of the above, Cheng provided specific behavioural examples: for instance, the leader’s methods of control and dominance include unwillingness to

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delegate, top-down communication, information secrecy and imposing tight control; subordinate compliance and obedience are manifested in behaviours such as showing public support for the leader, suppressing dissenting views, avoiding open confrontations, unconditionally accepting the leader’s directives and displaying loyalty to and trust in the leader. The concept of shi-en refers to leader behaviours that demonstrate personal favours and generosity. For example, a boss might demonstrate his shi-en by offering generous financial assistance to an exemployee who struck out on his own but later had financial difficulties. In response to the leader’s shi-en, subordinates feel indebted to the leader, grateful and obliged to reciprocate. How does the concept of shi-en differ from the constructs of leader consideration (Fleishman, 1953; Stogdill, 1974) and supportive leadership (Bowers and Seashore, 1966; House and Mitchell, 1974) as described in the Western leadership literature? Consideration refers to the degree to which a leader acts in a friendly and supportive manner, shows concern for subordinates and looks out for their welfare, whereas supportive leadership includes a variety of behaviours by which a manager shows consideration, acceptance and concern for the needs and feelings of other people (Yukl, 1998). Clearly shi-en is similar to these behaviours, but it also differs from them in several subtle ways. First, shi-en goes beyond the work domain and is both holistic and highly personalized. For example, the leader may help subordinates deal with personal or family problems, perhaps offering aid in an emergency or giving advice on dating or marital disputes. Second, shi-en is long-term oriented. The boss may continue to employ old, loyal employees who no longer perform their duties effectively. Third, shi-en may be exercised by granting grace and protection: for instance, when subordinates make grave errors, the leader may protect them by avoiding public humiliation or disclosure that may cause irrevocable career damage. Fourth, although consideration is generally couched in an atmosphere of respect for individuals and a spirit of egalitarianism, shi-en is practised in the context of strong authority. The boss does not let the subordinate forget who is the boss and who is the subordinate. Considerate behaviours such as treating subordinates as equals, being willing to accept their suggestions, and consulting them before making decisions are not considered shi-en. Cheng also noted that the exercise of paternalistic leadership is highly personalistic in nature: that is, the boss does not treat all subordinates the same (Cheng, 1995b), but routinely categorizes subor-


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dinates into in-group and out-group members. In general, the leader exhibits less li-wei and more shi-en to in-group members than to outgroup members. There are three criteria that determine whether a subordinate is categorized into the in-group or the out-group by the boss (Cheng, 1995b). The first and foremost factor is guanxi, the existence of particularistic ties between the leader and the subordinate such as kinship, shared local origin, a teacher–student relationship or a former classmates relationship (e.g., King, 1991; Tsui and Farh, 1997; Farh, Tsui, Xin and Cheng, 1998). The second factor is zhong-cheng, which may be defined as a subordinate’s willingness to be loyal and obedient to the leader. The third factor is subordinate work competence. An ultimate in-group member is one who has guanxi with the leader, who is perceived to be zhong-cheng to the leader, and who is competent at work, whereas an ultimate out-group member is one who has no guanxi and is perceived to be disloyal, disobedient and incompetent. The psychological process underlying the distinction between in-group and out-group members is therefore similar to that described by leader-member exchange theory (e.g., Scandura and Graen, 1984), although the particular bases for classification are different. In summary, Cheng’s research has broadened and elaborated on previous research by Silin (1976), Redding (1990), Westwood and Chan (1992) and Westwood (1997). It extends this line of research by examining the dynamics between PL and subordinate responses. It provides a framework that uses shi-en and li-wei to help us understand PL with behavioural examples. What Cheng called li-wei includes the following elements from Silin, Redding and Westwood’s conceptions of paternalism-control and dominance, centralized authority, aloofness and social distancing, keeping intentions ill defined, reputation building and didactic leadership. Cheng’s shi-en corresponds to Redding’s fatherly concern and sensitivity to the subordinate’s view (or needs) and to Westwood’s patronage. His description of leaders’ bases for categorizing subordinates into in-group and out-group members and for subsequent differential treatment is an elaboration of Redding’s personalism and Westwood’s nepotism. The only part of PL that is notably missing in Cheng’s framework is moral leadership. In retrospect, the lack of discussion on moral leadership is not because it was absent or unimportant in Cheng’s sample of paternalistic leaders but because, coming from an indigenous framework, the subtle virtues that define leader morality and integrity were taken for granted.

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ELEMENTS OF PATERNALISTIC LEADERSHIP The above review suggests that the phenomenon of PL in CFBs may be broken down into three distinct elements: authoritarian leadership (or authoritarianism), benevolent leadership and moral leadership (or leader morality and integrity). Authoritarian leadership, which is similar to Cheng’s concept of li-wei, refers to leader behaviours that assert absolute authority and control over subordinates and demand unquestionable obedience from subordinates. Benevolent leadership, which is similar to Cheng’s shi-en, refers to leader behaviours that demonstrate individualized, holistic concerns for subordinates’ personal or family well-being. Moral leadership, which is subtle and hard to describe, may be broadly depicted as leader behaviours that demonstrate superior personal virtues or qualities that provide legitimacy as well as arouse identification and respect from subordinates for the leader. PL is thus defined as a style that combines strong discipline and authority with fatherly benevolence and moral integrity couched in a personalistic atmosphere. There is quite a consensus among these writers about what constitutes authoritarian and benevolent leader behaviours. Less can be said about moral leadership, since these writers were not consistent on the exact virtues or qualities that a leader must possess in order to be morally superior. Silin’s idea of moral leadership depends on demonstrated financial and commercial success and unselfishness. Although unselfishness is clearly a Confucian virtue, financial and commercial success is not necessarily indicative of morality and integrity in Chinese societies. Redding also recognised the importance of moral values in Chinese societies. He argued that an understanding of the Chinese moral charter is essential to an understanding of the emergence of Chinese capitalism (Redding, 1990: 239). This moral charter, according to Redding, includes a broad set of Confucian values such as filial piety, human-heartedness, reasonableness, tolerance, propriety, respect for the hierarchy of age and sense of responsibility to workers. Westwood (1997: 467) pointed out two facets of moral leadership in CFBs. First, the boss needs to be seen to adhere personally to rules of proper and virtuous behaviour and thus serve as model for others, and second, the boss needs to signal that the authority inherent in his role is not being exercised purely for his own self-interest but on behalf of the collective, taking account of the well-being of all concerned. Although the above writers do not agree upon a fixed set of virtues or personal qualities, they all seem to agree that a pater-


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nalistic leader is a morally superior person who leads in part by his virtues. In this sense, PL may be construed as a form of virtuocracy (Pye, 1981, 1985; Whitley, 1992). Since it is unclear which specific leader behaviours or virtues illustrate moral leadership in CFBs, we review two other studies that point to the importance of a leader’s moral character in Chinese organizations. First, Cheng and Zhuang (1981) studied effective leadership styles in Taiwanese military personnel and found moral character to be an important dimension of leadership. They asked soldiers to generate statements to describe leader behaviours and then combined these statements with items adapted from Fleishman’s Leader Behaviour Description Questionnaire (LBDQ) to construct their leadership scale (Fleishman, 1953). Factor analysis of 1160 surveys of these military personnel yielded three independent factors of leadership: consideration, initiating structure and gong-si-fen-ming (being scrupulous in separating public from private interests). The first two factors were of course identical to those typically found in LBDQ in the West. The third factor refers to certain aspects of a leader’s moral character. Figure 4.1 lists the English translations of the five items used by Cheng and Zhuang (1981) for the moral character factor. An examination of these items reveals that all five reflect concerns about engaging in behaviours that could be construed as abusing one’s authority for selfish personal gain. A second line of research conducted in the PRC also suggests that a leader’s moral character is an important dimension of Chinese leadership (Ling, Chen and Wang, 1987; Xu, 1989; Ling, 1991). Building on the work of Misumi (1985), who showed that effective leaders in Japan scored high on both performance and maintenance behaviours, the cited authors discovered a third dimension of leadership, moral character, that was independent of performance and maintenance but essential in accounting for leadership effectiveness in the PRC. Moral character here refers to the perceived moral integrity of the superior. Figure 4.1 also provides an English translation of items taken from the Chinese CPM (character, performance and maintenance) scale on the leader’s moral character. The CPM scale, which has 30 items, is an indigenous instrument developed in the PRC for measuring three dimensions of leadership. It has been tested widely in the PRC and has acceptable reliabilities and a clean factor structure (Ling, 1991). An examination of the items reveals that the leader’s moral character is primarily conceptualized as an absence of unprincipled, selfish behaviours, especially that of taking advantage of one’s positional

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Cheng and Zhuang’s Scale (1981) 1. 2. 3. 4. 5.

He He He He He

does not take advantage of his subordinates for personal gain. is not prejudiced against those who are in the minority. does not abuse his position to pursue self-gain. does not borrow money from his subordinates. does not manipulate guanxi (personal relationship) for self-interest.

Chinese CPM Scale (Ling, 1991) 1. Your superior is not clannish. He does not organize factions or engage in faction politics. 2. Your superior endures hardship before others do, and enjoys happiness after others have had enjoyment. 3. Your superior is vengeful and designs devious schemes to punish his opponents. (reversed) 4. Your superior is highly disciplined and does not mix personal interests with business. He places organizational goals ahead of his personal goals. 5. Your superior ingratiates himself with superiors to gain favours and is a yes man. (reversed) 6. In hiring and promotion, your superior is not jealous. His or her decisions are based on individual qualifications or merits only. 7. Your superior uses his authority to seek special privileges for himself. (reversed) 8. Your superior does not claim other’s work or contributions as his own. 9. Your superior does not use guanxi (personal connections) or back-door practices to obtain illicit personal gains. 10. Your superior is not preoccupied with acquiring personal fame or wealth.

Figure 4.1

English translation of items that measure leader’s moral character

power to pursue personal gain or other personal agenda. Nearly all items in the table reflect this deep-rooted concern. Moreover, this concern about the abuse of authority for selfish gain does not seem to be limited to those who are in leadership positions. It is also reflected in the conception of organizational citizenship behaviour in Taiwan. Farh, Earley and Lin (1997) showed that organizational citizenship behaviour in Taiwan consisted of three etic dimensions (identification with company, altruism towards colleagues and conscientiousness) and two emic ones (interpersonal harmony and protecting company resources). The emic dimension of protecting company resources refers to ‘discretionary behaviour by an employee to avoid negative behaviours that abuse company policies and resources for personal use’ (Farh, Earley and Lin, 1997: 429). The


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abusive behaviours include ‘use company resources to do personal business (e.g., company phones, copy machines)’, ‘conduct personal business on company time’, and ‘view sick leave as benefit and make excuses for taking sick leave’ (Farh, Earley and Lin, 1997: 428). The above findings, taken together, suggest that although leader morality and integrity may entail many virtues, two seem to stand out in Chinese contexts: not acting selfishly (especially refraining from abusing authority for personal gain) and leading by example. Since the samples for the above studies were not drawn from CFBs, one may question whether the above results can apply to PL. We believe that they are probably relevant for two reasons. First, leader virtues are shaped by social norms in a society, and thus they are likely to transcend organizational boundaries. Second, the two virtues identified above were very similar to the two facets of moral leadership described by Westwood (1997). Therefore, we conclude that these two virtues are central behavioural elements of leader morality and integrity in PL. Figure 4.2 summarizes leader behaviours under each of the three key elements of PL and the corresponding subordinate responses. The specific behaviours listed are illustrative, not exhaustive. Under authoritarian leadership, the major types of leader behaviours include asserting authority and control, underestimating subordinate competence, building a lofty image and acting in a didactic style. The corresponding subordinate responses include compliance, obedience, respect, fear and shame. Leader benevolence is manifested mainly in individualized care. Its corresponding subordinate responses are gratitude and willingness to reciprocate. Leader morality and integrity is demonstrated by acting unselfishly and leading by example, which in turn inspire identification and imitation by subordinates. Implicit in Figure 4.2 is the complementarity of leader and subordinate roles. Authoritarian leadership cannot work unless subordinates have been socialized to respect vertical hierarchy and have a dependent mind-set (Pye, 1981; Redding, 1990). Leader benevolence cannot be sustained if it does not engender feelings of indebtedness and a willingness to reciprocate in subordinates. Moral leadership works only if subordinates identify with their leader’s moral superiority and are willing to imitate it. When both leaders and subordinates play their respective roles, social harmony exists. When a subordinate is not ready or willing to play his or her role, a leader’s insistence on PL (especially authoritarian leadership) will be futile at

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Cultural Analysis of Paternalistic Leadership Leader Behaviour

Subordinate Response

Authoritarianism Authority and control

Compliance

• • • •

• Show public support • Avoid open conflict with boss • Avoid expressing dissension

Unwilling to delegate Top-down communication Information secrecy Tight control

Obedience

▲

• Ignore subordinate suggestions • Belittle subordinate contributions

▲

Underestimation of subordinate competence

Image building

• Accept leader’s directives unconditionally • Loyal to leader • Trust in leader Respect and fear

• Act in a dignified manner • Exhibit high self-confidence • Information manipulation

• Show deep respect • Express fear in awe of the leader

Didactic behaviour

Have a sense of shame

• Insist on high performance standards • Reprimand subordinates for poor performance • Provide guidance and instructions for improvements

• Willing to confess mistakes • Take leader’s instructions seriously • Correct mistakes and improve

Benevolent Leadership

• Never forget leader’s favours

Treat employees as family members Provide job security Assist during personal crises Show holistic concern Avoid embarrassing subordinates in public Protect even grave errors of subordinates

▲

Show gratitude

• • • • • •

▲

Individualized care

Strive to reciprocate • • • •

Sacrifice self-interest for leader Take assignments seriously Meet leader’s expectation Work diligently

Leader Morality and Integrity

• Identify with leader’s values and goals • Internalize leader’s values

Lead by example

▲

Identification

• Does not abuse authority for personal gain • Does not mix personal interests with business interests • Put collective interests ahead of personal interests

▲

Unselfishness

Modelling • Imitate leader behaviour

• Act as an exemplar in work and personal conduct

Figure 4.2

Paternalistic leader behaviour and subordinate response


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best and may lead to strain, disharmony and even a breakdown of the relationship at the worst. In this sense, PL is based more on followership than on leadership.

CULTURAL ROOTS OF PATERNALISTIC LEADERSHIP What are the primordial social and cultural forces in Chinese societies that render Chinese employees receptive to PL? Why do such leadership and the corresponding subordinate behaviours (especially absolute obedience) not carry the same stigma in China as they do in the West? We analyse these questions in the following section. Authoritarian Leadership To understand authoritarian leadership in Chinese contexts, one must understand the social structure of the traditional Chinese family. Of all the great civilizations, China made the family the most central (Bellah, 1970). Under the influence of Confucianism, the family has been the basic building block of Chinese society for three millennia. Of the five cardinal relationships in Confucian socialism (emperor–minister or subject, father–son, husband–wife, older brother–younger brother, and friend–friend), three of them explicitly address social relations within the family (father–son, husband–wife and brother–brother). In China’s patriarchal tradition, the vertical bond between father and son is considered paramount and supersedes all other social relations, including the husband–wife relationship, and the father’s authority over sons (and other family members) is absolute. In his insightful work on law and society in China, Chu (1961) summarized the authority of the father in a traditional Chinese family as follows: The Chinese family was patriarchal. The grandfather or father was the ruling head and had authority over all the members of the family, including his wife and concubines, his sons and grandsons, their wives and children, his unmarried daughters, his collateral relatives who were junior to him and who shared his domicile, his slaves and servants. His control of the family economy and his power to make financial decisions strengthened his authority. In addition, since the concept of ancestor worship was central to the perpetuation and solidarity of the family, the authority of the family head, who was also

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the family priest, was further enhanced. Finally, his authority was recognized and supported by law. (Chu, 1961: 20) On the surface, this form of patriarchal authority closely resembles that found in ancient Mediterranean cultures such as those of Israel, Rome and Greece (Bellah, 1970). For example, the leaders of the ancient tribes of Israel commanded complete obedience from their wives, sons and sons’ families. Even later, in the time of Christ, filial piety was still considered by the Jews as ‘among all the commandments the weightiest of the weighty’ (Bellah, 1970: 83). The fifth of the Ten Commandments was of course ‘Honour your father and your mother that your days may be long upon the land which the Lord your God give you’ (Exodus 20:12). However, as Bellah (1970) pointed out, there are fundamental differences in the nature of the patriarchal authority in the Chinese and ancient Mediterranean cultures. The difference does not concern who is in charge, but how he is in charge. In the West, the power of the patriarch originated from his contact with God and his obedience to divine commandments. As Western societies developed, the relationship between the patriarch and God grew increasingly remote, and patriarchal power no longer went unchallenged. The development of complex political units and powers in ancient Greece and Rome resulted in competition between the state and the patriarch for power over individuals, which further eroded the legitimacy of the patriarch. The ensuing rise of the Western legal tradition put increasingly tighter limits on the scope of patriarchal power, as is described by Hamilton: Roman laws codified the patriarch’s personal power by specifying the areas in which his personal judgement alone had jurisdiction. As the West became Christian and Rome fell, the family gradually lost its patrilineal tradition, becoming more truncated in the Middle Ages and nuclear in the modern era. But the areas of personal discretion remained, and within those areas, a notion of patriarchy persisted into modern times, becoming virtually synonymous with the arbitrary power of men over women. (Hamilton, 1990: 82) Thus, the West saw the steady decline of patriarchalism. In contrast, the Chinese had no omnipotent gods who legitimized fatherly authority. Instead, patriarchy was founded on the father–son relationship defined in Confucianism. The essence of this relationship is captured


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in the concept of xiao, translated as ‘filial piety’ and literally meaning ‘submission to the will of the father’. For Confucianism, the family is in many respects the religious context (Bellah, 1979: 87). Since one’s relation to the universe is mediated through one’s parents, one’s primary religious obligation is filial piety. Thus filial piety is not just a defining virtue for a perfect man, but the glue that holds the patrilineal family together and the cornerstone of an orderly Confucian society. The centrality of filial piety in Chinese society can be seen from the following passages recorded in Confucian classics dating from some 2000 years ago: Serving parents when alive with love and affection and when dead with grief and sorrow – this completely exhausts the basic duties of living men. (from Xiao Jing, The Book of Filial Piety, ch. 18) Filial piety is heaven’s pervading principle, earth’s fundamental meaning, and the people’s duty. (from Xiao Jing, The Book of Filial Piety, ch. 7) You Zi said, ‘Few of those who are filial sons and respectful brothers will show disrespect to superiors, and there has never been a man who is not disrespectful to superiors and yet creates disorder. When the root is firmly established, the moral law (Dao) will grow. Filial piety and brotherly respect are the root of humanity (ren).’ (from Lun Yu, the Analects, ch. 1, discourse 2) Not only did China and the West differ on the very basis on which fatherly authority originated, but this authority followed different trajectories of historical development. While the power of the father over the household became codified and restricted in the West, patriarchalism was strengthened in imperial China by increasingly rigidly defined role relationships (Hamilton, 1990; Smith, 1994). For example, during the Tang (618–906 ad) and Song (960–1279 ad) periods, Chinese imperial law held it a crime to kill a son regardless of the reason, although the punishment was lessened if the son had been disobedient. In the Ming (1368–1644 ad) period, fathers would go unpunished if they killed their sons for being unfilial. And China’s last dynasty, the Qing (1644–1911 ad) maintained the most authoritarian rule in Chinese history (Smith, 1994). Why did China’s imperial rulers and the privileged elite tolerate and even strengthen patriarchalism over the years? The Legalist school was a key factor (Yu, 1976; Smith, 1994). The Legalist school

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originated in the Spring–Autumn Period of ancient China (403–221 bc), at roughly the same time that Confucius was preaching his moral philosophy. In that period, the reigning Zhou dynasty had disintegrated, which resulted in complete social chaos and lawlessness. Unlike Confucianists, the Legalists were objective and realistic, looking to the present rather than the past for solutions (Chan, 1963). They denounced moral platitudes and vain talk, demanding accomplishments and results. Their answer to the pressing problems of the time was to establish a powerful, centralized imperial regime that could unify China and rule it with iron-fist discipline. Assuming that human nature was evil and driven by self-interest only, the Legalists advised the emperor never to trust, delegate to, or share authority with, ministers. They encouraged the use of various forms of control tactics in policing ministers and advocated that a harsh penal code must be publicly proclaimed and applied to all. In Chinese history, the Legalists were instrumental in setting up the dictatorship of Qin (221–206 bc), which unified China and instituted the tightest regimentation of life and thought in Chinese history. It can be readily seen that Legalism is entirely incompatible with Confucianism, which advocates the cultivation of virtue, the development of individual personality, government for the people, social harmony, and the use of moral principles, moral examples, and moral persuasion (Chan, 1963: 251). After 15 years Qin collapsed, and the Han dynasty followed (206 bc–220 ad) and ruled during one of the most glorious periods in all of Chinese history. In early Han times, under Emperor Wu (141–87 bc), Confucianism was adopted as a state cult, and Legalism was relegated to the status of a minor school of thought. The Legalist administrative approach, however, proved too practical and too addictive to be abandoned by China’s imperial rulers. Emperor Wu’s government was fundamentally Legalist in structure, although Confucian in spirit (Yu, 1976; Smith, 1994: 31). To compete with Legalism to win the support of imperial rulers, Confucianism went through a subtle transformation (Yu, 1976: 32). Out went mutuality in dyadic relationships, in came a relentless emphasis on the duties and obligations of the weak roles (minister, son, wife and younger brother) in wu-lun relationships. This transformation is best demonstrated in the idea of Three Bonds (sang-gong) proposed by Tung Chung-Shu (c.179–104 bc), a prime minister of Emperor Wu. The Three Bonds stipulated the emperor as the ruler of the minister, the father as the ruler of the son, and the husband as


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the ruler of the wife. The non-reciprocal obligations owed by inferiors to superiors within this framework set the authoritarian tone of much of life in traditional China until the end of imperial times (Smith, 1994). In this politicized Confucian social order, the source of imperial authority lies in the role relationship between the emperor and the minister (or the subject), which itself was an extension of the father–son relationship. By affirming and embracing patriarchy as the organizing principle of society, China’s imperial rulers solidified their absolute authority over their subjects as well. Hamilton summarized the nature of Chinese patriarchy well in the following passage: Chinese patriarchy places the stress on the subordinate’s duty to obey (xiao), assigns role obligations that signify his or her submission to duty (e.g., mourning rites), and restricts legitimate acts of power and obedience to behaviour in role sets (e.g., father/son, emperor/subjects, husband/wife). This depersonalized form of patriarchy is in turn justified by the belief that it is the duty of all individuals to conform to their roles in order to maintain the harmony of the whole. (Hamilton, 1990: 93) The above analysis points out an important characteristic of patriarchal authority in the Chinese context: that is, its power and its legitimacy hinge on the follower’s internalization of their ‘subordinate’ roles. In the words of Herbert A. Simon, custom is the most important basis for authority because under the influence of custom, subordinates view obedience to authority as socially ‘expected’ conduct (Simon, 1976: 130).To the extent that Chinese societies are able to inculcate the duties and obligations of ‘sonship’ into sons or ‘followership’ into subordinates, patriarchal authority is established. How does the legacy of patriarchalism in China relate to PL in modern CFBs? Yang (1993) described a generalization process, called pan-familism or generalized familism, in which Chinese people simply generalize experiences and habits acquired in the family to other groups so that the latter can be regarded as quasi-familial organizations. This pan-familism process can take place at three levels: (1) structural patterns and functional rules, (2) interpersonal ethics and role relationships, and (3) attitudes, thoughts, values and behaviours. Since the family remains the only social or collective group that is really important to contemporary Chinese (Yang, 1988), it is natural for the Chinese to treat the family as the prototype for almost all

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other organizations. When pan-familism is applied in a CFB, the owner/manager takes on the role of the father, and the subordinate the role of the son: that is, the all-powerful boss dictates, and the subordinate listens and complies. We have traced the cultural roots of authoritarian leadership in Chinese societies. Let us turn to the cultural bases of benevolent leadership. Benevolent Leadership In the Confucian ideal, dyadic role relationships are founded on mutuality. The following paragraph from the Li Ji (The Book of Rites) describes the nature of mutuality: What are the things which humans consider righteous (yi)? Kindness on the part of the father, and filial duty on that of the son; gentleness on the part of the elder brother, and obedience on that of the younger; righteousness on the part of the husband, and submission on that of the wife; kindness on the part of the elders, and deference on that of juniors; benevolence on the part of the ruler, and loyalty on that of the minister. These are the ten things which humans consider to be right. Two principles are clear in the above passage. First, people who assume the superior roles (fathers, elder brothers, husbands, elders and rulers) should treat those who are in inferior roles (sons, younger brothers, wives, juniors and ministers) with kindness, gentleness, righteousness and benevolence. Second, persons who assume the inferior roles should respect their superiors by following the principles of filial duty, obedience, submission, deference, loyalty and obedience. Therefore, the ideal social relations are ‘benevolent ruler with loyal minister’, ‘kind father with filial son’, ‘righteous husband with submissive wife’, ‘gentle elder brother with obedient younger brother’ and ‘kind elder with deferent junior’. These principles also form the cultural mandate and expectations that the leader should be benevolent to the follower. However, we should hasten to point out that the intensity of role obligations for the superior and the inferior is not symmetrical. The tradition of Three Bonds has made it clear that even when superiors behave in contradiction to their role requirements, inferiors are still expected to fulfil their role obligations. Although the Confucian


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classic Xiao Jing (The Book of Filial Piety), describes the numerous duties and obligations of sonship, no such literature exists on how fathers should fulfil their role; it is as if fatherly love and gentleness were a human instinct that does not need to be cultivated. Moreover, given the authoritarian role of the father, a father’s benevolence does not necessarily translate into his responsiveness to the psychological needs of the son. Psychologists have studied child rearing in contemporary Chinese families and found that the Chinese father–son relationship tends to be marked by affective distance, perhaps even tension and antagonism (Ho, 1987). A recent review by Wu (1994) found that Chinese socialization is characterized by a strong emphasis on training in obedience, proper conduct, impulse control and acceptance of social obligations, with little attention given to independence, assertiveness and creativity. These observations suggest that within Chinese families, fatherly benevolence is often overshadowed by concern for discipline and obedience.A warm, affectionate father may be more the exception than the norm in Chinese families. How does this cultural heritage play out in the boss–subordinate relationship in CFBs? First of all, we must recognize that subordinates are hired hands, and thus they are rarely totally dependent on the boss or the organization. This limits the range of authority that the boss may exercise. Beyond the expectation for ‘fatherly concern’, we suspect that the boss treats the employee benevolently for a different reason: that is, the powerful concept of bao (response or return: Yang, 1957). The core meaning of bao is reciprocity, which has served as one basis of social relations in China. The Chinese believe in reciprocity of actions between one person and another. Favours done for others are often considered ‘social investments’, for which handsome returns are expected. As Yang pointed out (1957: 291), although acceptance of the principle of reciprocity is required in practically every society, in China the principle is marked by its long history, the high degree of people’s consciousness of its existence, and its wide application and tremendous influence in social institutions. This strong sense of bao has persisted in contemporary Chinese societies, and it is one of the underlying forces that spawn the ubiquitous phenomenon of guanxi (personal connections) in business as well as social relations (King, 1991; Yang, 1994; Tsui and Farh, 1997). Since there is no compelling institutional force that requires the boss to act benevolently to the employees, benevolence on the part of the boss generates indebtedness on the part of the employees, who will then try to reciprocate in

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earnest. This reciprocity may take the form of genuine gratitude, personal loyalty, or obedience to and compliance with the boss’s requests (beyond what is normally required in the subordinate role). This pattern of the ‘patron–client’ relationship between leader and subordinate is widespread. It is not only found in overseas CFBs but also in SOEs and government bureaucracies in the PRC (Pye, 1985; Walder, 1986). In sum, the cultural roots of benevolent leadership originate from the Confucian ideal of the kind, gentle superior, and they are further cemented by practical concern for exchanging superior favours for subordinate indebtedness, personal loyalty and obedience. All come under the umbrella of the powerful norm of reciprocity. Moral Leadership As noted earlier, Confucius believed that the cultivation of individual virtues was the foundation of society. In the realm of government, Confucius emphasized the use of moral principles, moral examples and moral persuasion in governing. He did not believe in the efficacy of law and punishment, which he thought could regulate overt behaviours only, not inner thought. The most effective form of governance was therefore leading by virtue and by moral example. In the Lun Yu (the Analects), several passages illustrate this philosophy vividly: A ruler who governs his state by virtue is like the north polar star, which remains in its place while all the other stars revolve around it. (Ch.2, discourse 1) Lead the people with governmental measures and regulate them by law and punishment, and they will avoid wrongdoing but will have no sense of honour and shame. Lead them with virtue and regulate them by the rules of propriety, and they will have a sense of shame and, moreover, set themselves right. (Ch.2, discourse 3) Ji Kang Zi asked Confucius about government, saying, ‘What do you think of killing the wicked and associating with the good?’ Confucius replied, ‘In your government what is the need of killing? If you desire what is good, the people will be good. The character of a ruler is like wind and that of the people is like grass. In whatever direction the wind blows, the grass always bends.’ (Ch.2, discourse 19)


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In the Confucian ideal, the basic requirements for a leader were to demonstrate superior morality by performing the rites associated with his roles. At the highest level, the emperor as the Son of Heaven was thought to enjoy absolute powers as long as he ruled the country by virtue. Under the emperor, imperial officials had to demonstrate moral rectitude before they were worthy of being appointed as officials. In the Han period (206 bc–226 ad), the most important criterion for being selected for official posts was a demonstration of possessing the virtues of being a genuinely filial son without corruption. During the Sui-Tang (589–907 ad) and later periods, an examination system was established and institutionalized in which imperial officials demonstrated their moral worth through mastery of the Confucian classics, which were the major sources of Confucian ethics. In the public sphere, for millennia imperial officials were required to observe core Confucian ethics (e.g., filial piety) most seriously. For example, as late as the Qing dynasty (1644–1911 ad), officials had to withdraw from duty for up to three years to mourn the death of a parent (Smith, 1994). Beyond Confucian ethics, the emphasis on the moral virtue of the official is also necessitated by the lack of institutional protection for citizens in traditional China. Under the influence of Legalism, traditional Chinese law was overwhelmingly penal and designed primarily to protect the entire social order against moral or ritual impropriety (e.g., van der Sprenkel, 1962; Yu, 1976; Smith, 1994). It was only secondarily interested in defending the rights of individuals or groups against other individuals or groups, and not at all concerned with defending such rights against the state (Smith, 1994: 34). It had no due process in the Western sense, no trial by jury, and no formal presentation by counsel. In essence, this legal system was an instrument of state power and control, not a source of individual autonomy (Smith, 1994: 34). Lacking institutional protection for individual rights, the fate of individuals outside the family sphere rested entirely in the hands of imperial officials. The moral character of the officials thus took on added significance in imperial China. Despite modernization, this tendency to rely on the rule of man in lieu of the rule of law has persisted in contemporary Chinese societies to varying degrees (Ho, 1994; Lin, 1994). In sum, the importance of moral leadership has its roots in the Confucian philosophy of governance. A weak legal tradition and the rule of man further underscore the importance of moral character of those who occupy positions of authority.

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Paternalistic Leadership Authoritarian Moral Benevolent leadership leadership leadership

ŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸŸ Cultural Roots

• History of three thousand years of imperial rule • Politicized Confucianism – Three Bonds (father as the ruler of son, emperor as the ruler of ministers. husband as the ruler of wife) • Legalism – Law and punishment – Centralized power and authority – Tactics of control

Figure 4.3

• Confucianism – Governance by virtue – Governance by moral example – Governance by the rule of propriety (li)

• Confucianism – The obligations of the father and emperor roles – Human heartedness (ren) • Norm of reciprocity (bao)

• Rule of Man

Cultural roots of paternalistic leadership

Figure 4.3 lists the cultural forces behind each of the three elements of PL. We have used the image of an iceberg to depict the idea that PL rests on the tip of the mass of Chinese traditional values and ideology. PRELIMINARY RESEARCH EVIDENCE ON PATERNALISTIC LEADERSHIP IN CONTEMPORARY CHINA How is PL received in contemporary Chinese societies? Recently we conducted a large-scale survey of work values in the PRC, Taiwan


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and Hong Kong, which examined employees’ expectations for two elements of PL, authoritarianism and benevolence. We did not investigate leader morality and integrity because it has been addressed in previous research (e.g., Cheng and Zhuang, 1981; Ling, 1991). The PRC sample consisted of 1025 employees drawn from 38 enterprises from nine different provinces. The Taiwanese sample included 1188 employees drawn from 11 enterprises from seven counties. We tried to make sure that the mainland and Taiwanese samples were comparable. For example, all the enterprises studied were in the electronics, food and service industries. In addition, all our participating Taiwanese companies had PRC subsidiaries, and most of these subsidiaries were also included in the PRC sample. Within each selected enterprise, employees of all ranks were invited to participate in the survey. A detailed description of the two samples can be found in Cheng (1998). The Hong Kong sample was smaller (N = 256), and it included employees from two electronics factories of a multinational firm whose mainland and Taiwanese subsidiaries had also participated in the survey. In a separate analysis, we singled out employees from this multinational firm. Since the pattern of results for this sample was substantially the same as that for the larger sample, we report results for the larger sample only. Our survey contained eight items measuring employee’s respect for authority and expectation of leader’s benevolence (see Table 4.1). All items were measured on a six-point Likert scale (1 = strongly disagree, 2 = disagree, 3 = slightly disagree, 4 = slightly agree, 5 = agree, 6 = strongly agree). The same Chinese items were used in the three regions. We factor-analysed the eight items in each sample. Results of these analyses revealed that in each sample, the four items for respect for authority loaded on one factor and the remaining four items, measuring expectation of leader’s benevolence, loaded on a separate factor. The two dimensions were modestly correlated for each sample, though the correlation was statistically significant (r = 0.09, 0.19, 0.14 for the PRC, Taiwan and Hong Kong, respectively). The Cronbach alphas ranged from 0.56 to 0.60 for respect for authority and from 0.64 to 0.76 for expectation of benevolence. We examined mean differences across the three regions using oneway analysis of variance (ANOVA) and post hoc comparisons. Results are presented in Table 4.1. In terms of respect for authority, the three regions varied significantly, with Hong Kong showing the highest level,

110 Table 4.1

Cultural Analysis of Paternalistic Leadership Respect for authority and expectation of leader’s benevolence in the PRC, Taiwan and Hong Kong†

Variables

Respect for Authority All important decisions in an organization should be determined by management. Superior may reprimand the subordinate in public for poor performance. Success in my organization is mainly due to the effort and leadership of the management. The subordinate should pay close attention to superior’s instructions and be willing to repent and follow. Overall Expectation of Leader’s Benevolence Beyond work relation, the superior should express concern about subordinate’s daily life. It is the superior’s responsibility to take good care of subordinates. When the subordinate makes mistakes, the superior should teach and admonish with patience. When the subordinate encounters personal emergencies, the superior should provide timely assistance. Overall

The PRC (N = 1020)

Taiwan (N = 1176)

Hong Kong (N = 261)

F

M

SD

M

SD

M

SD

3.37‡

1.27

3.41‡§

1.33

3.62§

1.36

3.90*

3.11§

1.32

2.43‡

1.22

2.98§

1.28

83.22**

3.23§

1.29

3.41‡

1.37

3.69¶

1.38

13.78**

4.28‡

1.12

4.29‡

1.12

4.57§

0.91

8.07**

3.50§

0.83

3.39‡

0.85

3.72¶

0.82

17.67**

5.17‡

0.81

5.12‡

0.81

4.46§

1.03

78.44**

4.57§

1.09

4.85‡

1.00

4.28¶

1.07

41.47**

5.02

0.86

4.97

0.81

4.89

0.76

2.72

5.10‡

0.85

5.06‡

0.79

4.61§

0.85

39.35**

4.97‡

0.68

5.00‡

0.65

4.56§

0.65

49.47**

* P < 0.05; ** P < 0.01. † For each variable, means not sharing common superscripts ( ‡, §, ¶) differed significantly at the 0.05 level or better using Scheffe’s test.


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followed by the PRC, and then Taiwan. In terms of expectation of leader’s benevolence, Hong Kong scored significantly lower than the PRC or Taiwan, and there was no significant difference between the PRC and Taiwan. Despite these regional differences, all three groups of Chinese employees expressed a strong expectation of leader benevolence (means = 4.5–5.0) and a mixed view on respect for authority (means = 3.39–3.72). The survey also included several demographic variables, of which age and educational level are of particular interest since they may reflect generational differences and the influence of modernization. Respect for authority was found to be positively correlated with age in the PRC (r = 0.06, p < 0.05), Taiwan (r = 0.15, p < 0.01) and Hong Kong (r = 0.23, p < 0.01), but it was negatively correlated with education in the PRC (r = -0.09, p < 0.01) and Taiwan (r = -0.13, p < 0.01) and uncorrelated with education in Hong Kong (r = -0.08, n.s.). Expectation of leader’s benevolence was found to be uncorrelated with age in the PRC (r = 0.06, n.s.) and Taiwan (r = 0.03, n.s.), and positively correlated with age in Hong Kong (r = 0.15, p < 0.05). Expectation of leader’s benevolence was also found to be uncorrelated with education in the PRC (r = 0.01, n.s.) and Hong Kong (r = 0.06, n.s.), and positively correlated with education in Taiwan (r = 0.10, p < 0.01). The above results show that Chinese employees had a generally high level of expectation of leader’s benevolence, and this expectation was higher in the PRC and Taiwan than in Hong Kong. Furthermore, this expectation was generally unrelated to individual differences in age or education. In contrast, respect for authority was highest in Hong Kong, followed by the PRC and then Taiwan. Older individuals exhibited a higher level of respect for authority, and individuals with more education tended to have lower levels. These results suggest that benevolent leadership is likely to be well received by Chinese employees (especially in the PRC and Taiwan). Authoritarian leadership, however, may not be well received, especially among those who are younger and well educated and from Taiwan or the PRC. We have reviewed the literature on PL, analysed its cultural roots and provided some preliminary data on how Chinese employees might respond to such leadership. In the final section of this chapter, we will point out key issues that should be addressed and propose a preliminary PL model for future research in this area.

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FUTURE RESEARCH DIRECTIONS Relationships among the Three Elements of Paternalistic Leadership In this chapter, PL is defined as being composed of three elements – authoritarianism, benevolence, and moral leadership – all of which are rooted in Chinese cultural traditions and found to be present in the leadership behaviour of the bosses of overseas CFBs (Silin, 1976; Redding, 1990; Cheng, 1995a, 1995c). PL is defined as leadership involving all three of these elements to varying degrees. That said, we do not imply that these three elements are inseparable (especially for discussing leadership in non-CFB contexts). Let us speculate about their interrelationships. First, moral leadership is probably positively correlated with benevolent leadership because leader benevolence, as illustrated in our data, was widely expected as part of the leader’s role in Chinese societies. Thus a leader who practises benevolent leadership should be more likely to be perceived as possessing moral character by subordinates. Second, the relationship between moral leadership and authoritarianism may be tenuous. On the one hand, the leader’s moral leadership (as perceived by subordinates) should strengthen authority, especially referent and legitimate powers (French and Raven, 1959), thus putting the leader in a position to exercise strong influence. On the other hand, the increased sphere of the leader’s influence may render authoritarian behaviours entirely unnecessary. The net effect of these two opposing forces may be that leader’s moral leadership is unrelated to his authoritarianism. Finally, the relationship between authoritarianism and benevolence is even more intriguing because Chinese leaders have found it difficult to employ both elements simultaneously. Cheng (1995c) noted that in CFBs and in the military in Taiwan, the head of a unit frequently played an authoritarian role while his or her deputy played a predominantly benevolent role. This occurred because the head found it difficult to play both roles effectively. Similar divisions also occur in many Chinese families, where the father often plays a disciplinarian role and the mother a nurturing one. The difficulty of playing both roles well suggests that the elements of authoritarianism and benevolence are probably negatively correlated. The above discussion leads us to conclude that although PL consists of three elements, they may not be highly integrated in a single person. It may be more useful to conceptualize them as three styles that con-


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verge in the bosses of CFBs. Future research should examine their singular as well as interactive effects on subordinate and organizational outcomes in different types of Chinese organizations. Societal Modernization and the Challenge to Authoritarian Leadership As noted earlier, authoritarianism in Chinese culture is rooted in the paramount value of submission to authority. This pillar of traditional Chinese culture has been under relentless assault by Western-led modernization in the twentieth century (Yang, 1998). Studies conducted in Taiwan (see Yang, 1996 for a summary) have shown that submission to authority was incompatible with modern values of egalitarianism and open-mindedness and has been gradually weakened over time. Similarly, King (1996: 270) noted that the Chinese in Hong Kong no longer lived uncritically under the traditional Confucian ideology and had adopted a rationalistic, instrumental attitude towards traditional values. The recent social history of the PRC proves to be an even more radical blow to the traditional value of submission to authority. In the early 1950s, during the agrarian land reform that engulfed the entire countryside, the landed gentry class (which had been the traditional mainstay of China’s peasant society) was put on public trial and had their land confiscated (Chu and Ju, 1993). In the cities, the business class was discredited and wiped out. By the late 1950s, party cadres at various levels had consolidated all authority in the society and created a society of organized dependency (Walder, 1983). Then came the devastating Cultural Revolution (1966–76), which turned the entire society upside down. When these same Party cadres who had exercised their power with an air of almost absolute finality were subject to all kinds of abuse and humiliation at the hands of the young Red Guards, the basis of authority in Chinese society began to fall apart. Even after the Red Guards were banished to labour exile in remote regions and many of the downgraded cadres returned to their erstwhile positions, the meaning of authority was never the same as before. Authority must still be submitted to when it controls the distribution of extremely scarce resources. But this submission is no longer willingly expressed, but reluctantly extracted and intensely resented. (Chu and Ju, 1993: 312)

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Even after two decades, the devastating effect of the Cultural Revolution on respect for authority still surfaced in our survey data. We divided our mainland sample (N = 1011) into the following four age groups based on participants’ ages at the beginning of the Cultural Revolution in 1966: group 1 – 1 year old or not yet born (N = 560); group 2 – age 2 to 11 (N = 263); group 3 – age 12 to 16 (N = 84); and group 4 – age 17 or above (N = 104). Of the four groups, group 3 should be the most heavily influenced by the Cultural Revolution since its members were in the middle or high schools when the Revolution began. They were also the prime age group targeted for joining the Red Guard. We compared differences in respect for authority by age group using ANOVAs and post hoc comparisons. The results showed that group 3 had significantly lower scores on respect for authority than any of the other three groups (means for groups 1 to 4 were 3.44, 3.64, 3.22 and 3.67, respectively). No similar age difference was found in samples from Taiwan or Hong Kong. When these 84 individuals were omitted from the PRC sample, the correlation between age and respect for authority rose from 0.06 to 0.11 (p < 0.01). Even within Chinese families, people’s attitudes toward filial piety have undergone significant changes over this century. There is evidence that filial piety is generally on the decline and no longer commands the same degree of observance it once did (Ho and Chiu, 1994; Ho, 1996). Although the core filial obligations such as ancestor worship and repaying one’s indebtedness to parents have been largely preserved in overseas Chinese communities, absolute obedience to parents and subjugation of individuals’ needs and interests to those of their parents have largely been abandoned (Ho, 1996). Moreover, Yang (1988) has noted a shift of the power structure of the family from the father/son axis to the husband/wife axis in the Chinese mainland, Hong Kong and Taiwan. Although parents are still respected, they have lost their total authority and absolute power over their children (Yang, 1988). The above review suggests that the experience of modernization (and Communism) in contemporary Chinese societies has weakened the very foundation of the Chinese conception of authority. One can no longer assume that submission to authority is a universal value espoused by all Chinese, especially among those who are younger and more educated. Indeed, recent research shows that individual differences in attitudes towards submission to authority moderated the relationship between work attitude and organizational behaviour in


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Hong Kong and Taiwan (e.g., Farh, Earley and Lin, 1997; Farh, Leung and Law, 1998; Pillutla, Farh, Lee and Lin, 1998). It is also worth noting that cross-cultural research continues to show that Chinese societies as a whole tend to exhibit a larger power distance than many Western countries (Hofstede, 1980a; Smith and Wang, 1996). There is also evidence from cross-cultural research that, compared with their Western counterparts, Chinese leaders tend to be less participative (Xia, 1987), to be much more likely to rely upon their superiors in handling events (Smith and Peterson, 1988), and to have a more paternalistic attitude towards companies (Chang, 1985). These observations may have led Hofstede and Bond to conclude: ‘The ideal leader in a culture in which Power Distances are small would be a resourceful democrat; on the other hand, the ideal leader in a culture in which Power Distances are large is a benevolent autocrat (or “good father”)’ (Hofstede and Bond, 1988: 14). These broad generalizations probably hold true in cross-cultural comparisons, but they should not be interpreted as suggesting that, within Chinese culture, authoritarian leadership is associated with positive subordinate responses or organizational outcomes. As we have seen from our recent survey, submission to authority as a social value is no longer viewed positively (or even negatively) in Chinese societies. This suggests that authoritarian leadership may also no longer be viewed positively. This is especially the case for Western-invested organizations in China since Chinese employees who self-select into such organizations expect participative leadership. These are interesting possibilities that need to be scrutinized in future research. In conclusion, with the deterioration of the traditional value of submission to authority in Chinese societies and the fact that most managers are not owners of their organizational units, authoritarian leadership in its present form is unlikely to be well accepted by Chinese employees. Like filial piety, it must be transformed to adapt to the modern context. We think that this transformation may take two different forms. First, authoritarian leadership may be transformed by purging the leader behaviours that are particularly degrading to individual dignity (e.g., belittling subordinate contributions, ignoring subordinate suggestions, tight control and insisting on absolute obedience). Other facets of authoritarian leadership (e.g., image building, providing guidance and instructions, high performance standards) may still be retained and even reinforced in some organizational contexts. Second, instead of being fixated on building personal wei (impressive strength or might which inspires awe or

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fear), the owners/managers may direct their attention to building the wei of core principles or values that they cherish. When wei is transferred from the owner/manager to core principles or values, subordinates are no longer obedient to ‘man’ but to ‘law’. They no longer experience the fear and awe associated with the exercise of the authority of the owner/manager, but the wei of the core principles or values. Impersonal authority built on principles or values is less likely to arouse employee resistance than personal authority in contemporary Chinese societies. It also has the benefits of evolving a strong, more enduring corporate culture, smoother managerial succession, and greater stability and continuity over time. Future research should study these speculations. Unresolved Issues Surrounding Moral Leadership Our analysis suggests that for moral leadership to work effectively, a society must have a single set of clear moral standards. In other words, moral leadership may not work effectively in a pluralistic society in which conflicting value systems coexist. In traditional China, Confucianism provided the guiding ethical principles for the entire society. In contemporary Chinese societies, modern (or Western) values coexist with traditional Confucian values, and each has its own system of moralities (Hwang, 1998). It is thus increasingly difficult to define a single set of values that are accepted by all. What are the important virtues for moral leadership in this changing context? Earlier, we argued for two important virtues for moral leadership in contemporary Chinese societies: (1) to avoid acting selfishly and (2) to lead by example. The importance of these virtues is based on studies conducted in the PRC and Taiwan. How important are these virtues for business organizations in overseas Chinese communities such as Hong Kong? Are there other virtues important for moral leadership, given the rapid infusion of Western values? These are important issues that need to be addressed in future research. Researchers also need to examine how subordinates form their impression of leaders’ moral integrity, how this impression changes over time, which leader behaviours are most influential in the impression formation process, what impact moral leadership has on subordinate- and organization-level outcomes, and, finally, how organizations develop and cultivate a culture of moral leadership. These issues are important not only for organizations, but also for Chinese societies at large, which are often criticized for paying too little attention to business ethics.


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Unresolved Issues Surrounding Benevolent Leadership Leader benevolence refers to behaviour that demonstrates individualized, holistic concern for a subordinate’s well-being. Here we have the image of a caring leader who is attentive to subordinates’ needs. Our survey results indicate that Chinese employees in the PRC, Hong Kong and Taiwan held a strong expectation of benevolent leadership, and this tendency did not vary across age or educational status. These findings suggest that leader benevolence is still expected and appreciated by employees. However, when leader benevolence is actually put into practice, it may lead to conflicts with modern values such as equity, equality, economic rationality and respect for individual privacy. For example, in resource allocation, benevolent leadership implies that the boss will distribute resources among subordinates based on the need rule rather than on equity or equality. A leader’s protection of long-term loyal employees may clash with today’s market rationality of downsizing and restructuring.A leader’s concern for subordinates’ private lives may offend those who are conscious of their privacy. These potential conflicts suggest that although benevolent leadership is a popular idea, practising it without trampling on basic modern values is no easy task. Future research should examine how Chinese leaders practise benevolence without creating these value conflicts, and how Chinese employees espousing varying degrees of modern values respond to different types of benevolent practices. Relations with Leadership Styles in the Western Literature PL is prevalent in CFBs, but the essence of the leadership task in modern organizations is the same, involving directing, organizing, influencing, decision making and controlling. Thomas Manning, a managing director of Ernst and Young who operates out of Hong Kong, has been quoted as saying: ‘About 80% of what these Asian family companies are trying to do is the same as what others are trying to do worldwide. What makes a good company in Asia makes one in San Francisco or in Stuttgart’ (Dumaine, 1997). We should not be surprised to find some similarities between elements of PL and leadership styles described in the Western leadership literature. Although the purpose of this chapter is not to detail these similarities as well as differences between the East versus the West, it is nevertheless useful to point out the obvious for future cross-cultural research.

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Earlier we noted similarities and differences between consideration and benevolence. The concept of individualized consideration in Bass’s model of transformational leadership (Bass, 1985, 1996) is even more similar to benevolence. Future research should examine how Chinese and Western leaders express benevolence and individualized consideration in their cultural contexts, and how subordinates respond to these leader behaviours. Despite the differences in the conceptions of authority between China and the West, several aspects of authoritarian leader behaviours (see Figure 4.2) are similar to Western concepts of autocratic leadership, initiating structure and high performance expectation. Although autocratic leadership has fallen out of favour in modern organizations in the West, the other leadership concepts are still quite relevant. Future research should examine cross-cultural differences in subordinates’ perceptions of leader authority and how their perceptions influence their response to various forms of authoritarian leader behaviours. Beyond benevolence and authoritarianism, the leader’s morality and integrity has begun to receive increasing research attention in the Western leadership literature. For example, Burns (1978) described the transforming leader as one who can raise the consciousness of followers to higher levels of morality and motivation by appealing to ideals and moral values such as liberty, justice, equality, peace, and humanitarianism. In Bass’s conceptualization of transformational leadership, the leader’s integrity and trustworthiness are considered important attributes of charisma (Bass, 1985). In Schein’s model of cultural leadership (Schein, 1992), role modelling (also called leading by example) is one of the five primary mechanisms by which a leader can mould the culture of an organization. Role modelling here refers to communicating values and expectations through the leader’s own actions, especially actions showing loyalty, self-sacrifice and service beyond the call of duty. Several studies conducted in the USA have shown that perceived leader integrity is positively correlated with subordinate trust in leaders (Morgan, 1989), job satisfaction (Vitell and Davis, 1990; Craig and Gustafson, 1998), and negatively correlated with desire to quit (Craig and Gustafson, 1998). More interestingly, the newly developed Perceived Leader Integrity Scale (PLIS: Craig and Gustafson, 1998) includes several items that address ethical concerns found in Chinese scales of leader morality and integrity (Cheng and Zhuang, 1981; Ling, 1991). For instance, the following items taken from the PLIS express


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concerns about leader selfishness and lack of exemplary behaviour: ‘Would steal from the organisation’, ‘Would take credit for my ideas’, ‘Would blame me for his/her own mistake’, ‘Always gets even’, ‘Gives special favours to certain “pet” employees, but not me’, and ‘Is a hypocrite’. These studies suggest that leader morality and integrity are important for leadership effectiveness in China as well as in the USA Future research should explore the commonalties as well as differences in the East–West conceptions of moral leadership. Finally, the similarities in cross-cultural leadership lead us to speculate that Western leadership theories which have the same concerns as Chinese culture may be more transferable to Chinese organizations than those which do not. Using a sample from Taiwan, Chen and Farh (1999) found preliminary support for this general proposition. They found that the ‘relationship-oriented’ transformational leader behaviours (e.g., facilitating collaboration, providing individualized support and providing an appropriate model) had a strong positive effect on subordinates’ job satisfaction, organizational commitment, in-role performance and organizational citizenship behaviour. The effect of ‘task-oriented’ transformational leader behaviours (such as articulating a vision, giving intellectual stimulation and holding high performance expectations) on subordinate responses is less strong. Future research should take national culture into consideration in formulating a more complete theory of effective leadership in global settings. A Preliminary Model of Paternalistic Leadership We would like to close this chapter by presenting a preliminary model of PL to integrate our thinking in this area. This model is depicted in Figure 4.4. At the heart of the model are the three elements of PL and their corresponding subordinate responses. Leader morality and integrity is linked to subordinate respect for and identification with the leader. Leader authoritarianism is connected with subordinate’s dependent mindset and willingness to comply with authority. Finally, leader benevolence is associated with subordinate’s indebtedness to the leader and sense of obligation to repay his/her indebtedness. We use vertical double arrows to depict the reciprocal nature of the relationship between leader’s paternalistic behaviours and subordinate responses. Moreover, the three elements of PL (i.e., authoritarianism, morality and integrity, and benevolence), albeit distinguishable, are certainly not independent. Although we have speculated about

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LEADER BEHAVIOURS SOCIAL/CULTURAL FACTORS Familism Respect for hierarchy Personalism/particularism Norm of reciprocity (bao) Interpersonal harmony Leadership by virtues

Morality and Integrity

------------------- --------------------䉴䉳

Authoritarianism

-------------

䉴

䉳

䉴

䉳

• • • • • •

Benevolence

------------------------------ --------------------------------- -----------

ORGANIZATIONAL FACTORS

Respect and Identification 䉴

Dependence and Compliance

䉴

䉳

䉳

• Family ownership • Inseperation of ownership from management • Entrepreneurial structure • Simple task environment and stable technology

䉳

䉴

SUBORDINATE RESPONSES Figure 4.4

A preliminary model of paternalistic leadership

Indebtedness and Obligation to Repay


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their interrelationships, the exact form of these relationships remains to be clarified in future research. We use dotted lines to suggest their interdependency. Likewise, the three types of subordinate responses are also interrelated. For example, subordinates’ indebtedness to the leader and their perception of leader morality and integrity are probably positively associated with their willingness to comply with leader’s directive. We therefore use dotted lines to connect the three types of subordinate responses to indicate their interdependency. The phenomenon of PL is embedded in the context of a host of social/cultural and organizational factors. The key social/cultural factors consist of familism and Confucian values, which include respect for hierarchy, personalism/ particularism, the norm of reciprocity (bao), interpersonal harmony, and leadership by virtues. These factors have already been discussed in detail in preceding sections of this chapter. The organizational factors, however, need some explanations. Drawing on previous work by Redding (1990) and Westwood (1997), we consider PL is more likely to be found in organizations with the following characteristics: 1. Family ownership. The organization is predominantly owned by members of a family. Family ownership allows the management to adopt the Chinese family as a model for organizing and running the business. Key familial features include the owner/manager as the father figure, the employee as the obedient son, holistic concern for employees, strong authority conferred upon the leader, personalized loyalty between the leader and the subordinate, and expectations of obedience and conformity within the hierarchy. 2. Non-separation of ownership from management. The combination of ownership with management legitimizes the strong authority of the owner/manager. As the owner/founder of the organization or their close kin, the manager/owner is intensely committed and has in-depth knowledge about its business, both of which further strengthen his or her authority. 3. Entrepreneurial structure. The organization tends to be new and small, with limited product lines and geographic dispersion. It tends to have a simple internal structure with a low level of specialization, formalization, standardization, and professionalization. 4. Simple task environment and stable technology. The organization tends to face a relatively simple task environment. Its core technology is well understood and does not change unpredictably.

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These characteristics allow the owner/manager to maintain tight control and centralize key decisions without losing effectiveness. These characteristics also allow the organization to be less dependent on the initiatives of employees for its survival. In our preliminary model, the social/cultural and organizational factors provide the appropriate context for the practice of PL. This means that PL is more likely to be practised (and perhaps more effective) in family-owned and -managed businesses than in nonfamily-owned businesses. Individuals who identify with traditional Chinese cultural values (such as submission to authority) are more likely to respond positively to PL than those who do not. PL will lead to more positive outcomes when it is practised in a small organization with a limited product line, a simple task environment and a stable technology than in a large organization with diverse product lines, a complex environment and unstable technology. This preliminary PL model is rudimentary, but it draws our attention to the essential elements of paternalistic leader behaviours and corresponding subordinate responses. It also points out the social/cultural and organizational factors in which PL is likely to be viable. We hope that this model may serve as a starting point for the development of a more complete theory of PL in Chinese contexts.

CONCLUSION In this chapter we have taken an indigenous perspective towards the analysis of PL in Chinese organizations. We began with a review of the ideographic evidence on PL in CFBs, which culminated in the identification of its three constituent elements: authoritarianism, benevolent leadership and moral leadership. Each of the elements is further linked with a set of corresponding subordinate responses (psychological as well as behavioural). We then investigated the cultural legacy of China that underlies PL, explored its relevance to Chinese organizations in contemporary societies, and speculated about its challenges in light of societal modernization. We concluded the chapter by outlining a preliminary PL model. Leadership is a subject that has intrigued Chinese people and scholars for more than three thousand years. It is also a subject of enormous importance to leaders and organizations of the contemporary world as they face unprecedented challenges in globalization, intense competition and technology innovation. Through in-depth analysis of


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the cultural underpinnings of leadership in CFBs, we hope to stimulate research on understanding the type of leadership style that would fit well with changing Chinese cultural values and meet the needs of modern organizations at the same time.

Note 1.

The authors would like to express their sincere appreciation to Xiaoping Chen, Madan Pillutla, Anne S. Tsui and Katherine Xin for their comments on an earlier version of this chapter.

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Part II Joint Venture Management and Negotiation in China


5 Control and Performance in Sino-Foreign Equity Joint Ventures Pien Wang, Yunye Zhi and Kong Yam Tan

The results of a questionnaire survey of 174 Sino–foreign EJVs and personal interviews with 40 managers and Chinese government officials revealed that foreign parents ranked control differently depending on whether they had majority, equal or minority stakes in EJVs. Regardless of equity level, ‘the right to appoint the general manager’, ‘board meetings’ and ‘auditing’ were viewed as important control mechanisms. Positive relationships were also found between foreign parents’ control over their EJVs and both their and Chinese parents’ satisfaction with EJV performance. JV control is defined as the process through which a parent firm ensures that the way a JV is managed conforms to its own interests (Schaan, 1983). Effective and efficient control over some or all of the activities of a JV not only protects a parent firm from premature exposure of its technological or other proprietary know-how, but also helps it implement its strategies and attain its overall objectives (Geringer and Herbert, 1989). Conversely, ineffective control over a JV can limit the parent firm’s ability to coordinate its activities and efficiently utilize its resources (Stopford and Wells, 1972; Lorange and Morton, 1974; Anderson and Gatignon, 1986). Parent firms can exert control over their JVs through a wide range of mechanisms, including maintaining a majority stake, appointing key personnel, relying on advanced management and technological knowhow, holding board meetings, and setting up policies and procedures (Friedman and Begiun, 1971; Killing, 1983; Chen, 1991; Lu and Wang, 1996; Xia, 1997). However, these control mechanisms might not be equally available and important to all parent firms. For instance, a majority stake is not an option for foreign firms involved in industries in which a foreign majority is prohibited by the policies of a host country. A minority partner engaging in a labour-intensive industry is probably less able to use superior management and technical skills to 131

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Control/Performance in Sino–Foreign Equity JVs

exercise effective control over a JV than its majority counterpart engaged in a high-technology industry.Thus it is crucial for parent firms to understand the variety of measures they can use to achieve control. Schaan (1988) made various suggestions as to how even a minority partner could exercise control over a JV. In his study of UK JVs with partners from Western Europe, the USA, and Japan, Glaister (1995) found that control mechanisms such as the appointment of key JV managers and the sources of accountancy, planning and control systems were largely derived from the UK parent with at least a 50 per cent shareholding in a venture. In their study of 132 Sino–Singaporean JVs, Wang, Wee and Koh (1998) found that Singaporean parents with majority, equal and minority shareholdings had different perceptions of the importance of a variety of control measures. However, most research other than the work of Schaan, Glaister, and Wang and colleagues has given scant attention to the issue of the importance of control mechanisms and equity shareholdings. No country has received more JVs (both equity and cooperative joint ventures) than the PRC since it opened up its economy in 1979. From 1986 to 1996, JVs accounted yearly for more than 60 per cent of the total utilized amount of FDI in China (China Resources Advertising & Exhibition Company Ltd, 1983–1997/8).Thus, the JV has been the most important entry mode employed by foreign investors entering the China market. JV control is often a contentious issue, and this is certainly true for Sino–foreign JVs. Foreign investors’ desire to manage PRC operations according to their norms of good practice and strategic objectives may conflict with Chinese partners’ concern about their foreign counterparts’ taking advantage of them (Chen, 1991). The purpose of this study was to examine two major issues. First, the importance of various control mechanisms as perceived by foreign parents with majority, equal and minority stakes was investigated. Second, the relationships between the control of foreign parent firms over JVs and foreign and Chinese parents’ satisfaction with JV performance were analysed.

CONTROL MECHANISMS Control of a JV can be gained through many mechanisms, such as majority shareholding, key personnel appointments, setting up policies and procedures, holding board meetings, auditing and so forth.

Pien Wang, Yunye Zhi and Kong Yam Tan

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Majority Shareholding Some scholars have suggested that the equity position of a parent and its control over a JV are closely related (Anderson and Gatignon, 1986). Tomlinson (1970) and Stopford and Wells (1972) found that holding a majority equity position could ensure a parent a certain degree of control over a venture. Killing (1983) also found that 70 per cent of the dominant parent–controlled JVs (where only one parent played an active role in decision making) in his samples were majority-owned by the active parent. Wang, Wee and Koh (1998) found that Singaporean firms with majority shareholding perceived themselves as having more control over their JVs than firms with equal or minority shareholding. Thus, the majority of responding Singaporean firms (56.8 per cent) owned majority stakes in their JVs. Similarly, in a survey of 67 MNCs with JVs in China, Lu and Wang (1996) found that 60 per cent of the foreign parents had majority stakes. Xia (1997) indicated that majority ownership would not ensure absolute control of JVs. Schaan (1988) further noted that even minority shareholders could exert a degree of control over JVs that was quite disproportionate to their level of shareholding. The empirical study of 90 Sino–US JVs by Yan and Gray (1996) also provided evidence that JV partners could gain management control disproportionate to their level of ownership through the input of non-capital resources such as technology, management expertise and access to government support. Moreover, the policies of the PRC government demand a controlling state interest in certain ‘pillar’ industries. Therefore, regardless of ownership levels, parent firms would seek other mechanisms to control JVs. The importance of these mechanisms might also differ depending on the equity stakes and competitive advantages of the parent firms. Right to Appoint Personnel to Key Positions Control requires knowledge of events and circumstances. Such knowledge is most readily available to a venture’s parent if it appoints key personnel running the operation or in critical functions such as marketing or finance (Schaan, 1988; Geringer and Frayne, 1990; Lu and Wang, 1996). Communication between the JV and the parent is likely to be good because employees of the two firms are acquainted with one another. More complete information offers the prospect of tighter

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control, and furthermore, such employees are likely to act in ways which are acceptable to their parent firms (Killing, 1983). Key positions in Sino–foreign JVs include the chairman of the board of directors, the general manager and the functional managers. General Manager Article 39 of the 1983 Regulations for the Implementation of the Law of the PRC on Chinese–Foreign Equity Joint Ventures (henceforth, the EJV implementing regulations) stipulates that the general manager should carry out the decisions of the board and organize and conduct the daily management of the EJV. The general manager should, within the scope granted him by the board, represent the EJV in external dealings, have the right to appoint and dismiss his subordinates, and exercise other responsibilities and rights authorized by the board within the EJV. In general, it is not too difficult for Chinese and foreign partners to agree on the appointment of general managers. Foreign parents hope to appoint their own managers to this position to enhance communication and control. Chinese parents typically think that it is relatively easy for them to obtain information about EJV operations. In addition, in order to gain advanced management know-how, they are often willing to let their counterparts appoint this position. Thus, in their survey of 67 MNCs with JVs in China, Lu and Wang (1996) found that the percentage (77 per cent) of MNCs with the right to appoint the general manager was greater than that (60 per cent) of MNCs with majority ownership. Wang, Wee and Koh (1998) also revealed that 80 per cent of Singaporean parents with majority ownership, 65 per cent with equal ownership, and 48.5 per cent with minority ownership had the right to appoint the general managers of JVs. Tretiak and Holzmann (1993) observed that by concentrating authority in the hands of the general manager and by appointing expatriates for other key positions, a foreign investor could strengthen a minority or 50-50 position. Functional Managers Chinese managers and workers (in particular, the elderly ones and those working in areas with fewer foreign investments) resist Western HRM practices such as differential payment levels and the attachment of job security to performance (Child, 1996). In addition, Chinese


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partners often see JVs as a handy dumping ground for redundant staff (Economist Intelligence Unit, 1997: Ch. 9).Therefore, the Chinese side usually strives to obtain the right to appoint a JV’s personnel manager to maintain control over personnel and social welfare policies and thus protect their workers (Pearson, 1991). This approach has often proved unsatisfactory, mainly because the Chinese appointees lack the skills and/or motivation needed to make the project a success. Hence, many foreign partners find it in their interest to become completely involved in recruitment, and they consequently bring in foreign human resource managers (Houdard, 1998). Foreign partners should also try to obtain the right to select a JV’s financial manager (Houdard, 1998). The majority (54 per cent) of the Singaporean parents Wang, Wee and Koh (1998) surveyed had the right to appoint the financial managers of their JVs in China. Their personal interview results also indicated that it was important to maintain control of the financial aspect of the EJVs if the projects were very large. Thus these companies sent expatriate financial controllers to China to provide training in modern accounting and financial methods. At the same time, the financial controllers could act as ‘policemen’ for the foreign parent firms. As compared to Singaporean parents without the right to appoint the financial manager, those with the right to do so felt that they had greater control over their EJVs. Board Meetings Board meetings are conducted to keep significant matters under appropriate review and to keep all partners adequately informed. This opportunity is particularly important when authority has been delegated to one partner, but the others want to know what is going on (Schaan, 1988). According to Article 35 of the EJV implementing regulations, board meetings should be convened at least once a year. Article 6 also stipulates that a board of directors is empowered to discuss and take action on, pursuant to the provisions of the article of association of the EJV, all fundamental issues concerning the venture, including expansion projects, production and business programmes, the budget, distribution of profits, manpower and pay, and key personnel. Wang, Wee and Koh (1998) found that Singaporean partners with various equity stakes considered board meetings to be quite an important control mechanism.

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Veto Right Article 36 of the EJV implementing regulations stipulates four issues which require unanimity of board members: amendments to the articles of the association, mergers with other organizations, dissolution, and increases in registered capital. Some experienced managers running Sino–foreign EJVs have advised firms to limit other issues which require the unanimous agreement of the board members, as the addition of more issues would imperil an investor’s ability to make decisions (Tretiak and Holzmann, 1993). However, stipulating issues requiring the unanimous agreement of board members is an effective weapon minority partners can use to protect themselves; Schaan (1988) and Chen (1991) suggested that minority partners could prevent their majority partners from unilaterally implementing decisions they disagreed with by negotiating for the inclusion of a veto right over decisions important to their interests in the JV contract. Examples of such decisions include dividend policy, transfer pricing and selection of key executives. Capital Budgeting and Resource Allocation Parents can influence the type of projects that a JV is going to undertake by participating in the formulation of the capital appropriation request which sets the criteria and conditions for approval. Providing feedback on these requests can be an effective way to educate JV managers about a parent’s expectations and priorities (Schaan, 1988). Use of Technology and Management Advantages Firms can also gain control by relying on technical superiority and managerial skills to gain participation in the management of daily operations (Friedman and Beguin, 1971). This method is often used by foreign parents possessing superior technology and management skills to gain control over their JVs in China (Chen, 1988). In contrast, PRC parents frequently lose control over their JVs because Chinese board members or managers are incompetent, unmotivated or too busy to effectively carry out their responsibilities. These appointments have often been based on their positions and connections in government bureaus rather than on their management and technical expertise (Chen, 1991; Xia, 1997).


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The Control–Performance Relationship in Joint Ventures When China first opened its door to foreign investors, its economy, politics and culture were very different from those of the foreign firms. To have one partner making nearly all the decisions, as was the situation in wholly-owned subsidiaries (WOSs), increased the probability of poor performance in China. Thus, studies of 20–22 Sino–foreign JVs conducted by Shenkar (1990) and Beamish (1993) showed that it was effective to divide control along functional lines. However, China has moved closer to a market economy, and foreign expatriate managers have gained greater experience in China; recent studies have shown that dominant control by foreign parents was positively related to JV performance. For instance, Osland (1994), through in-depth case studies of eight Sino–US JVs, found that managers at both the US parent and the JV felt satisfied with JV performance when the US side had dominant control. In his survey of 38 Sino–US JVs, Ding (1997) found that dominant managerial control exercised by the US partner had a positive impact on JV performance. Similarly, Wang, Wee and Koh (1998) found a positive relationship between the Singaporean partners’ perceived degree of control and their level of satisfaction with JV performance.

RESEARCH QUESTIONS Although previous research has suggested various mechanisms through which parent firms could exercise control over their JVs, most of this research has failed to investigate the relationship between the importance of control mechanisms and parents’ equity stakes. Control Mechanisms and Equity Stakes A parent firm can utilize various mechanisms to exercise as much control as possible over its WOS. However, this is not possible in a JV because two or more parent firms must share control over a child firm. The mechanisms available to a parent firm are frequently affected by its equity stake. In 134 Sino–Singaporean EJVs, the majority partners were more likely to win the right to appoint the general and key functional managers and thus exercise operational control (Wang Wee and Koh, 1998). In addition, according to law, all major issues concerning EJVs must be approved by board members.

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Hence, majority partners are also likely to regard board meetings as important for control. Parent firms with equal stakes will attempt to bargain for the right to appoint key managers. These firms are more likely to win if their counterparts perceive them as possessing superior management and technical skills beneficial to the running of the EJVs. For parent firms without the right to appoint key managers, board meetings and auditing will probably become important control mechanisms because they provide information about daily operations and strategic directions. Finally, the right to veto allows firms to prevent their partners from adopting measures which are not in their best interests. Although it is possible for minority partners with superior management and technical know-how to win the right to appoint some management positions, it is likely that they will not be able to appoint as many EJV managers as those with majority or equal ownership. Thus these firms are more likely to rely on mechanisms like board meetings, capital budgeting and resource allocation to ensure some control of strategic direction. Control and Performance Previous studies have generally shown that foreign parents’ greater control over JVs was positively related to their satisfaction with these ventures’ performance. However, very few (if any) large-scale empirical studies have examined the relationship between foreign partners’ control over ventures and the performance satisfaction of their Chinese counterparts. This important issue deserves further investigation because a JV cannot last for long if only one parent feels satisfied. Thus, we investigated the following: Research question 1: What are the importance rankings of control mechanisms as perceived by foreign parent firms with majority stakes in Sino–foreign EJVs? Research question 2: What are the importance rankings of control mechanisms as perceived by foreign parent firms with equal stakes in Sino–foreign EJVs? Research question 3: What are the importance rankings of control mechanisms as perceived by foreign parent firms with minority stakes in Sino–foreign EJVs?


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Research question 4a: What is the relationship between foreign parents’ degree of control over EJVs and their satisfaction with EJV performance? Research question 4b: What is the relationship between foreign parents’ degree of control over EJVs and Chinese parents’ satisfaction with EJV performance?

METHODS The data of this study were gathered by two principal methods: a questionnaire survey and personal interviews. Mail Survey Several sources of information were explored and combined in compiling the JV list. These sources included: The Complete Works of Joint Venture, Foreign Venture and Co-operation Enterprises in China (1995, Jinghua Publishing House); 1996 AmCham Shanghai Member Corporations (American Chamber of Commerce in Shanghai); 1996 Shanghai Member Directory (Japanese Chamber of Commerce in Shanghai); The France Chamber of Commerce and Industry in China (1996); The Directory of Taiwan Investors in Shanghai, China (February 1995, Association of Taiwan Investors in Mainland China); The Directory of Enterprises with Foreign Investment and Foreign Representative Offices in Shanghai (1995, Industrial and Commercial Publishing House); and a list of Sino–foreign JVs in Wuxi provided by the Wuxi Foreign Economic Relations and Trade Committee. Although there were overlaps between the above-mentioned sources, no two provided exactly the same listings. These sources yielded a list of about 1400 Sino–foreign JVs. Survey Instrument A six-page questionnaire was designed to gather data on the following ten aspects of the Sino–foreign JVs: demography, mechanisms used by the foreign parents to exercise control, Chinese and foreign parents’ degrees of control, Chinese and foreign parents’ level of satisfaction with JV performance, foreign parents’ right to appoint positions, Chinese parents’ contribution, foreign parents’ commitment, interpartner relationships, problems, and foreign parents’

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investment strategies. This chapter reports findings related to the first four aspects. The questionnaire had both an English and a Chinese version. The latter was prepared by the researchers, who are proficient in both languages. Between October and December 1996, pretesting interviews were held with managers of and consultants to 12 parents of Sino–foreign JVs in Singapore and eight Sino–foreign JVs in the Shanghai and Wuxi areas in China. The Chinese version of the questionnaire was mailed to Chinese chairmen or general managers of the JVs, and the English version was sent to foreign chairs and general managers. Between February and March 1997, questionnaires were mailed to 1400 JVs in China along with stamped, self-addressed envelopes. In our covering letter, we promised respondents anonymity and a copy of the survey results as incentives. Since a JV might have multiple foreign parents, respondents were asked to indicate the nationality of the foreign parent with the largest ownership and to complete the questionnaire with respect to that foreign parent and the Chinese parent. The total of 201 usable questionnaires represented a response rate of 14.4 per cent. Of the 201 responding firms, 174 were EJVs, and 27 were contractual joint ventures (CJVs). EJVs have a separate legal status and take the form of limited liability companies. The Chinese and foreign partners contribute to the registered capital and take profits, risks and losses in proportion to their contributions. CJVs are similar to partnerships in that no separate ‘legal person’ is formed. The sharing of profits and losses is based on a contractual agreement rather than an equity split. Here we will only report the findings pertaining to EJVs. Personal Interviews In-depth interviews were conducted with officials from four PRC government bureaus, managers of 14 foreign parent firms (12 Singaporean parents, one US parent and one Taiwanese parent), two PRC parents, and managers of 13 EJVs (four Sino–Hong Kong EJVs, two Sino–French EJVs, two Sino–US EJVs, one Sino–Singaporean EJV, one Sino–Japanese EJV, one Sino–Australian EJV, one Sino–Italian EJV and one Sino–Swedish EJV). These companies were from varied industries, including electronics and electrical products,


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power plant construction, chemical products and property development. As some firms and government bureaus allowed us to interview more than one of their employees, 35 high-level managers and five government officials were interviewed.The 35 managers held the positions of chairman, vice chairman, director, managing director, general manager, deputy general manager, financial controller, functional manager, senior officer and company consultant. Most of these interviewees were personally involved in the initial negotiations of the EJVs. Interviews (including pretests) were conducted with an interview guide which ensured that all the relevant questions were asked and allowed for the probing of unclear areas. Each interview lasted about two hours. All the interviewees were informed of the interview topics in advance. The interviewer formed open and trusting relationships with the interviewees by communicating in their preferred language (either English or Chinese), ensuring anonymity, generally taking notes rather than using a tape recorder (used for two interviews), offering reports of key research findings, and expressing an understanding of the interviewee’s situation from the interviewer’s firsthand experience with a Sino–foreign EJV. These interviews were conducted in Singapore and China by one of the coauthors between October 1996 and March 1997. RESULTS AND DISCUSSION Tables 5.1–4 report the findings of the questionnaire survey. Interview findings were compared with survey findings and used to illuminate the latter. Profile of Respondents Positions of the Responding Managers and Their Previous Employers Of 174 respondents, 53 (30.5 per cent) were chairmen, vice chairmen or directors of the boards of the EJVs, and 60 (34.5 per cent) were top-level managers, holding the position of general manager, deputy general manager, president or managing director. There were 11 respondents (6.3 per cent) holding a position such as executive vicepresident or marketing manager. A number of respondents (50, or

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28.7%) did not reveal their positions. Eighty-six (49.4%) respondents had previously worked for Chinese parent firms, 69 (39.7%) had worked for the foreign parents; and 14 (8.0%) had worked for the third party. Five respondents (2.9%) did not disclose their former employers. Origins of Foreign Parents Fifty-eight foreign parents (33.3%) were from these Western countries: USA (11.5%), Germany (6.3%), Canada (4.6%), the UK (3.4%), France (2.3%), Australia (2.3%), Switzerland (1.7%), Sweden (0.6%) and Holland (0.6%). Thirty-two (18.4%) were from Japan. Seventynine (45.4%) were from Hong Kong or Macau (35.6%), Singapore (4.0%), Taiwan (4.0%), Thailand (0.6%), Malaysia (0.6%), or the Philippines (0.6%). We refer to this group as the overseas Chinese category. Size of the Foreign Parents The Western and Japanese parents were larger than the overseas Chinese parents; the percentages of these three groups with 1995 sales of equal to or more than US$100 million were 61.8, 55.6 and 24.3 per cent respectively. Registered Capital of EJVs Similarly, the Sino–Western and Sino–Japanese EJVs were also larger than the Sino–overseas Chinese EJVs; the percentages of these three categories of EJVs with registered capital of equal to or more than US$10 million were 46.6, 31.3 and 19.0 per cent respectively. Industrial Sectors of EJVs Most of the EJVs were involved in electronics and electrical products (20.1%), machinery (13.8%), chemicals, petroleum and plastic (10.3%), textiles and apparel (9.8%) or construction materials (5.7%). Other EJVs were in industries such as pharmaceutical products (4.6%), food and beverages (4.6%), and office supplies and printing (4.0%). Years of Operation of EJVs One hundred and four EJVs (61.2%) had been in operation for 5 years or less, whereas 66 EJVs (38.8%) had been in operation for


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more than 5 years. The average number of years of operation of the EJVs was 5.4 years. Percentage of Ownership of Foreign and Chinese Parents at Set-Up and Present When the 174 EJVs had first been set up, the foreign parents of 74 (42.5%), 29 (16.7%), and 70 (40.2%) of them held majority, equal and minority stakes respectively. The average foreign ownership level was 48.4 per cent. At the time of our questionnaire survey, the number of foreign parents holding majority stakes had increased to 86 (49.4%). In contrast, the number of foreign parents holding equal and minority stakes had decreased to 22 (12.6%) and 65 (37.3%), respectively. Overall, the average foreign equity level had increased to 49.5 per cent. The increase in the foreign equity level occurred partially because majority stakes enabled foreign partners to maintain better control over key appointments, product quality, brand reputation, protection of technology and so forth. In addition, many Chinese partners could not contribute their share of capital for further expansion, and thus some of them reluctantly sold part of their stakes to their foreign counterparts. According to Xia (1997), two different views on the increase in foreign majority shareholding prevailed in China. One view was that the issue of controlling stakes should be determined by the relative competitive strengths of foreign and Chinese partners. The other view was that MNCs’ controlling stakes had considerably hurt China through domestic market monopolies, damage to national industries, loss of national wealth, decrease of national confidence and so forth. Origins of Foreign Parents with Majority, Equal and Minority Stakes As shown in Table 5.1, most foreign parents with majority (66.3%) or equal shares (67.3%) were from Western countries or Japan, and most foreign parents with minority shares (68.8%) were overseas Chinese firms. Control Respondents were asked to indicate their level of control (1 = very low control, 5 = very high control) over their EJVs. Both the foreign and Chinese parents felt that they had a more than moderate level of control, as the control indexes for the former and the latter were 3.48 and 3.37, respectively.

144 Table 5.1

Control/Performance in Sino–Foreign Equity JVs Current foreign equity status of Sino–Western, Sino–Japanese, and Sino–overseas Chinese EJVs

Origins of foreign parents

Current foreign equity More than 50%

Western Japanese Overseas Chinese

39 (47.0%) 16 (19.3) 28 (33.7)

Column total

83 (100.0)

50% 9 (40.9%) 6 (27.3) 7 (31.8) 22 (100.0)

Row total

Less than 50% 10 (15.6%) 10 (15.6) 44 (68.8)

58 32 79

64 (100.0)

169*

* Missing observations = 5.

Performance The EJVs in our study were engaged in a variety of industries, so the expected rates of return would naturally differ. Many firms considered certain performance-related information (such as sales and profits) confidential. Moreover, as a result of the country’s shift towards a market economy and the implementation of a management responsibility system, the criteria adopted by Chinese and foreign firms to evaluate the performance of their JVs were converging (Osland, 1994; Zhao and Culpepper, 1996). Therefore, common and general criteria were used to gauge the Chinese and the foreign parents’ satisfaction with EJV performance. The criteria – learning management know-how, upgrading technology, growth, profitability, and overall performance – were measured on a 5-point Likert-type scale (1 = low satisfaction, 5 = high satisfaction). As shown in Table 5.2, both the foreign and Chinese partners were more than moderately satisfied with their EJVs on all five performance criteria, as all the indexes were above 3.40. In addition, the results of the Pearson correlation test revealed that significant and positive correlations (r = 0.34–0.79, p < 0.000) existed between the foreign and the Chinese parents’ satisfaction on all five. Majority Equity Stakes and Control Mechanisms Respondents were asked to indicate the importance of 16 mechanisms on a 5-point scale (1 = not at all important, 5 = very important). Table 5.3 shows the importance of these mechanisms as perceived by

Pien Wang, Yunye Zhi and Kong Yam Tan Table 5.2

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Satisfaction with performance of Chinese and foreign parents*

Satisfaction†

Learning management know-how

Upgrading technology

Profitability

Growth

Overall performance

Chinese parents Foreign parents

3.67 3.43

3.58 3.41

3.53 3.44

3.63 3.59

3.67 3.61

* For Chinese parents, N = 169–71; for foreign parents, N = 170–2. † 1 = low satisfaction, 3 = moderate satisfaction, 5 = high satisfaction.

Table 5.3

Rankings of control mechanisms’ importance by foreign equity status*

Control mechanisms

Majority (N = 75–84)

Equal (N = 7–21)

Minority (N = 11–63)

Majority shareholding Right to appoint the general manager Right to appoint personnel to critical functional areas Superior technical know-how Board meetings Superior management know-how Auditing Right to veto Maintaining control over sales or export Capital budgeting and resource allocation Setting up policies and procedures Spending authorization limit Right to appoint chairman of board Monthly or quarterly reports Goals written into EJV agreement Maintaining control over supplies of key materials

4.38 (1) 4.38 (1)

2.86 (16) 4.20 (2)

2.09 (16) 3.57 (3)

4.18 (3)

3.90 (5)

3.14 (10)

4.16 (4) 4.10 (5) 4.10 (5) 3.95 (7) 3.92 (8) 3.88 (9)

3.63 (10) 4.33 (1) 3.68 (8) 4.05 (4) 4.06 (3) 3.37 (13)

2.81 (13) 3.80 (1) 2.93 (11) 3.60 (2) 3.39 (7) 2.92 (12)

3.83 (10)

3.86 (6)

3.50 (4)

3.79 (11)

3.65 (9)

3.38 (8)

3.73 (12) 3.68 (13)

3.62 (11) 3.33 (14)

3.38 (8) 2.64 (15)

3.58 (14) 3.54 (15)

3.62 (11) 3.86 (6)

3.49 (5) 3.48 (6)

3.48 (16)

2.88 (15)

2.65 (14)

* 1 = not at all important, 3 = moderately important, 5 = very important.

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foreign parents with majority, equal and minority stakes. The numbers in parentheses represent the rankings of the importance of the mechanisms. Majority Shareholding Foreign parents with majority stakes considered majority shareholding to be the most important control mechanism. During our interviews, we also found that many foreign firms would not enter into EJV contracts unless they could hold a majority stake. A key reason was that the majority partner was more likely to win the right to appoint the chairman of the board, the general manager and other key managers (see Table 5.4). However, not all the majority foreign parents enjoyed a similar influence in appointing key personnel and exercising control over the major decisions of EJVs. In a 60–40 equity split, the deputy general manager assigned by the minority Chinese partner to the EJV was usually actively involved in managing the EJV. Only when the equity levels of the foreign partners went up to 75 per cent or more were Chinese partners willing to play a passive role. In these EJVs, frequently the only contribution of the Chinese side was to help the EJVs establish guanxi with various local parties. In some cases, foreign partners paid their Chinese counterparts a certain amount of dividends regardless of whether the EJVs made a profit or not, as long as their Chinese partners agreed not to interfere with management. This type of EJV is known as a ‘true wholly-owned venture and false EJV’. The Table 5.4

Percentage of foreign parents (with the largest ownership) with the right to appoint positions in EJVs

Positions

Total (N = 173)

Majority parents (N = 86)

Equal parents (N = 22)

Minority parents (N = 65)

Chairman of the board Deputy chairman of the board General manager Deputy general manager Financial manager Personnel manager Marketing manager Production manager Purchasing manager

27.6 40.2 51.7 27.6 37.4 24.7 21.3 19.5 14.9

41.9 31.4 72.1 27.9 52.3 34.9 31.4 32.6 25.6

22.7 40.9 45.5 27.3 27.3 13.6 18.2 9.1 9.1

10.8 52.3 27.7 27.7 21.5 15.4 9.2 6.2 3.1


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result of t-tests also showed that foreign partners with 75 per cent or higher equity levels felt that they had more control (4.6 on a scale of 5) over their EJVs than those with equity levels between 50 and 74 per cent (4.0). Right to Appoint the General Manager In addition to majority shareholding, an equally important control mechanism for majority partners was the right to appoint the general manager. This result was consistent with Wang, Wee and Koh’s (1998) finding that Singaporean parents with majority shares also regarded this right as crucial. In many cases, winning the right to appoint the general manager also meant that the foreign parent indirectly gained the right to appoint other important functional positions: more than 74 per cent of the general managers had the right to appoint their EJVs’ financial, purchasing, personnel, marketing and production managers. Right to Appoint Personnel to Critical Functional Areas Among the various functional positions, the job of financial manager was considered to be the most important, with more foreign parents having the right to appoint this position than any other functional position. Moreover, many foreign parents could appoint this position indirectly, as the financial manager was frequently appointed by the general manager, who was in turn appointed by the foreign parents. Superior Technical Know-How Although superior technical expertise was considered to be the fourth most important control mechanism by foreign majority parents, the importance of this mechanism might be affected more by the origins of the foreign parents than by their equity stakes. As compared to overseas Chinese firms which were generally involved in more labourintensive industries, Western and Japanese firms possessed more sophisticated technological know-how and hence were more able to use it as a weapon to exercise control over their JVs in less developed countries. This reasoning is supported by the findings of this study, as the results of an ANOVA showed that the Western parents (M = 4.09) and Japanese parents (M = 3.80) considered superior technical knowhow to be a more important control mechanism than the overseas Chinese parents (M = 3.07). The finding on the overseas Chinese firms

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is echoed in Wang, Wee and Koh (1998), which showed that Singaporean parents considered reliance on technical skills to be only moderately important (M = 3.39). This is because the technology of Singaporean firms is not sophisticated enough to be used as an effective control mechanism. In our sample, most (76.3%) of the foreign parents holding majority stakes were from the West and Japan, whereas most (68.8%) of the foreign parents holding minority stakes were from Hong Kong or Macau (Table 5.1). Thus the importance of superior technical know-how as an effective control mechanism is more likely to be the result of the origins of the foreign parents than the result of their equity levels. On the Chinese side, a major objective of EJV formation was learning advanced technology; the results of an ANOVA showed that the Chinese parents of Sino–Western EJVs (M = 3.70) and Sino– Japanese EJVs (M = 4.03) felt more satisfied with the EJVs’ technology upgrading than did the Chinese parents of Sino–overseas Chinese EJVs (M = 3.30). Superior Management Know-How As in the case of technical know-how, the importance of superior management know-how as a control mechanism might be affected more by the origins of foreign parents than by their equity level. The results of ANOVA test showed that the Western (M = 4.08) and Japanese parents (M = 3.80) considered superior management know-how to be a more important control mechanism than the overseas Chinese parents (M = 3.20). The survey findings also reveal that, on average, Western, Japanese and overseas Chinese parents respectively had 3.2, 3.1 and 2.0 expatriates running their EJVs. Because more Western and Japanese expatriates transfer advanced management skills to EJVs, the results of an ANOVA showed that the Chinese parents of the Sino–Western EJVs (M = 3.88) and Sino–Japanese EJVs (M = 3.97) felt more satisfied with the EJVs’ learning of management know-how than did the parents of Sino–overseas Chinese EJVs (M = 3.42). Board Meetings The Chinese prefer decision-making styles characterized by ‘unanimous consultation’ and ‘equality and mutual benefit’ (Pearson, 1991), and this is also the principle of Sino–foreign EJVs as stipulated in Article 1 of the EJV implementing regulations. Thus it was important


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for the foreign majority shareholders to consult their Chinese counterparts at board meetings, so that the latter would feel that they were respected and would support the EJVs. It is easier for one partner to achieve control of an EJV if the other partners fully cooperate. Auditing The PRC law stipulated that EJVs must be audited by either local accounting firms or international accounting firms certified in China. Our personal interviews revealed that regardless of having the right to appoint the financial controllers/managers of the EJVs, foreign parents (especially MNCs) would attempt to hire well-established accounting firms (such as the international ‘Big 6’ firms certified in China) to audit their EJVs. Audits by external firms provide independent and objective reviews of EJVs’ management. During an interview, a Japanese vice chairman of an EJV in the electrical and electronics business pointed out that Chinese partners were more willing to accept the advice given by professional external auditors than the advice given by internal auditors appointed by their foreign counterparts. Although foreign partners with majority stakes often had the right to appoint financial managers, managers in charge of functions such as purchasing, marketing and sales were sometimes appointed by their Chinese partners. Therefore, these foreign majority partners also considered it important to engage external accounting firms to audit certain aspects of EJV operations. Equal Equity Stakes and Control Mechanisms Board Meetings As shown in Table 5.4, the percentages of foreign parents with equal stakes with the right to appoint key EJV positions were lower than those of foreign parents with majority stakes. Thus the former were not likely to exert as much influence over the daily operations of EJVs as the latter. Consequently, board meetings became a more important control mechanism because they provided opportunities to influence strategic direction and be kept informed of operations on at least a yearly basis. Right to Appoint the General Manager In view of the importance of the position of the general manager, some foreign partners with equal or minority stakes insisted, during

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negotiations, on the right to appoint the general manager as a condition for their entering an EJV contract. The Chinese side would only agree to such a demand if they were convinced that the foreign side possessed superior management know-how and/or strong financial resources. As shown in Table 5.4, 45.5 per cent of the foreign parents with equal stakes had obtained the right to appoint the general managers. Veto Right Foreign parents with equal shareholding considered the right to veto critical matters, such as capital budgeting and resource allocation, approval of new projects and expansion of business scope, to be an important control mechanism. This veto right allowed an equal partner to prevent another partner from adopting measures which would damage the former’s vital interests. However, frequently resorting to this mechanism to protect interests would result in a deadlock in EJV operations and cause frustration for all parties involved. Auditing Since parent firms with equal stakes were less likely to have the right to appoint key managers of the EJVs, auditing was one of the ways which helped them gain a clear picture of the efficiency and effectiveness of the EJV operations. Right to Appoint Personnel to Critical Functional Areas Similar to the majority partners, foreign partners with equal stakes also perceived the right to appoint personnel to critical functional areas to be an important control mechanism. However, the percentages of equal partners with the right to appoint various functional posts were much lower than those of foreign majority partners with such a right. This observation demonstrated that the former were in a weaker position to bargain for the appointment of functional managers than the latter.Among all the functional posts, the chief financial officer was considered to be the most important: the percentage (27.3%) of the foreign equal partners with the right to appoint this post was higher than those of other posts. Goals Written into the EJV Agreement Compared to majority partners, equal partners were less able to exercise operational control because the latter had fewer rights to appoint


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key managers. Including goals in the EJV agreement would give partners with an equal stake certain assurances that their interests in and objectives for forming EJVs would not be neglected. Minority Equity Stakes and Control Mechanisms Board Meetings, Auditing, and the Right to Appoint the General Manager Like the foreign parents with equal stakes, minority foreign parents also considered board meetings, auditing and the right to appoint the general manager to be important control mechanisms. Capital Budgeting and Resource Allocation As compared to the majority partners, minority partners were less likely to be actively involved in the daily operations of the EJVs, so they would attempt to influence strategic directions by means of capital budgeting and resource allocation. Consequently, they perceived this mechanism to be important. Monthly or Quarterly Reports Minority partners were usually less likely to have the right to appoint key managers to EJVs. In addition, board meetings were normally convened only once or twice a year, and hence monthly or quarterly reports enabled them to monitor the operations of the EJVs on a more regular basis. For this reason, one Taiwanese parent company in the industrial park in Sichuan province which we interviewed had even asked the EJV to submit daily reports on its expenditures. Control of Foreign Parents over EJVs and Their Satisfaction with EJV Performance The results of the Pearson correlation test showed that foreign parents with greater control also tended to feel more satisfied with the learning of management know-how (r = 0.25, p = 0.001), upgrading of technology (r = 0.35, p < 0.000), growth (r = 0.19, p = 0.012), and overall performance (r = 0.24, p = 0.002) of their EJVs. The findings of this study were consistent with those of Lee and Beamish (1995), Osland (1994) and Wang, Wee and Koh (1998), as they found that greater control by the partners from developed countries over their JVs was related to higher levels of performance satisfaction.

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Control of Foreign Parents over EJVs and Chinese Parents’ Satisfaction with EJV Performance The results of this study also revealed that greater control by the foreign parents was associated with Chinese parents’ greater satisfaction with the learning of management know-how (r = 0.30, p < 0.000), upgrading of technology (r = 0.34, p < 0.000), and overall performance (r = 0.18, p < 0.02). The major objectives of the Chinese parties when forming EJVs with foreign investors were to absorb advanced management and technical skills, earn foreign exchange, and gain better access to export markets. The findings of this study showed that these objectives were perceived as more likely to be realized if the Chinese partners allowed their foreign counterparts to have a greater degree of control over the EJVs.

CONCLUSION Although there have been some discussions on control mechanisms in the joint venture literature, few studies have researched the issue of the importance of a variety of control mechanisms as perceived by JV parents with majority, equal or minority stakes. This study was an attempt to fill this gap by examining such an issue through a questionnaire survey of 174 Sino–foreign EJVs and personal interviews with 40 managers and government officials in Shanghai and Wuxi, China. The findings of this study revealed that, depending on the equity stakes of the foreign parents, their ranking of the importance of control mechanisms differed. The majority of foreign parents considered majority shareholding to be the most important control mechanism because a majority stake would usually give them the right to appoint the general manager. In addition, they were also in a better position to bargain for the right to appoint critical functional personnel. Most of the majority foreign parents were from the West or Japan, and hence they could also use their superior management know-how and superior technical know-how to exercise control over their EJVs. The Chinese preferred to deal with issues in a friendly, consultative and fair manner, so the majority foreign partners perceived that it was important to use board meetings to keep their Chinese counterparts informed of major issues in order to win their cooperation.


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Foreign parents with equal ownership considered board meetings to be the most important control mechanism. It was also very important for them to have the right to appoint the general manager. The right to veto enabled them to prevent their Chinese counterparts from adopting measures which were not in their best interests. Auditing helped foreign partners (especially those without the right to appoint the general manager) to gain a clearer picture of operations. As for foreign partners with minority stakes, veto right and influence on capital budgeting and resource allocation at board meetings were considered to be important. The right to appoint the general manager was also an important control mechanism for those minority foreign partners with superior management know-how. Also, monthly or quarterly reports could keep them informed of the operations of the EJVs on a more regular basis. The right to appoint the general manager, board meetings and auditing were perceived to be important control mechanisms by foreign parents with different levels of shareholdings. General managers were in charge of daily operations of EJVs. About threequarters of the general managers in our study also had the authority to appoint functional managers. Foreign parents perceived this appointment right to be crucial regardless of their equity. Since a major objective for Chinese firms was to learn advanced management know-how from foreign investors, it was not too difficult for such investors (even those holding only equal or minority stakes) with superior managerial expertise to obtain the right to appoint the general manager. Board meetings provided foreign parents with equal or minority stakes with opportunities to influence the strategic direction and be kept informed at least yearly. Foreign parents with majority stakes also perceived the importance of making use of board meetings to discuss and consult on major issues with their Chinese counterparts, so that the latter would feel that they had ‘face’ and would cooperate with the former. Auditing helped foreign partners to gain a clear picture of the operations of EJVs. The findings of this study also revealed that foreign parents with majority stakes were more likely than those with equal or minority stakes to obtain the right to appoint key operational positions as well as the chairman of the board and many board members. Our conclusion was that a majority stake was indeed a very important control measure because it allowed a parent to exercise greater control over both the strategic and operational aspects of an EJV; hence the trend is for foreign partners to hold majority stakes in their EJVs in China.

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The findings of this study are useful for foreign and Chinese parent firms and the PRC government for several reasons. First, the study illustrates the importance of a variety of control mechanisms according to the equity stakes of the parent firms. Second, it shows that, at the current stage of economic development, a greater degree of control by foreign parents is positively related to the performance satisfaction of both Chinese and foreign parents. Hence, both the Chinese government and partners should lessen their worry about the possible negative impacts of dominant foreign control of EJVs. Third, we found that, in addition to equity level, competitive advantages (for example, superior know-how) can be used as control mechanisms. With the exception of superior management know-how and superior technical know-how, the mechanisms investigated in this study were formal ones. However, a proper regimen of control should not rely exclusively on formal mechanisms such as a majority stake, the right to appoint key positions, and board meetings. Schaan (1988) observed that control was easiest and most effective if a good working relationship between partners prevailed. Koenig and van Wijk (1991) and Faulkner (1994) also argued that development of a trustworthy interpartner relationship was the most effective control mechanism in interorganizational alliances: thus it is suggested that future studies of control mechanisms include examination of informal mechanisms. These might include trust, interpartner relationships and the assigning of parent firm managers who are knowledgeable about the operations of EJVs to evaluate the information and signals being received from their firms’ foreign ventures.

References Anderson, E. and Gatignon, H. 1986. ‘Modes of foreign entry: A transaction cost analysis and propositions’, Journal of International Business Studies, Fall: 1–26. Beamish, P. W. 1993. ‘The characteristic of joint ventures in the People’s Republic of China’, Journal of International Marketing, 1(2): 29–48. Chen, R. H. 1988. ‘The selection of joint venture partners and internal coordination’, Management World, 5: 92–7. Chen, Z. M. 1991. Management of Sino-Foreign Joint Ventures. Nanking: Nanking University Press. Child, J. 1996. Management in China During the Age of Reform. Cambridge: Cambridge University Press.


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Ding, D. Z. 1997. ‘Control, conflict, and performance: A study of U.S.–Chinese joint ventures’, Journal of International Marketing, 5(3): 31–45. Economist Intelligence Unit Ltd 1997. China Hand. London: Economist Intelligence Unit. Faulkner, D. 1994. ‘The central importance of partner attitudes to the success of strategic alliances’, paper presented at the Academy of Management meeting, Miami Beach, FL. Friedman, W. G. and Beguin, J. P. 1971. Joint International Business Venture in Developing Countries. New York: Columbia University Press. Geringer, J. M. and Frayne, C. A. 1990. ‘Human resource management and international joint venture control: A parent company perspective’, Management International Review, Special Issue: 103–20. Geringer, J. M. and Herbert, L. 1989. ‘Control and performance of international joint ventures’, Journal of International Business Studies, Summer: 235–54. Glaister, K. W. 1995. ‘Dimensions of control in UK international joint ventures’, British Journal of Management, 6(2): 77–96. Houdard, F. 1998. Operating in China: A Survivor’s Guide for Foreign-Invested Companies. Hong Kong: Economist Intelligence Unit. Killing, P. J. 1983. Strategies for Joint Venture Success. New York: Praeger. Koenig, C. and van Wijk, G. 1991. ‘Interfirm alliances: The role of trust’, in R. A. Thietart and J. Thepot (eds), Microeconomic Contribution to Strategic Management, Ch 9: 1–16. New York: North-Holland Elsevier. Lee, C. and Beamish, P. W. 1995. ‘The characteristics and performance of Korean Joint Ventures in LDCs’, Journal of International Business Studies, 26(3): 637–54. Lorange, P. and Scott Morton, M. F. 1974. ‘A framework for management control systems’, Sloan Management Review, Fall: 41–56. Lu, Y. B. and Wang, X. J. 1996. ‘Research on the strategies and management of multinational companies’ joint ventures in China’, Management World, 2: 139–47 and 150. Osland, G. E. 1994. ‘Successful operating strategies in the performance of US–China joint ventures’, Journal of International Marketing, 2(4): 53–78. Pearson, M. 1991. Joint Ventures in the People’s Republic of China: The Control of Foreign Investment under Socialism. Princeton, NJ: Princeton University Press. Schaan, J. L. 1983. ‘Parent control and joint venture success: The case of Mexico’, unpublished doctoral dissertation, University of Western Ontario. Schaan, J. L. 1988. ‘How to control a joint venture as a minority partner’, Journal of General Management, 14(1): 4–16. Shenkar, O. 1990. ‘International joint ventures’ problems in China: Risks and remedies’, Long Range Planning, 23(3): 82–90. Stopford, J. M. and Wells, L. T. 1972. Managing the Multinational Enterprise. New York: Basic Books. Tomlinson, J. W. C. 1970. The Joint Venture Process in International Business: India and Pakistan. Cambridge, MA: MIT Press. Tretiak, L. D. and Holzmann, K. 1993. Operating Joint Ventures in China. Hong Kong: Economist Intelligence Unit. Wang, P., Wee, C. H. and Koh, P. H. 1998. ‘Control mechanisms, key personnel

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appointment, control and performance of Sino-Singaporean joint ventures’, International Business Review, 6: 351–75. Xia, Y. F. 1997. ‘Correctly view the issue of holding a controlling stake in Sino–Foreign JVs by multinational companies’, Management World, 6: 59–83. Yan, A. and Gray, B. 1996. ‘Linking management control and interpartner relationships with performance in US-Chinese joint ventures’, in J. Child and Y. Lu (eds), Management Issues in China: 106–127. London: Routledge. Zhao, L. and Culpepper, R. 1996. ‘Performance measures for China-based joint ventures: A comparison of Chinese and American managers’, Journal of Asian Business, 12(4): 33–50.

6 Operating Modes and Performance: US High-Technology Ventures in China Mark Cannice and John D. Daniels

This chapter develops a theoretical model of optimum entry mode choice that is then modified through examination of 15 US hightechnology entries into China. The model is based on foreign operations’ motivation theory, dominant logic theory, technology transfer cost theory and options theory. It is then linked to performance through contingency theory. The final adapted entry model proved effective in predicting the sample firms’ Chinese venture performance. In recent years, global trade and global FDI have grown faster than global output, with the USA and China as major players. There is near consensus that the business relationships between the two countries, especially in high-tech sectors, are likely to grow in the future. This study (1) develops a model of foreign operating entry mode decisions based on an integration of classic and emergent management theory, (2) adapts this model through a comparative case analysis of 15 US high-tech firms’ decisions about their mode of entry into China, (3) postulates what the ideal entry mode should be, based on the adapted model, and (4) compares perceived performance with the fit to the adapted model. We believe a theory-building approach using case studies (e.g., Eisenhardt, 1989) is appropriate for better understanding the complexities of a successful business entry into the Chinese market. The study combines two streams of research on modes of foreign operations: the decision-making stream (Anderson and Gatignon 1986; Hill, Hwang and Kim, 1990) and the performance stream (Chowdhury, 1992; Woodcock, Beamish and Makino, 1994). This study merges these two streams by linking a theoretically derived operatingmode decision model to venture performance via a contingency framework. This model should allow firms to match their critical 157

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US High-Technology Ventures in China

concerns to their operating mode choice better and thereby affect performance positively. The framework is developed through an integration of five theoretical lenses: foreign operations’ motivation theory, dominant logic theory, technology transfer costs (transaction cost economics) theory, options theory and performance/contingency theory. The first four are used to develop the optimal entry mode model; the last is used to determine if using the optimal model relates positively to performance. These relationships are shown in Figure 6.1. We specifically sought to examine four foreign-operating-mode alternatives: WOS, JV, licensing agreement, and liaison office.1 The categories of WOS and JV included both production and sales operations. We treated liaison offices as a separate category because they are precluded from actually producing or selling in China. They may interest Chinese companies in their products, but any actual sales must be made from the USA.These alternatives were selected because they illustrate a firm’s choice of production/sales or no production/sales in China and of complete ownership, partial ownership or no ownership of a venture. Two basic research questions were addressed in the study: (1) what factors influence the operating mode decision of a firm? (2) What are the performance implications of this choice? We intend to refine this model through analytic induction (Glaser and Strauss, 1967) through an examination of 15 cases of US high-tech investment in China.

ENTRY MODE DECISION MODEL AND PERFORMANCE Entry Mode Choice and Performance in China We seek to build a framework that specifies ways in which firms can experience ‘high-performing’ business entries into China. A review of existing research on entry into China is crucial to establishing benchmarks for our framework. Much of the research concerning the performance of operations in China concentrates primarily on JVs and uses relatively small samples. Osland and Cavusgil (1996) found that seven of the eight JVs they studied reported profitable performance. In fact, managers from both sides of the ventures reported being satisfied with them, although US managers expressed concerns over lack of control and Chinese managers would have preferred faster technology transfer. Yan and Gray (1994), using a comparative case study method to analyse four US/PRC JVs found that the bargaining

1. International Strategy Market-seeking Resource-seeking (Transnational integration) (Competitive response)

P1

2. Decision Process Process comprehensiveness Team heterogeneity

P2

3. Technology Transfer Costs P3 Tacitness Value Appropriability

Foreign Operating Mode Wholly owned subsidiary Joint venture Licensing agreement Exporting

P5

Venture performance

P4

4. Environment Perceived uncertainty Strategic potential

Template of foreign-operating-mode decision model

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Figure 6.1

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power of JV partners influenced control in a JV and, ultimately, venture performance. They found that Chinese managers generally focused on learning from US partners, but US managers desired market share and profitability. Pan, Chi and Kao (1996) investigated the determinants of the profitability of foreign enterprises in China. They oversaw the interviews of over 1000 foreign enterprises in China and found that these enterprises yielded higher profits when they leveraged their proprietary knowledge. They also showed that enterprises from the USA and Japan were more profitable than those from Hong Kong or Taiwan. Additionally, they found that the operating modes they studied (wholly foreign-owned enterprise, EJV and cooperative venture) did not affect the level of profitability significantly. In a related study of 1066 foreign enterprises in China, Chi, Wu, Pan and Kao (1995) used duration analysis to track the time it took foreign ventures to receive permits, begin production and earn a profit. These authors reported that WOSs and cooperative operations with nonstate-owned enterprises started manufacturing faster than businesses having other forms. However, once again, the mode of investment did not seem to be related to the time it took to earn a profit. Selzer, Ma and Banthin (1992) reported an 11.6 per cent average return on investment (ROI) for the US companies they surveyed in China, and Campbell (1989) reported that 11 of 14 US/Chinese JVs studied reported ‘good ROI’. Although these studies provide valuable performance information on distinct operating mode choices, they do not account for factors which lead a management to pursue a particular operating mode. The factors which affected mode decisions could also have affected the ventures’ performance. An incorporation of the decision factors into estimations of venture performance should provide a more complete picture of the operating mode–performance link. Leveraging the value of the preceding work, we seek to establish a fresh perspective on successful market entry by building a framework from theory and refining that model with data on 15 US firms’ Chinese market entry experiences. Foreign Operations Motivation Theory A firm’s motivation for foreign operations determines its international strategy, which is defined as its choices about acquiring foreign resources, capturing foreign markets, integrating its operations glob-

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ally and making competitive responses. Our typology is based on global strategic considerations like those developed by Hill, Hwang and Kim (1990). However, it extends the reach of previous typologies in that it incorporates both venture considerations (market-seeking and resource-seeking) and corporate considerations (transnational integration and competitive response). We posited both that the international strategy motivating operations in China will affect the entry mode choice and that certain entry modes will prove more effective in implementing different international strategies. Dominant Logic Theory A firm’s underlying international strategy (market- or resourceseeking, transnational integration or competitive response) may be sound;however,the context in which a specific entry decision is reached can have a significant impact on the entry mode choice and the resulting ventures’ performance. Works by Aharoni (1966), Nelson and Winter (1982) and Allison (1971) suggest that decision making may become institutionalized as organizational inertia leads to routine ways to accomplish tasks such as choosing an entry form. As corporate decisions are often an artifact of a previous time and dominant logic, this chapter examines the role that the decision context of a firm plays in determining the firm’s entry decision. Research indicates that a comprehensive decision process should lead to more effective decisions and better firm performance. We therefore argue that a comprehensive decision process will allow a firm to set aside the biases of its dominant logic. Further, the make-up of a decision team (homogeneous versus heterogeneous) will either bolster or diminish the influence of the firm’s dominant logic (Schwenk, 1984; Murray, 1989), thereby affecting the entry decision. We therefore posited that a heterogeneous decision team will tend to diminish the influence of a dominant logic. We refer to a decision-making context in which the process is comprehensive and the decision team is diverse as a ‘high decision context’. The higher the decision context, the lower the bias due to previous market entry choices, and the higher the performance. Technology Transfer Costs/Transaction Cost Economics Theory Technology transfer costs are defined as the costs associated with the transfer of a firm’s technology (machinery or know-how) across

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organizational boundaries (Williamson, 1975). Transaction cost theory emphasizes the cost side of transferring knowledge outside a firm and implies that firms seek efficiencies. The costs of negotiating and transferring information to other firms, the opportunity costs of abdicating a market in favour of a licensee or JV, and the threat of creating a competitor in markets beyond the purview of an agreement affect the choice of entry mode (Contractor, 1990). As the probability of market inefficiencies rises, a firm becomes more inclined to internalize any necessary transaction, which means owning operations rather than contracting them to another company. Kogut and Zander (1993) wrote that a firm’s efficiency in transferring technology dictates the amount of hierarchy it perceives as necessary. We suggest that the hierarchy chosen will become more internalized, going from licensing to JV to WOS as the technology becomes more tacit and valuable. Options Theory Duncan defined the environment as ‘the totality of physical and social factors that are taken directly into consideration in the decision-making behavior of individuals in the organization’ (1972: 314). In this context, the uncertain social, political and economic environments of China need to be examined, along with the strategic potential of its market and resources. Options theory, first applied by Black and Scholes (1973), is based on the adage that there is value in keeping one’s options open. This theory has proved useful in explaining patterns of global expansion (Kogut, 1991). It seems useful for predicting modes of expansion into China because, as Table 6.1 shows, the value of an option increases as both the environmental uncertainty and strategic value of a market increase. In essence, exercising an option transforms potential value into realized or net present value (NPV). It is the interplay of the strategic potential and environmental uncertainty of a market that determines the impact that the environment will have on a firm’s entry mode decision. Balancing the value of the option of market participation with the estimated NPV of operations enables prediction of firm involvement in the host nation. The option value and NPV of a market are a function of the market’s potential and environmental uncertainty. High NPV implies high involvement (WOS), and moderate NPV implies moderate involvement (JV). However, high option value implies high

Mark Cannice and John D. Daniels Table 6.1

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Market valuation through options analysis

High strategic potential Low strategic potential

High environmental uncertainty

Low environmental uncertainty

High operations value Moderate NPV Low options value Low NPV

Low options value High NPV Low options value Moderate NPV

environmental uncertainty and the need to keep a low involvement option open (licensing or liaison office). Firms will respond to the higher contributor to value: that is, either the NPV or the option value. Table 6.1 summarizes these associations. Contingency Theory A few studies have attempted to link entry mode choice to performance (e.g., Woodcock, Beamish and Makino, 1994). This analysis bases predictions of performance on a contingency (fit) relationship between modelled and actual entry choices. Performance is measured as reported venture profitability. Table 6.2 summarizes the theoretical framework that determines the model for optimal entry mode decision factors. We posited that adapted framework and entry mode must be effectively aligned to ensure strong performance. Because we posited that each entry mode best fits a particular profile of the independent factors, we argue that performance will be enhanced when the entry mode matches the corresponding optimizing profile. This notion of matching a strategy to a contingent set of circumstances is the essence of contingency theory (Woodward, 1965).

METHODOLOGY This study focused primarily on theory development and relied on recommendations of Yin (1994), Eisenhardt (1989) and Parkhe (1993) about research design, data collection and analysis techniques. The research design was the multiple case study approach, involving headquarters’ interviews at 15 US high-tech companies with operations in China.2 Following prescribed analytic induction methods (Yin, 1994;

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US High-Technology Ventures in China Table 6.2

Entry mode

Wholly owned subsidiary Joint venture

Licensing or liaison office

Optimizing profiles Factors

Foreign operation motivation

Decision process, decision team

Technology transfer costs

Environmental assessment

All

Comprehensive Heterogeneous Comprehensive Heterogeneous Comprehensive Heterogeneous

High

High NPV value Low option value Moderate NPV value Low option value High option value Low NPV value

Resource-seeking Market-seeking Market-seeking

Moderate

Low

cf. Yan and Gray, 1994), we used the theoretical framework developed in the preceding section as a template against which to compare the findings for each case. When empirical results did not support the theory, the template was modified. A case study method is particularly valuable as it helps to explain not only entry mode decisions and their link to performance but also the why and how. It also allows new insight generation and the inclusion of factors other than those in the original model. Sample The sample included high-tech firms from the computer/integrated circuit, telecommunications and medical equipment industries. For convenience, we chose only companies headquartered in the Bay Area near San Francisco. Companies were identified through various directories.We telephoned to determine whether they had operations fitting the study’s constructs and, if so, the name of the person in charge at headquarters. We sent letters explaining the study and telephoned again to determine willingness to participate and to schedule a meeting. All interviews were conducted in late 1996 or early 1997. Data Coding and Integration The interviews, conducted primarily with one to three vice presidents of manufacturing, marketing or sales from each firm, included openended and focused questions and a structured survey. The study also


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relied on archival records (company annual reports, 10Ks, press releases and financial data), direct observation (of factory floors, headquarters and personnel) and documentation (internal administrative notes and outside newspaper articles). Before interviewing, we completed a pilot case study to help us develop questions and clarify the theoretical framework. The initial open-ended questions were designed to encourage a respondent to relate an investment or marketing experience in China, the major factors considered, and resulting venture performance. The interviewer took pains not to bias the response at this time but encouraged the executive to speak at length of an event with which he (all were men) was very familiar. This phase of the interview yielded most of the new insights generated in the study. At the conclusion of each executive’s response and clarification, focused questions (also open-ended), centred on the study’s framework and preliminary constructs, were asked. Specifically, the executive was asked to comment on the effects of the firm’s strategy, technology, decision process and risk perception of China on its choice of operating mode and venture performance. Finally, structured survey questions using a Likert-type scale were verbally administered to the respondents. There were three or four items for each construct. Survey responses served primarily to validate the data from the open-ended discussions: for example, if a respondent said the motive of a venture was primarily to sell in China, questionnaire items on this issue were checked to verify consistency. If we found a contradiction between the open-ended and the survey response, we scrutinized the background data, the full summary and other observations made for the interview. We then triangulated various streams of data (interviews, surveys and archival) to determine the crucial decision factors which drove the entry decision and also to establish the performance of the venture. The data were coded by the two authors at an 85 per cent reliability. Fit between actual company actions and theoretically prescribed actions was determined for each case. Like Yan and Gray’s (1994) method, our procedure allowed either validation of the template or an adjustment to it. Where a case supported the theory fully (entry mode choice and contingent link to performance), replication was claimed. High fit and high performance led to a claim of literal replication; low fit and low performance or moderate fit and moderate performance led to a claim of theoretical replication (Yin, 1994). Where

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the case did not support the theory, we probed to explain why it did not or adjusted the framework.

RESULTS The sample included various entry vehicles: WOS (sales), WOS (manufacturing), JV (sales), JV (manufacturing) and liaison offices. Licensing existed only within the context of JV agreements. The Appendix summarizes the pertinent characteristics and responses for all the sample firms. Each firm is numbered (1–15), and anecdotal examples are referenced by those numbers. Claims of fit and framework support (case replication) are included. Finally, the Appendix lists adaptations to the framework and new insights. Contingency Theory The adapted model suggests support for the idea that entry into China within the case-adapted parameters results in optimal performance; therefore the contingency theory approach to entry mode selection appears worthy of further empirical testing. Of the 15 companies, 14 could be matched to an ideal entry mode. (Firm 4 exhibited no clear pattern in terms of the four theories used in the model, so we were not confident about the ideal mode.) Seven of the 14 had a high fit, four had a moderate fit, and three had a low fit. Of the seven companies with a high fit, six also reported high performance. Of the four with a moderate fit, three reported moderate performance. Of the three with a low fit, all reported low performance. However, this finding must be viewed with caution. We examined performance only in terms of whether respondents felt that the level of profit thus far was high, low or medium.There are, of course, other motives for entering a market, such as defensive pre-emption of a competitor. Technology Transfer and Governmental Constraints Companies are not necessarily free to choose the mode of entry into China that they would prefer. For example, if they want a JV, they are constrained by the availability of Chinese companies with the right complementary resources and sufficient understanding of the technology being transferred to minimize transaction costs. If they want a WOS, out of fear of technology appropriability (Daniels and Magill,


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1991), Chinese authorities may not allow it.All three respondents with low performance stated that government restrictions constrained their entry mode choice, and two of these entered with JVs. One of these is delaying technology transfer to its Chinese partner for fear of appropriability and is forgoing market penetration as a result. These companies may have accepted a less-preferred entry mode rather than none at all; this view makes sense in light of our finding that many US companies entered China to supply industrial customers from the USA that had moved into the Chinese market. We shall return to this point; however, it should suffice to say that the loss of an important USA-based customer in China may put the relationship with the same customer in the USA at risk. Our findings point to an alternative method of managing technology transfer risk. Previous studies (e.g., Kim and Hwang, 1992; Kogut and Zander, 1993) have asserted that firms should keep tacit, valuable technologies within their own organizational boundaries (that is, choose WOSs). Relatedly, Davidson and McFetridge (1985) found that firms were more likely internally to transfer technologies that were newer and closer to the cores of their businesses. However, because a WOS is not always permissible, companies protect core technologies in other ways, such as by transferring technology that is older rather than newer, peripheral rather than core, and segmented rather than complete. For example, one company transferred five-year old process technology to its JV in order to achieve its objectives of forming a legal entity, hiring its own people and servicing its clients better. Another (firm 13) satisfied Chinese authorities by establishing a research and development facility in China to do basic research on core technology, but research was performed only on segments of that technology; therefore, the Chinese personnel had no access to key technological components. Still another (firm 10) established a JV with a Chinese company to manufacture line cards in order to facilitate import of its own integrated circuits into China. However, the line card production was peripheral to its core competency and had little long-term value to the company. Table 6.3 summarizes these technology transfer strategies. Market-Seeking Motivations The primary motivation for entry into China (12 of 15 respondents) was to gain markets. Market-seeking was prevalent despite the plentiful supply of qualified and inexpensive labour available in China.

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Core Peripheral

Technology transfer strategies

Segment

Complete

Partitioned core transfer Minor non-core transfer

Significant core transfer Complete non-core transfer

Thus viewing China as a marketplace rather than as a resource base may be specific to high-tech manufacturers, who hesitate to develop the specific skill base necessary to support their sophisticated manufacturing processes but envisage large product sales in China’s massive market. Among the market-seeking companies, those providing high and low levels of sales/service integration differed.The former emphasized dedication to servicing customers (often existing customers now operating abroad) rather than finding new customers and markets; this emphasis usually led them to favour a WOS for sales and service offices. This high-integration sales strategy seemed to be a function of three factors: the design-in requirement for a company’s product as a component in its customer’s products, the relative value chain position of the focal company and the desired level of service differentiation. Several companies needed to design their product into their customer’s production system, so their sales forces needed to be at their customers’ design facilities. For example, a firm 3 respondent stated: ‘We must follow our OEM [original equipment manufacturer] customers on a world-wide basis to their design/production facilities. We need to design-in our product with the OEM to make the sale, therefore we must be where the design is taking place.’ This sentiment was echoed for firm 8: ‘Our product is so integrated into the design of a fabrication facility that it is not important where our product is finally put in place. We must sell at the development stage of a fabrication production system.’ This design-in requirement seems best satisfied with a direct presence (WOS) at the point of customer product design. A high-level design-in requirement drives high-integration sales strategies (WOS for sales and service), and the customer structure (centralized to decentralized) determines the point of supplier focus (headquarters or production site). A low design-in requirement can be satisfied with third-party distribution efforts at either the customer’s headquarters (centralized structure) or production site


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(decentralized structure). Typically, supplier firms face this requirement more than original equipment manufacturers (OEMs). The need to follow customers abroad has often been noted, especially for service companies (Miracle, 1966; Terpstra and Yu, 1988; Erramilli and Rao, 1990). The reasons include being better able to serve existing customers than local companies in the foreign market can, and the fear that they will lose clients domestically if they do not serve them abroad. Terpstra and Yu argued that the motive to follow and serve existing customers differentiates the service industry from the manufacturing industry; however, our study suggests that this motive may be equally critical for high-tech manufacturing firms that depend on system integration. This client-following or high integration behaviour appears stronger among firms further down the value chain from the final customer. Options Theory Options theory seems to have only a minor association with operating mode choice and venture performance. Rather than managing the trade-off between China’s environmental risks and strategic opportunities through the choice of entry mode, companies are managing risk in other ways. These include building relationships with local governments and industry officials, JV partner selection, regional site selection (some sites were viewed as less risky than others), local recruitment, and exercising a high decision context. For example, firm 11 maintained a relationship with central government authorities to mitigate risk and smooth possible operating constraints, reducing risk to a task to manage rather than a major influence on operating mode choice. Decision Context The decision context seems to have little influence on the performance of foreign high-tech companies operating in China. For example, of seven companies having high-context decision making, two had high and two had low performance. Of five companies with low-context decision making, two had high and two had low performance. The lack of support for earlier work may be due, in part, to the constraints placed on modes of operations by Chinese authorities. These constraints modify both the context in which a decision is taken (e.g., Jones, Jacobs and van’t Spijker, 1992) and the operating modes

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available to a firm (resource and government constraints). We added these constraints to the adapted framework as well. Adapted Model The adaptations from the within- and cross-case analyses were incorporated into the operating mode decision/performance framework. In Figure 6.2, the original template shown in Figure 6.1 is adapted to illustrate the case-based modifications. In the adapted framework, a firm’s international motive is the driving force (bold arrow) for its operating mode decision. Within the firm’s international strategy, a market-seeking strategy is segmented into high versus low sales integration efforts, which are the primary drivers of the operating mode choices taken by the firms in this sample. A firm’s decision context proved to be a moderating rather than a causal factor, having little effect on operating mode selection, probably because of governmental constraints. The environment and technology transfer costs are not completely discounted in the adapted framework; however, they were primarily managed in ways other than the operating mode choice. Additional moderators are now shown in the adapted framework in the section ‘Constraints/Incentives’. The constraints are external ones (i.e., Chinese governmental restrictions) which affected the decision context, in that firms either spent little time on an operating mode choice because of external constraints or spent much time looking for ways to manoeuvre around those constraints. ‘Incentives’ refer to internal efficiencies. Simply, firms pursued efficiency in their resource expenditures while attempting to satisfy their international strategies or minimize their technology transfer costs. Normally, this resource incentive or efficiency was a function of the scale of involvement: for example, a high level of sales makes the fixed costs of a wholly owned sales office more efficient than the variable costs of a distributor. The link to performance is shown in the adapted framework, and an adapted contingency framework is displayed as Table 6.4. We have removed decision context from the contingency framework because it did not relate to better performance. The order of importance of factors’ fit with the operating mode goes from left to right in Table 6.4. The motive for international operations is predominant. The environment proved to be somewhat more important than technology transfer costs and thus was shifted to the second position.

Decision Context Decision process comprehensiveness Decision team heterogeneity Constraints/Incentives

International Strategy

Resources Government

Market-seeking (high/low sales integration) Resource-seeking (Transnational integration) (Competitive response)

Operating Mode

Environment

Wholly owned subsidiary Joint venture Distributor (export)

Perceived uncertainty Strategic potential

Venture performance Fit

Technology Transfer Costs Tacitness Value Appropriability

Adapted foreign-operating-mode decision model

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Figure 6.2

172


Adapted foreign-operating-mode contingency profile

Entry mode

Factors International strategy

Environment


Wholly owned subsidiary

(1) Marketing-seeking (high-integration) (2) Market-seeking, high volume (low-integration) (3) Resource-seeking (4) Transnational integration (5) Competitive response

High NPV

High to moderate

Joint venture

(1) Market-seeking (through JV partner selection) (2) Less optimal mode for any strategy listed above, but may be necessary to meet government or resource constraints

Moderate NPV or option value

Moderate

Liaison office

(1) Marketing-seeking (2) Low-integration, low-volume

High option value

Moderate to low

Context for the Framework The adapted operating mode framework, to a large degree, is generalizable to settings other than China. As noted earlier, our study of 15 cases of foreign investment in China was part of a larger study of 35 cases of foreign investment; the other 20 cases explored US high-tech investment in Japan, Malaysia, Taiwan, Hong Kong (pre-1997) and Singapore. Although the importance of fitting the operating mode choice to a firm’s primary decision factors (and especially to its strategy) was consistent for all 35 firms, the importance of decision context was only apparent in the non-Chinese cases: a firm’s decision-making process and its decision team’s heterogeneity were only associated with venture performance in countries other than China. We expect


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that China’s strict legal and regulatory environment, which restricts the investment alternatives available to investing firms, caused this to be true. Thus we removed decision context from the contingency table here, although it should be included in most other cases. However, China is not alone in its strict investment oversight. Other developing and industrialized countries also boast extensive regulatory investment regimens. A firm’s decision context would probably also be less closely associated with venture performance in countries possessing highly restrictive investment laws. Further, as demonstrated by current global financial turmoil, national investment and capital regimes are fluid over time.Therefore, the usefulness of a firm’s decision context in enhancing venture performance may vary for the same country over time. Again, we assert that firm-level strategy and technological issues and environmental measures would be useful predictors of operating mode choice and venture performance in most instances of foreign investment. Case Examples Although the Appendix summarizes the data from all 15 respondents, it is useful to review a good fit/good performance and a poor fit/poor performance example to illustrate how companies were classified. Firm 13, a manufacturer of high-end computers, reflects good fit with the adapted model and good performance. A high-integration market-seeking strategy drove this company. Through a comprehensive process undertaken by a functionally and regionally diverse group of managers, the company decided to put its own engineers in Beijing to serve its existing customers directly and provide technical consulting services to its potential clients. To staff a WOS with its own engineers, firm 13 needed to be registered as a local Chinese company. Gaining government permission required the firm to complete sophisticated development work in association with Chinese government engineers. The company diminished its perceived risk of technology appropriation by conducting only small segments of its core operating system research with these engineers. The company reasoned that the joint development work would be of little value without knowledge of the complete operating system design. However, this joint development work satisfied government demands and allowed the firm to pursue its own strategy. The company also perceived

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the Chinese environment as having only a moderate NPV due to its moderate uncertainty and moderate short-term market potential. However, the firm still proceeded with a WOS, and it reduced uncertainty by establishing a close working relationship with the government. Here, the high fit between the firm’s international strategy and the operating mode choice outweighed the moderate fit of the firm’s perception of environmental uncertainty and possible technology loss. The firm’s high decision context appears to have allowed the firm to choose a coherent strategy and operating mode, although it did not directly lead to a particular operating mode choice. Firm 9, a manufacture of semiconductor processing equipment, reflects poor fit with the adapted model and poor performance. The company viewed China as a long-term market opportunity. However, China required a manufacturing JV in order for the firm to maintain a direct sales presence. Because this firm was fearful of losing its technology, it refused to be partnered by any Chinese firm. Instead, it chose to use US governmental channels to persuade the Chinese government to make an exception. This tactic proved fruitless. The company was then limited to establishing a liaison office in China for product demonstrations only. It had to rely on third-party distribution for new sales and could not directly service its current or potential customers with the high-integration marketing that was needed. Although the firm engaged in a high decision context, its concern about technology appropriation led to a suboptimal operating mode, rather than to finding a means to manage the risk with a mode that would allow it to pursue its marketing strategies. Although the liaison office was appropriate for the firm’s low estimation of China’s NPV, it was inappropriate for the high-integration market strategy required by a two-step supplier. It also handled the high transfer costs associated with the firm’s tacit technology poorly. Although government constraints limited options, the poor fit of the appropriate strategy to the operating mode appears to have led to the assessment of the venture’s poor performance. To sum up, in the case analyses it became clear that companies (such as the one described above) which compromised on fulfilling their major strategic reason for entering China were the least satisfied with performance. Satisfied companies, such as the first case, had sought every means to assure their strategic motives were fulfilled while finding ways to manage technology appropriability and environmental uncertainty. Although these companies did not fully avoid appropriability risk and incurred some extra costs, fulfilling their major motive more than compensated them.


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CONCLUSIONS We find that our developed framework suggests support for the contingency relationship: there is better perceived performance when entry mode coincides with the modified theoretical model. However, any generalizations from this study must be approached with caution because we focused narrowly on US high-tech firms investing in China. In fact, although we did not report here on our larger study, which included 20 other high-tech companies elsewhere in Asia, those experiences were different in some ways: for example, there was a much higher incidence of JVs in China (5 out of 15) than in other locations (2 out of 20). The companies’ decision contexts also had less of a relationship with performance in China than elsewhere in Asia. It is quite likely that the differences are due to the Chinese government’s having high involvement before granting an entry permit. Clearly, the JV operating mode is most often favoured by the Chinese government. Investing firms also appear to accept this mode in hopes of learning more about the Chinese environment from JV partners. Chinese government constraints make all the more significant the finer-grained strategies of technology transfer management and environmental uncertainty abatement discussed earlier. Still, venture performance in China seems highly satisfactory. Of the 15 firms operating in China, 12 reported high or moderate performance. Basically, companies respond to a regulatory environment in three ways: (1) by avoiding entry because they consider the regulations to be too stringent, (2) by entering because they consider the regulations to be acceptable, and (3) by finding loopholes that let them work around the regulations (Boddewyn and Brewer, 1994). All the companies in our study belong in categories 2 and 3. To the extent that they were able to negotiate an entry mode that fitted the modelled theoretical base, performance was high. However, apparently some companies forwent their entry mode preferences because the Chinese market seemed so appealing, but accepting second-best entry mode was not without cost as they sought to restrict technological appropriation and to deal with Chinese authorities to lessen adverse environmental risks. The result was usually that performance was poor or only moderate for companies that lacked a fit with the theoretical construct. This pattern may suggest that companies will become reluctant to enter the Chinese market if they cannot negotiate a fit between their optimum and a permissible entry mode. In fact, since we did not look at companies that have avoided the Chinese market, we do not know how pervasive this situation is.

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Our analysis points to the specific following issues that may be of value to managers involved in international expansion decisions. 1. Choose a foreign operating mode that meets the requirements of the factors management considers most critical. 2. Among other considerations, ensure the operating mode choice suits the strategy pursued for the new venture. (The case data indicate that fitting the operating mode to a venture’s strategy is the most critical contingency in the venture’s performance.) 3. Consider using alternative methods of managing technology transfer/protection issues. These may include transferring peripheral rather than core technology and partial rather than complete processes. 4. Consider using alternative means of managing the environment. Pursue building relationships with local officials and partners. Employ a comprehensive decision process to ensure all alternatives have been evaluated. 5. When pursuing a market-seeking strategy, evaluate whether the situation warrants a high-integration sales effort to deal with potential clients. The need for this high-integration effort is a function of the products’ design-in requirements, their relative value chain positions, and the desired level of service differentiation. If a highintegration sales effort is needed, a WOS sales/support office is likely to be more effective than other modes of distribution. 6. Employ a comprehensive decision process with a heterogeneous decision team to help break the mould of traditional strategy formulation and facilitate better selection of international strategies and operating modes. Again, the restrictions placed upon firms wishing to develop production or sales capability in China may limit the feasibility of recommendations 1 and 2 above. Put simply, firms investing in China frequently may not be permitted to select the ideal operating mode to support their strategies and other contingencies. These restrictions, when and where they exist, increase the relevance of recommendations 3 and 4: that is, when companies are prevented from choosing an operating mode which minimizes the risk of technology loss or environmental uncertainty, firms must employ finer-grained methods to mitigate these contingencies. The importance of these finer-grained operating strategies proved readily apparent in China’s business environment and should prove equally important in other highly regulated investment environments.

Appendix: Summary of Pertinent Case Data for the Sample Firms Firm 2

Firm 3

Firm 4

Firm 5

Main products

Manufacture ICs

Manufacture communication infra-equipment

Manufacture computers

Manufacture computers

Manufacture medical equipment

Value chain placement

One-step supplier

One-step OEM

OEM

OEM

One-step OEM

Operating mode

WOS (sales)

JV (sales)

JV (manufacturing)

WOS (sales)

WOS (sales)

Entry date

1994

1995

1996

1994

1994

Foreign entity activity

Sales and service for Chinese market


Manufacture computers for China and export



Foreign motivation

Market-seeking (high-integration)


Market-seeking

Market-seeking


Decision context

High

Low

High

High

Low


Moderate

Moderate

Moderate

High

Moderate to high

NPV or option value

Moderate option Low NPV

Moderate NPV Moderate option


Low NPV Low option

High NPV Low option

Constraints

None

Governmental restrictions

Resources, government

Resources, US and Chinese Governments

None

177

Firm 1


Description

178

Appendix: Continued Description

Firm 1

Firm 2

Firm 3

Firm 4

Firm 5

Fit

High

Moderate

High

Unclear

High

Fit explanation

Direct presence satisfies highintegration market-seeking strategy

High-integration strategy requires direct presence

JV choice appropriate for strategy, technology and environment

Multiple constraints on foreign entity operation obfuscate fit analysis

Direct presence satisfies one-step OEM high-integration and high NPV, and moderate technology costs

Performance

High

Moderate

High

Moderate

High

Support/replication

Yes (literal)

Yes (theoretical)

Yes (literal)

Unknown

Yes (literal)

Framework adaptation

No

Government restrictions moderate mode choice

No

Home and host government restrictions moderate mode choice and performance

Resource incentives (efficiency) moderate mode choice

Insights

Need core group of trusted people to start operation

Choose JV partner aligned with target market

Must increase local market share to encourage related suppliers

Customer resource constraints demand mix of old and new technology

Increasing sales potential makes fixed costs of sales office more efficient than distributor commissions

Main products

Manufacture computer memory boards

Manufacture semiconductor processing equipment

Manufacture IC fabrication yield management equipment

Manufacture IC processing equipment

Manufacture integrated circuits (ICs)


One-step supplier

Two-step supplier

Two-step supplier

Two-step supplier

One-step supplier

Operating mode

JV (development)

WOS (sales/support)

WOS (service)

Liaison for sales

JV (manufacture)

Entry date

1994

1995

1996

1980s

1994


Joint development and sales

Sales/support for China customers

Service for China fabricating facilities

Demonstrate product; coordinate with distributors

Manufacture line card to use with own ICs

Foreign motivation

Market-seeking




Transnational (learning)

Decision context

Low

Moderate

Unclear

High

Low


Moderate

Moderate

High

High

Moderate

NPV or option value


Low NPV Low option


Moderate option Low NPV

Low NPV Low option

Constraints

Government restrictions

Government

None

Government

Government

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Appendix: Continued Firm 6

Firm 7

Firm 8

Firm 9

Firm 10

Fit

Low-moderate

Moderate

Moderate

Low

Low

Fit explanation

One-step supplier needs high-integration strategy which requires direct presence

WOS fits high-integration strategy but not market valuation or technology costs

WOS service fits well with high-integration strategy and two-step supplier position

WOS fits high technology costs, but 2-step firm must have high-integration sales

Integration normally needs WOS. Government constraint precludes this. Low decision context led to poor partner selection

Performance

Low

Moderate

Unknown

Low

Low

Support/replication

Yes (theoretical)

Yes (theoretical)

Unknown

Yes (theoretical)

Yes (theoretical)


Value chain position moderates strategy and mode choice

Emphasis on impact of strategy to fit mode and ensure high performance

High design-in requirement leads to high integration

Government restrictions limit mode choice

Government or resource restrictions precludes fit

Insights

Use of JV development to attain market seeking objectives

Use indirect model to enter country and cut ties when established

Sales of high design-in product often made at headquarters. Should have direct presence there.

Emphasis on technology transfer costs may be misplaced. Use other technology, management strategies

Low decision context led to poor partner selection.

180

Description

Main products

Provide design, manufacturing services to OEMs

Manufacture disk drives

Manufacture range of computers

Develop design software

Manufacture video communication equipment


One-step supplier

One-step supplier

OEM

One-step OEM

OEM

Entry date

1996

1992

1995

1995

1995


Manufacture/design services OEMs

Test and assembly of disk drives

Do basic and applied research. Consult with potential customers

Work with government officials, coordinate with distributors

Sales and service to local customers

Foreign motivation


Resource-seeking


Market-seeking

Market-seeking

Decision context

High

Low

High

High

Moderate


Moderate

Moderate

High

High

Low

Net present value or option value

Moderate NPV Low option

High NPV Low option



High NPV Low option

Constraints

None

Government

Government

Government

Government

Fit

Moderate

High

High

High

High

181

182

Appendix: Continued Description

Firm 11

Firm 12

Firm 13

Firm 14

Firm 15

Fit explanation

WOS choice is appropriate for high sales integration but unnecessary for moderate NPV and technology transfer costs

JV fits moderate technology and resource-seeking objectives under government constraints

WOS meets highintegration and high technology cost demands

Distribution OK for broad market-seekng effort

WOS fits high volume sales and high Market value

Performance

Low

High

High

High

High

Support/replication

Yes (theoretical)

Yes (literal)

Yes (literal)

Yes (literal)

Yes (literal)


Emphasize fit of Strategy to mode choice

JV is good for resource-seeking if need partner to get in market

No

Office requires third party distribution

No

Insights

Develop ongoing relation with government to mitigate potential constraints

Change strategy from market-seeking to resource-seeking as new information became available

Provide R&D to meet government demands and use as competitive advantage to attract customers

Develop relationship with government to further product acceptance. Piggyback on related suppliers

Upgrade market seeking strategy with direct presence


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Notes 1.

2.

A licensing agreement here refers to arm’s-length licensing rather than licensing within a company’s family of subsidiaries. When a company established a WOS or JV to handle export sales in China, it was classified as a WOS or JV rather than as an exporter. The study actually included 35 companies with East Asian operations; however, this chapter reports only on the 15 with Chinese operations.

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Glaser, B. and Strauss, A. 1967. The Discovery of Grounded Theory. Chicago, IL: Aldine. Hill, C. W., Hwang, P. and Kim, W. C. 1990. ‘An eclectic theory of the choice of international entry mode’, Strategic Management Journal, 11: 117–28. Jones, R. E., Jacobs, L. W. and van’t Spijker, W. 1992. ‘Strategic decision processes in international firms’, Management International Review, 32: 219–36. Kim, W. C. and Hwang, P. 1992. ‘Global strategy and multinationals’ entry mode choice’, Journal of International Business Studies, 23(1): 29–52. Kogut, B. 1991. ‘Joint ventures and the option to expand and acquire’, Management Science, 37: 19–33. Kogut, B. and Zander, U. 1993. ‘Knowledge of the firm and the evolutionary theory of the multinational corporation’, Journal of International Business Studies, 24(4): 625–45. Miracle, G. E. 1966. Management of International Advertising. Ann Arbor, MI: Bureau of Business Research, Graduate School of Business Administration, University of Michigan. Murray, A. I. 1989. ‘Top management group heterogeneity and firm performance’, Strategic Management Journal, 10: 125–41. Nelson, R. R. and Winter, S. G. 1982. An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap Press. Osland, G. E. and Cavusgil, S. T. 1996.‘Performance issues in US–China joint ventures’, California Management Review, 38(2): 106–30. Pan, Y., Chi, P. K. K. and Kao, C. 1996 A Comparative Study of Profitability of Foreign Enterprises in China. Working paper, Lundquist College of Business, University of Oregon. Parkhe, A. 1993. ‘ “Messy” research, methodological predisposition, and theory development in international joint ventures’, Academy of Management Review, 18: 227–68. Schwenk, C. R. 1984. ‘Cognitive simplification processes in strategic decisionmaking’, Strategic Management Journal, 5: 111–28. Selzer, L., Ma, C. and Banthin, J. 1992. ‘Gauging investor satisfaction’, China Business Review, 19(6): 54–6. Terpstra, V. and Yu, C. M. 1988. ‘Determinants of foreign investment of U.S. advertising agencies’, Journal of International Business Studies, 19(1): 33–46. Williamson, O. E. 1975. Markets and Hierarchies: Analysis and Antitrust Implications. New York: Free Press. Woodcock, C. P., Beamish, P. W. and Makino, S. 1994. ‘Ownership-based entry mode strategies and international performance’, Journal of International Business Studies , 25(2): 253–73. Woodward, J. 1965. Industrial Organization: Theory and Practice. London: Oxford University Press. Yan, A. and Gray, B. 1994. ‘Bargaining power, management control, and performance in United States–China joint ventures:A comparative case study’, Academy of Management Journal, 37: 1478-517. Yin, R. K. 1994. Case Study Research: Design and Methods (2nd edn). Beverly Hills, CA: Sage.

7 International Business Negotiation in the Chinese Context Xinping Shi and Robert I. Westwood

We propose an integrated framework for empirical research on Chinese international business negotiations. This framework considers the ways that traditional Chinese values and the social, economic and political environments of contemporary China might influence negotiation processes and outcomes. By addressing the categories of antecedent determinants that should be considered, the framework could also be applied to other settings in a search for the culturespecific aspects of international negotiations. A substantial literature dealing with the principles and processes of negotiation within the American context has been generated over the last three decades (e.g., Walton and McKersie, 1965; Rubin and Brown, 1975; Druckman, 1977; Pruitt, 1981; Raiffa, 1982; Wall, 1985; Thompson, 1990; Neale and Northcraft, 1991; Lewicki, Litterer, Minton and Saunders, 1994). Important reviews include Wall and Blum (1991), Putnam and Poole (1987), Putnam and Roloff (1992), Thompson (1990), Lewicki, Weiss and Lewin (1992), and Thomas (1992). However, these authors have either overlooked other cultural contexts or implicitly assumed universality and applicability across cultures. Even when comparative studies have been undertaken, they have tended to be informed by US models and thus remain in thrall to culture-specific conceptualizations. Increasingly, universalistic assumptions in management theory and practice have been questioned (Hofstede, 1980, 1993; Adler, 1991; Boyacigiller and Adler, 1991; Doktor, Tung and Glinow, 1991; Tayeb, 1994; Fatehi, 1996), with culture frequently invoked as a moderator variable. More specifically, these authors suggest that different cultural values may lead to differences in conceptualization, structuring, processes and behaviours in negotiation. In addition, because negotiation is a complex interaction happening within a complex social system, a range of other contextual factors, such as prevailing ideo185

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International Business Negotiation

logies, political systems and processes, economic structures, legal frameworks and other institutional elements, may also affect an international negotiation. Tung complained that ‘the theoretical basis of much U.S. negotiation theory is flawed through being profoundly decontextualized’ (1988: 206). Phatak and Habib, who also noted the overemphasis on cultural values and and underemphasis on contextual variables, echoed the comment quoted above: ‘Too often academics and the business press have focused on negotiating strategies without duly emphasizing context. Even when negotiation context is discussed it is usually presented as a “cultural” issue’ (1996: 30). Despite calls for proper contextualization of international business negotiation voiced as far back as 1965 (Sawyer and Guetzkow, 1965), little conceptual or empirical work on contextualization has appeared. Therefore, previous international business negotiation theory and research are deficient either through assuming universality and being inattentive to cross-cultural differences, or through a damaging decontextualization and narrow focus. In this chapter, we contribute to the field by proposing an integrated model for indigenous research on international business negotiations within the Chinese context. This chapter generates an emic account from the Chinese perspective, mapping out the specific antecedent conditions, mediating variables, processes, behaviours and outcomes germane to that context, as well as their interrelationships. The particularity of this focus and the range of variables taken into account, especially neglected non-cultural factors in the macroenvironment, extend existing approaches. Propositions concerning relationships in the model are also offered. The chapter concludes with a discussion of the implications of, and research relevant to, the model.

A REVIEW OF SINO–WESTERN NEGOTIATION RESEARCH A review of the literature on Sino–Western negotiations (e.g., Pye, 1982; Tung, 1982, 1994; Deverge, 1986; Shenkar and Ronen, 1987; Stewart and Keown, 1989; Eiteman, 1990; Kirkbride and Tang, 1990; Osland, 1990; Kirkbride, Tang and Westwood, 1991; Chen, 1993; Tse, Francis and Walls, 1994; Wagner and Coll, 1994; Zhang, 1995; Blackman, 1997) reveals some critical deficiencies, which we summarize in the following way.

Xinping Shi and Robert I. Westwood

187

1. Existing comparative studies of international business negotiation in general and of Chinese negotiation with other countries in particular overlook the macroenvironmental influences of societal, political, ideological and economic factors. Conceptual studies have sometimes included these factors (Sawyer and Guetzkow, 1965; Moran and Stripp, 1991), but with scant elaboration of what is pertinent in a specific culture. This deficiency results from researchers’ taking a pseudoetic approach (Triandis, Vassiliou, Vassiliou, Tanaka and Shanmugam, 1972) and neglecting the culturally bounded nature of negotiation theory (Doktor, Tung and Glinow, 1991). Such models have been developed in and for the American context, where the macroenvironments are assumed to be common to the negotiating parties and need not be accounted for. Such commonality cannot be assumed in cross-cultural negotiation settings which entail different relevancies, issues and strategies. In Sino–Western business negotiations, such factors are likely to be of high significance, given the marked differences in the macroenvironments. 2. Studies of Sino–Western negotiations have revealed both similarities and differences in behaviours and processes but have failed to account for the causes of either. This deficiency is due to researchers’ paying insufficient attention to the determining effects of exogenous factors in the negotiation context. Noted similarities are attributed either to an assumed universality, a presumed commonality in the exigencies of business ethos and practice, or a broad convergence of social and economic environments. Any observed differences are typically attributed in a post hoc way to ‘culture’ with few studies explicitly studying and/or measuring these differences (Shenkar and Ronen, 1987; Xie, 1995). 3. Assumptions are made about modes of reasoning and conceptualizations of negotiation. American models proceed via a rational/instrumental reasoning perspective (Thomas, 1992). Negotiation is considered a problem-solving exercise entailing such conceptualizations as the rational calculation of outcomes of maximal utility, instrumental strategy and tactic choices; cost-benefit analysis; and legalistic concretization of outcomes in abstract and impersonal contracts (Raiffa, 1982; Wall, 1985; Thompson, 1990; Lewicki et al., 1994). In a Chinese context, a purely rational/instrumental mode of reasoning may lack resonance. 4. Previous research has focused on the ‘hardware’ of negotiations to the relative neglect of ‘software’ issues. The authors of one study, noting such a tendency, suggested that ‘how to approach negotiation

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is as important as, if not more important than, what is being negotiated’ (Tse, Francis and Wallis, 1994: 551). The hardware of negotiation refers to content and task-related issues, particularly marketing and financial ones. The preoccupation has been with measurable, quantifiable features that can be used for cost-benefit analysis. Software issues, such as the nature and form of the relationships between negotiating parties, social norms, the cognitive processes of negotiators, and the adaptive behaviours of negotiators as they go from a ‘within’ to a ‘between’ cultural context, are rarely addressed (Doktor, Tung and Glinow, 1991; Francis, 1991). It is likely that such factors are highly influential in determining cross-cultural differences in behaviour, processes and outcomes, and therefore they ought to be given greater attention (Tung, 1994; Xie, 1995). 5. There are problems of construct/concept incompatibilities in comparative negotiation studies (Adler and Graham, 1989; Graham, Mintu and Rogers, 1994). The equivalence of concepts/constructs developed in a Western context with those derived from the Chinese context cannot be assumed. Even if the research instruments are carefully translated, derived variables do not always resonate with the meanings, relevancies or problems that exist in the Chinese reality.

A CONTEXTUALIZED MODEL FOR INTERNATIONAL BUSINESS NEGOTIATIONS These and other shortcomings of existing research, together with the unbalanced understanding of business negotiations in contexts other than the American, led us to develop an integrated model of international business negotiation for indigenous research from a Chinese perspective. We sought to anchor the conceptualization of negotiations to the Chinese cultural and macroenvironmental context more fully. The model, delineating the core constructs and their relationships, is depicted in Figure 7.1. The framework is significant in four ways. 1. It works as an integrated theoretical model by mapping out a comprehensive set of factors germane to international business negotiations, contextualized with respect to the specifics of the Chinese situation.

Cultural Traits

䉲 Negotiation Behaviours and Processes Institutional/Organizational Framework

䉴

䉴

䉳—䉴

Core Values Social harmony Relationship orientation Guanxi and contextual communication Face and etiquette Reciprocity Social structure and power Time orientation Peripheral Values

Macroenvironmental Factors Political pervasiveness Ideology Economic conditions Policy and legal framework Employment relations

Maintaining relationships Leadership and decision making Social obligations Multiple interested parties Negotiation team Diffused decision making

Conceptions of negotiation Context framing and expectation structuring Negotiation planning 䉴 Control of negotiation setting Fostering trust and relationship building Communication Concession trading Manipulating tactics Adaptation

䉲 Negotiation Outcomes Relationships and agreement Economic and social goodness 䉴 Satisfaction and trustworthiness Tentative agreement and negotiation continuance 䉱

䉱

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Figure 7.1

A framework for international business negotiations in the Chinese context

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2. It functions as an empirical research framework. Each construct has determinable indicators, thus facilitating operationalization and rigorous empirical study. 3. It lays the ground for more meaningful comparative and crosscultural investigation of business negotiations. By mapping out the parameters of negotiation from an indigenous Chinese perspective for emic research and theory development, it can offer a viable basis for investigations of convergent and divergent negotiation issues in different cultural contexts. 4. Although developed with respect to the Chinese case, as a broad framework it offers scope for the development of indigenous research in other cultural contexts. More specifically, although the framework is developed with respect to the mainland Chinese case, it offers scope for identifying and confirming a common negotiation framework in the Confucian societies (China, Hong Kong, Singapore and Taiwan). The framework goes beyond the shortcomings of existing negotiation studies by (1) specifically emphasizing the antecedent conditions and relationships among constructs, (2) extending the identification and explanation of similarity and difference in traditional crosscultural studies by addressing the determining effects of cultural, societal and other macro factors on business negotiations, and (3) focusing more attention on software issues that have a strong influence on negotiation success in the Chinese context. It should be noted that simple, abstracted, linear and decontextualized unicausal relationships are not in line with Chinese cognitions and conceptions of the interrelated, multicausal, deeply contextual nature of things. Indeed, the simple Western models that are typical of orthodox scientific approaches may in general terms be deficient in representing the complexities of a real phenomenon such as an international negotiation. The diagrammatic model should be seen as an artificially simplified, linear and non-dynamic picture of negotiation phenomena and is only useful as a heuristic device. We would argue that the cultural and macroenvironmental factors function as a complexly interrelated pattern of values, structures and practices that collectively help to frame international business negotiations in the Chinese context and impact upon negotiation processes, behaviours and outcomes. It is, naturally, extremely difficult to represent such dynamic, multicausal, non-linear processes in two-dimensional static models.


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CHINESE CULTURAL TRAITS A detailed account of Chinese culture is obviously beyond the scope of this chapter; we consider only those core features that have implications for negotiations. Table 7.1 offers propositions concerning Chinese cultural factors and their influences upon business negotiations. The factors and their relevance to business negotiations are discussed in the following subsections. Core Values Chinese culture has a long history, showing great persistence and coherence. The roots are primarily in the religio-philosophical traditions of Confucianism, Buddhism and Taoism, and in pantheistic and animist beliefs. Confucianism has been central to most culturalist accounts of Chinese business and management practice in general (Redding, 1980, 1990; Redding and Wong, 1986; Hofstede and Bond, 1988; Shenkar, 1991; Chen, 1995; Fan, 1995) as well as specific management-related issues (Nevis, 1983; Boisot and Child, 1988; Tse, Lee, Vertinsky and Wehrung, 1988; Yau, 1989; Kirkbride, Tang and Westwood, 1991). The Confucian ethic has provided a subtle and tacit but forceful social, moral and behavioural code in China. Any attempt to summarize Chinese culture in schematic form is in danger of doing violence to its complex structure. However, to provide a heuristic, we capture the relevant core aspects of the culture under three categories, each of which has a number of subthemes. Social Harmony Harmony is a core element in Chinese culture, central to the main religio-philosophical traditions and critical in orientations to the self, environment and social relationships. A ‘harmony-with’ the environment is prescribed rather than the ‘mastery-over’ prescribed in the Western tradition. This entails a non-interventionist, outer-directed and ‘situation accepting’ orientation (Leung, 1992; Fan, 1995) in contrast to a Western ‘problem-solving’ orientation (Adler, 1991). Harmony conceptions also imply a fundamentally interconnected, embedded and contextualized perspective. This perspective militates against an abstractive, linear, unicausal, analytic mindset, fostering one instead that is holistic, multicausal, concrete, synthetic and highly sensitive to context (Redding, 1980; Kirkbride, Tang and Westwood,

Table 7.1

Chinese cultural traits and propositions on business negotiations

Factors CORE VALUES General proposition Social harmony

Relationship orientation Guanxi Communication Face and etiquette Reciprocity

Social structure and power

Time orientation

Contingency propositions (from peripheral values)

Propositions (1) Chinese cultural traits will affect a negotiation’s framework, processes and behaviours in distinctive ways. (2) Chinese negotiators will seek to establish and maintain harmonious relationships with counterparts to a greater extent than the counterparts will. (3) Chinese negotiators will seek to place the negotiation in a wider context and will seek to establish general principles first. (4) Chinese negotiators will engage in behaviours that limit the emergence of overt conflict with counterparts. (5) Responsibility for decision making in the negotiation will be more diffuse on the Chinese side. (6) The Chinese will regard negotiation as a relationship-building process and will expend more effort than counterparts on establishing relationships. (7) Chinese negotiators will consider the negotiation in relation to their guanxi connections and the interests inherent in that network. (8) Chinese negotiators’ style of communication will be more implicit and indirect than counterparts’. (9) Chinese negotiations will exhibit more ritualistic elements than counterparts. (10) The Chinese will behave in ways that show greater sensitivity to face. (11) The Chinese will expect counterparts to abide by implicit rules of reciprocal obligation. (12) If the Chinese make concessions, they will expect them to be reciprocated. (13) Chinese negotiators will have less clear mandates and autonomy in the negotiation than counterparts. (14) Chinese negotiators will exhibit greater status consciousness than counterparts. (15) The Chinese will display a greater preference for formality in negotiation behaviour and processes. (16) The Chinese will seek to place a negotiation in a historical context. (17) The Chinese will prefer to deal with issues as a package rather than as discrete sequential items. (18) The Chinese will display greater flexibility about pace and schedule and greater patience. (19) Chinese negotiators will emphasize long-term negotiation consequences more than short-term economic results. (20) The Chinese may display greater levels of caution, circumspection and suspicion than counterparts. (21) Chinese negotiators’ style may become more assertive and open in the pursuit of self-interest. (22) In some situations, Chinese negotiators will be oriented towards a shorter time frame.


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1991). There is a heavy reliance on intuition rather than on structured analysis (Redding, 1990; Fan, 1995). The Chinese rely upon their intense involvement in the contexts in which they function and use that to intuit critical relationships, linkages and directions. Implications for negotiation. Chinese negotiators will seek to place negotiations in a holistic – and especially a social and historical – context. As a corollary, they will wish to establish a framework for negotiations that is based upon established principles and generalities prior to any consideration of substantive issues. This value also implies the maintaining of harmonious relationships with negotiation parties. It also means that the Chinese side will tend to engage in behaviours that limit the emergence of overt conflict with counterparts. In addition, this value orientation contributes to a consensual approach to negotiation positions and to a more collective and diffuse view of responsibility for negotiation decisions and outcomes (Kirkbride, Tang and Westwood, 1991; Blackman, 1997; Brahm, 1997). The social harmony variable has a pervasive relationship with many variables in other parts of the model, including core orientations to the negotiation process and behaviour discussed in detail later in the chapter. These values help to shape general conceptions about negotiation processes and structures, approaches to context framing and expectation structuring, and processes fostering trust and relationship building. The requirement for social harmony also intersects with aspects of the organizational/institutional framework and the managerial roles for negotiation. Of particular note are the links with leadership and decision-making structures and processes, the structure of negotiation teams, the presence of multiple parties and interests in any negotiation, and the requirement to fulfil social obligations through negotiated outcomes. It also has a strong bearing on all outcome variables: the nature of agreements and post-negotiation relationships, the meeting of wider economic and social goals, and notions of trustworthiness. Relationship Orientation This is a critical element, since Chinese culture is profoundly relational. Indeed, Osland suggested that ‘Chinese cultural values are largely formed and created from interpersonal relationships and social orientations’ (1990: 7). Chinese culture is collectivist (Hofstede, 1980; Chinese Culture Connection, 1987; Hofstede and Bond, 1988;

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Fan, 1995). This characteristic is linked to Confucian doctrines of kinship: in the context of lineage and ancestor worship, the family represents a ‘form of social immortality, [and] families have something of the quality of a religion’ (Fan, 1995: 17). Nowadays the kinship tradition is transformed into a ‘familyism’ that pervades almost all social entities, including work groups (Fan, 1995; Blackman, 1997). The core reference for people is not their own egos but some collective, and collective interests take precedence over individual interests. Individuals are highly appreciated if they sacrifice their interests for a group’s welfare. It is believed groups are more powerful than individuals and contain more wisdom. Sharply delineated in-group/out-group orientations result. Individuals’ opinions should not contradict those of the group, especially those of the group leader. Informal channels of communication operate at the highest efficiency among group members; benefits are shared and distributed to in-group members first. Trust and coordination rather than adversarial actions smooth relationships between groups. Relationships are also characterized by diffuseness rather than specificity: relationships are not confined to specific spheres but have ‘extensionality’ (Trompenaars, 1993). The Chinese concept ren means individuals’ claims to humanity and personhood are contingent on a demonstrated proper awareness of and engagement with others. This contrasts with the Western ego-centred, entiative view. Implications for negotiations. In general terms, this orientation stresses the importance of relationships within and surrounding negotiations. Indeed, a negotiation is in large part defined in terms of relationship establishment and building. Time and energy will be spent in the early phases of the process to do this, and specific rituals and social practices will be engaged in. Such relationship building is a necessary basis for long-term trust, extensionality and diffuseness. Once trust is established, the need for more formal, contractual mechanisms to cement agreements diminishes. A negotiation outcome typically aspired to is the establishment of a relationship of long-term trust. There is a tendency to prefer to do business in the future with parties with whom such trust has been established. Guanxi and Contextual Communication Guanxi refers to a special kind of relationship characterized by implicit rules of obligation and reciprocity (Hwang, 1987; Chen, 1994;


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Yeung and Tung, 1994; Luo, 1997). Such relationships can grow into complex networks that constitute a ‘highly differentiated intricate system of overt or covert as well as formal and informal social subsets governed by the unwritten law of reciprocity’ (Wilpert and Scharpf, 1990: 647, citing Boisot and Child, 1988). Guanxi is a viable mechanism for coping with China’s highly personalistic and noncodified social order (Alston, 1989). It is also seen as a necessary mechanism for getting things done in – or despite – the convoluted Chinese bureaucracy (Osland, 1990: 8). Chinese culture is also a culture in which communication is highly contextual (Hall and Hall, 1987; Osland, 1990). The meanings of any communicative act are not conveyed directly and immediately by words, but implicitly and indirectly through the contextualized qualities of speech acts, including tacit understandings and the nature of the relationship between interlocutors. Implications for negotiations. This factor adds a more complex nuance to the Chinese negotiation context. Chinese negotiators must always be mindful of how a negotiation process, structure and outcome affect their guanxi networks. This requirement further contextualizes negotiation situations and extends the significance of trust building and maintenance. Together with the highly contextual communication value, this guanxi requirement leads to great care and a degree of circumspection in negotiation situations. In terms of negotiation behaviour, the Chinese interaction style is implicit and indirect. It also displays great conformance to social mores and etiquette and has ritualistic elements. These cultural traits have a bearing on the conception of negotiation, particularly on processes and behaviours: relationship and trust development, modes of communication and interactive style, preferences for concession trading and the deployment of manipulation tactics. They also, again, have a relationship with most key outcome variables identified later in this research. Face and Etiquette Face may exist in any society, but it has special importance in Chinese societies because of its centrality in social life and business transactions (Hwang, 1987; Alston, 1989; Chen, 1995). For the Chinese, face (mianzi) concerns one’s dignity, respect, status and prestige; thus, social and business interactions should occur without anyone losing

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face. Face can be protected, saved and given by observing social ritual and etiquette (for instance, attending ceremonies and banquets, giving or exchanging appropriate gifts in public). In business negotiations, Chinese negotiators may conduct some ritual events in order to create a congenial atmosphere, give face to their counterparts, express their sincerity, emphasize the importance of the negotiating tasks and signal the perceived social status of those attending. Such events ‘are the first move of the Chinese on the chessboard of business negotiations, and the toasts, far from being empty phrases and hot air, are the opening salvo in the negotiation process . . . because they reveal the opening position of the Chinese in business transaction’ (Beamer, 1993: 24). They are also important occasions when mutual respect and trust may start to develop. Such face-giving creates an emotional bond and allows each party to form a general view of its counterpart and begin to develop negotiation strategies. Implications for negotiations. Negotiations have functional ritualistic or quasi-ritualistic elements. The significance attached to giving and not damaging face in the negotiation process reinforces the tendency to adopt a polite, somewhat circumspect style of communication and behaviour. This once again has a direct bearing on the development of respect and trust between negotiating parties. This trait has a relationship with most of the negotiation process and behaviour variables. Reciprocity This is a social norm reflecting an inherent interdependence among social entities. The Chinese believe that acts of reciprocity (such as doing favours) between people signify one’s honour to others and so they view them as a form of social investment (Yau, 1989). Reciprocity has a strong influence on commercial behaviour through maintaining gracious interpersonal relationships and governing exchanges. Behind reciprocity are values of moral trust, equity and obligation (Hwang, 1987; Chen, 1995). Implications for negotiations. The Chinese tend to view a negotiation as a search for mutuality in which processes of reciprocation are critical. They will expect counterparts to honour the social rules of reciprocal obligation. Social cachet and insider status will be accorded to those who adhere to principles of reciprocity. The relationship, and


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hence the negotiation process, may break down if reciprocity norms are breached. More concretely, the Chinese expect their concessions to be reciprocated. They may even feel that Western counterparts have a moral obligation to do favours for them.This value has very clear implications for the processes of expectation structuring and concession trading, but it also pervades the whole conception of negotiation and of the appropriateness of certain behaviours and processes. Social Structure and Power Confucian precepts provide a comprehensive social ethic for maintaining a social order centred on clearly delineated status hierarchies. There is a large ‘power distance’: power is unevenly distributed but socially legitimized (Hofstede, 1991). The traditional concept of wu lun establishes a hierarchical set of relationships as a paradigm but incorporates the mutual obligations, reciprocities and behavioural requirements inherent therein. People are expected to accept their positions in the hierarchy, dutifully fulfil their roles within it, and not challenge the order. However, those with power are socially and morally obliged to discharge their authority with consideration for those in their charge. The paradigm is the father–son relationship, and the chief regulating mechanism is filial piety. This paradigmatic form extends into all other hierarchical relationships, including organizational superior–subordinate ones. Ideally, the head should lead through moral virtue in the sense of social appropriateness. Conformance to social rules and obligations sustains harmony and is itself a moral requirement. Thus a subtle, coherent and strong fabric of social order is constituted by this intersection of hierarchical structure with a social ethic. None of this is codified in law or institutionalized in structures of civil society: it is an implicit moral order. Implications for negotiations. Negotiators may have unclear mandates and limited autonomy. There is adherence to status hierarchies both within and outside the negotiation itself. This may entail some rigidities and formalities in interactions, especially across status levels. There will be concern for the relative and perceived status of the other parties and a desire to see people of appropriate status negotiating for the other side. Nuanced face sensitivities and other social rules attach to status and to status differentials. These factors affect negotiation processes and behaviours and negotiation team composition, leadership and decision making.

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Time Orientation The Chinese have a stronger orientation towards the past than towards the present or future. Research suggests an additional time-related cultural dimension, a long-term orientation, previously labelled ‘Confucian Dynamism’ (Chinese Culture Connection, 1987; Hofstede and Bond, 1988; Franke, Hofstede and Bond, 1991). These time orientations are reflected in abiding and deep respect for tradition and Chinese history. Notions of lineage and ancestor worship complement this time conception. The Chinese conception of time is also polychronic, non-linear, elastic and episodic, in contrast to the Western monochronic, linear, sequential, absolute and discrete orientation (Redding, 1980). People orient to action and events flexibly. The Chinese are generally patient and persevering, qualities also rooted in Taoism. The Chinese propensity for thrift is also linked to the long-term orientation (Chinese Culture Connection, 1987). Implications for negotiations. The Chinese side will probably contextualize a negotiation historically. They may refer to the past behaviour of the other parties’ governments or companies, or to China’s past. The polychronic, elastic conception of time will entail a holistic approach to the negotiation and an avoidance of item-by-item horse-trading. Chinese negotiators will be comfortable considering a number of issues simultaneously. There may be flexibility about scheduling and a tactical manipulation of time. They will display great patience regarding the pace of negotiations, and counterparts need to do the same.There will be an emphasis on the long-term consequences of the negotiation rather than on the short-term ones. This value obviously has a critical impact on the structuring of a negotiation and core processes and behaviours. Negotiation outcomes may not be considered final and absolute, and the negotiation relationship is likely to be perceived as continuing into the future. Peripheral Values These core values have exhibited remarkable persistence, stability and resistance to the influences of social and political changes over many years. Other aspects of the sociocultural milieu may have a more transitory, localized and ideologically informed character (Lachman, Nedd and Hinings, 1994). In modern Chinese society, such peripheral values are often manifestations of imported or adopted constructions such as


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socialism, Communism and Marxism–Leninism–Maoism. Furthermore, certain sociopolitical events – such as the Cultural Revolution (1966–76), the Economic Reform (1978–present), and acceptance of foreign technology and philosophy – have penetrated collective experience and memory. In addition, the turbulence of China’s recent history is itself significant. It has engendered a generalized sense of uncertainty and caution in people which affects their mindsets and influences their orientation towards international negotiations. It also engenders some avoidance of responsibility and a preference for careful, collective decision-making processes that ensure consensus. Implications for negotiations. Such vacillation and turbulence may engender a degree of circumspection, or even suspicion, on the part of Chinese negotiators. These conditions also contribute to the issues of the diffuseness of responsibility and the consensual and collective responsibility in decision making related to negotiations. In contemporary China, the traditional time orientation has been partially modified by the current zeitgeist. There is a greater emphasis on the present and the future and a sense of urgency. Western notions such as ‘time is money’ have achieved currency. Businesses, aware of new opportunities in the ‘socialist market economy’, often move quickly and seek short-term economic gains. This burgeoning ‘short-termism’ is a counterpoint to the traditional ‘long-termism’. Implications for negotiations. More time pressure may be exerted on negotiation processes as opportunities are pursued more speedily and rigorously. The negotiating style may become more assertive and aggressive. Time for ritual and relationship building may be somewhat curtailed. The collectivism of Chinese culture has also been somewhat reconfigured by the socioeconomic changes in the Reform period. Shifts in policy, rhetoric and doctrine have signalled the efficacy of individual self-interest, and many have pursued new opportunities on that basis. Again, this is seen by some as related to the reception of Western ideas and values such as individualism, opportunism and proactivity (Francis, 1991). Implications for negotiations. Negotiators may adopt an antagonistic attitude towards foreigners in certain circumstances (Blackman, 1997). Individualist and opportunistic attitudes and associated behaviours may become more apparent, especially when negotiators have

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more autonomy in decision making and a personal interest in negotiation outcomes.

MACROENVIRONMENTAL FACTORS While the cultural and societal impact on international negotiations has at least been attended to, other aspects of the macroenvironment have frequently been neglected (Phatak and Habib, 1996; Tung, 1988b). In fact, in international business negotiation settings, negotiating parties have different and non-negotiable macroenvironmental backgrounds that shape approaches to negotiations. The macroenvironment includes such factors as the political system, ideology, economic systems, institutional arrangements and infrastructure development. The Reform era in China has brought significant changes in macroenvironment. There has been a radical shift towards a socialist market economy, an explosion in foreign trade, openness to foreign investment, alterations to enterprise governance, legislative changes relating to all aspects of trade, business and organization management, radical changes in the labour market and substantial infrastructural development. However, this has not meant that the macroenvironment for business in China has converged with that of the West; considerable differences persist. We concur with Luo, who noted that ‘success in China requires an understanding of its unique business environment and the subsequent formulation of a viable country strategy’ (1997, 52). In Table 7.2, we list these factors and offer propositions concerning their influence on business negotiations. In the following subsections, the factors are discussed in detail. Political Pervasiveness The political-ideological system in China continues to influence all aspects of society, including the operation of enterprises and economic transactions (Shenkar, 1991).The Communist Party, through its cadres, continues to monitor and participate in business activity and management. Cadres not only engage in ideological work but also assume administrative roles to ensure that party policy and state laws are adhered to and plans fulfilled. Party members lead SOEs, government agencies and other public sector organizations. They are also usually negotiating representatives on Chinese negotiation teams.

Xinping Shi and Robert I. Westwood Table 7.2

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Chinese macroenvironmental factors and propositions on business negotiations

Factors

Propositions

General proposition

(1) Factors in China’s macroenvironment will affect a negotiation’s framework, processes and behaviours in distinctive ways. (2) Political issues will have a stronger, albeit implicit, influence on Chinese negotiators’ framing of negotiation tasks and outcomes than on counterparts. (3) Chinese negotiators will manage negotiation processes and outcomes to accord with public notions of political soundness. (4) Chinese negotiators will be more conscious of and sensitive about the ideological issues at stake in business negotiations than counterparts. (5) Chinese negotiators will display greater uncertainty and circumspection because of ideological vicissitudes. (6) Chinese negotiators will place greater emphasis on the contribution of a negotiation to the national interest. (7) Chinese negotiators will contextualize a negotiation with respect to national policies and economic plans. (8) The incomplete and developmental nature of China’s legal system will give rise to a degree of ambiguity in negotiation. (9) The ineffectiveness and inefficiency of implementation of Chinese policies and laws will provide opportunities for ‘informal’ arrangements and practices. (10) Chinese negotiators will exhibit high sensitivity to labour, welfare, and related issues in negotiation.

Political pervasiveness

Ideological factors

Economic conditions

Policy and legal frame

Employment relations

Such a politicized environment means unavoidable and overt political influence on business negotiations and, generally, no fundamental distinction between political and economic agendas (Wagner, 1990). Chinese negotiators need to adopt the proper guiding ideology, display loyalty, uphold a patriotic spirit, be seen to be safeguarding China’s interests, vindicate national honour and protect national secrets. The type of outcomes negotiators must seek with foreigners is a critical

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point of influence: negotiators (both sides) must remain mindful of officially sanctioned goals. Negotiation decisions cannot be made simply with reference to market conditions; the contribution to China’s long-term plans must be factored in and, as Wagner put it, ‘Chinese negotiators . . . are under pressure to conclude a business deal that is good both economically and politically’ (1990: 93; cf. Osland, 1990). Implications for negotiations. Political issues may inform outcome criteria and concession structuring. Chinese negotiators will be concerned about the negotiation meeting political expectations, or at least minimally violating them. The composition of the group, its leadership and decision processes may be affected. Ideology Chinese negotiators in Sino–Western business dealings are enjoined to serve the national interest by obtaining Western technology and capital, facilitating technology transfers, generating exports, and cooperating with and fostering international business operations. Furthermore, they are to do this without being unduly influenced by foreign ideas and philosophies (spiritual pollution). Perceptions of a history of exploitation and imperialistic intrusion have engendered a caution and mistrust of foreign engagement (Frankenstein, 1986; Adler, Brahm and Graham, 1992). This caution is coloured by a conception of the capitalistic system in which the exploitative extraction of profit is the foreigner’s prime motive (Eiteman, 1990; Wagner, 1990). Implications for negotiations. Negotiation outcomes often must conform to ideological expectations. Once again, outcome criteria and concession structuring may be shaped by ideological factors, as might team composition and decision-making criteria and processes. Economic Conditions The economic environment of China continues to have distinctive attributes, the most obvious being that it is still framed by a socialist political-ideological system. China’s economy, despite developing very rapidly, is still largely underdeveloped, and this poses certain limitations and sets the priorities to be sought in international


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negotiations. Furthermore, unbalanced development across China means that different priorities and capacities prevail regionally. Both Chinese and foreign negotiators need to attend to these politicalideological conditions. Foreign negotiators need to study the current Five-Year Plan to determine if their proposed project meets the national interests and priorities outlined therein (Frankenstein, 1987; Eiteman, 1990). Implications for negotiations. Chinese negotiators will contextualize a negotiation with respect to national policies and economic plans. The negotiation may need to incorporate wider economic issues and goals and not merely narrow enterprise goals. Outcomes in terms of regional or national interest may be factored in, at least rhetorically. Policy and Legislative Frame China has a long tradition of not relying heavily upon codification of laws. Engagement in international business has forced this to change. Government policy and legislative regulations relating to international business transactions have gradually developed and been elaborated over the past 20 years, mainly to clarify, promote and facilitate international business transactions and prevent illegal deals. However, the implementation of those policies and commercial laws is a major difficulty facing China. Corruption, bribery and ‘back door’ practices are widespread and persistent. This nexus of a burgeoning legal framework and its subversion crucially impinge on negotiations. An understanding of the grey areas of Chinese policies and laws and of the skills required to ‘pull guanxi’ and ‘walk through the back door’ is necessary (Yeung and Tung, 1994; Brahm, 1997). Implications for negotiations. International business negotiations are still framed by a somewhat loose and ambiguous legal system. In the absence of legal certitude, the quality of the relationship and trust established between negotiation parties remains key. The loose legal arena provides opportunities for bypassing formal legal procedures. This has implications for relationship and trust development in the negotiation process and for the scope and form of tactics deployed during negotiations. Negotiation outcomes remain less codified and subject to legal definition; thus, mutual trust and obligation play a more central role in cementing agreements.

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Employment Relations China’s socialist ideology entails particular conceptions of employment relations. Ideally, these should be non-exploitative, democratic and egalitarian. In practice, the ideology has resulted in policies of full employment, control over the labour market, relatively equalitarian wage systems, a highly paternalistic and invasive danwei (work unit) system, and an extensive work-level welfare regime. These policies have led to significant labour market rigidities, overmanning, ineffective motivational strategies and low productivity. The system is in a state of radical transition marked by the appearance of various types of non-state-owned enterprises, the introduction of employment contracts, the erosion of employment guarantees, more freedom of movement for workers, welfare reforms, a decline in the dominance of the danwei, and more flexible reward structures. However, such issues are highly sensitive, and there has been a good deal of circumspection in the implementation of policy edicts in these areas. Where a negotiation involves labour and employment issues, foreign negotiators must tread with great caution. Implications for negotiations. Agreements need to be seen to meet social obligations in addition to more normal business and economic objectives. Labour unions and other workforce stakeholders are a legitimate component in international negotiations in China. Social and employment concerns affect context framing, expectation structuring, and negotiation processes and outcomes. ORGANIZATIONAL-INSTITUTIONAL FRAMEWORK AND MANAGERIAL ROLES FOR NEGOTIATION The impact of the factors discussed so far on negotiation processes, behaviours and outcomes is, in many respects, mediated at the meso and the micro level. Institutional, organizational, and managerial roles and relationships mediate at the meso level and also affect negotiations directly. At the individual level, the antecedent factors are mediated through individual perceptions, enactments, cognitions and schemata. Comparative studies have shown little universality in management practices around the world (Hofstede, 1980; Adler, 1991; Fatehi, 1996). There is certainly a case for the distinctiveness of Chinese management, both on organizational and institutional grounds. A review of


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research on Chinese organizational behaviour and HRM pointed to many differences between China and other cultures (Xie, 1995). Studies of management in China since the reforms also point to many areas of distinctiveness (Laaksonen, 1988; Granick, 1990; Child, 1994). Some differences are attributable to culture, and thus accounts of overseas Chinese management have value (e.g., Redding, 1990; Chen, 1995); other differences are attributable to China’s particular political, ideological and institutional context. The key aspects of institutional, organizational and managerial roles and relationships of relevance to negotiation are discussed below. Table 7.3 gives propositions relating to these issues. Maintaining Relationships The paramount importance of maintaining interpersonal and interorganizational relationships is rooted in the fundamental relationship orientation of the Chinese culture. A number of values and social practices already discussed – such as guanxi, reciprocity and face – derived from that orientation are of significance for negotiation behaviour. An implication is that Chinese business transactions are not abstract, impersonal and specific but particularistic, personalistic and diffuse. Implications for negotiations. Negotiations take place in the context of a complex web of multiple interested parties and constituents. Considerable energy must be expended to build and maintain workable relationships with all of these. This has a major bearing on framing the context for a negotiation, the types of expectations and objectives pursued, and the requirements for developing good relationships and trust between all parties concerned. These in turn affect the nature and quality of the post-negotiation relationship and the agreement reached. Leadership and Decision Making Chinese social systems are characterized by hierarchical but networked leadership patterns. Chinese managers/leaders occupy pivotal positions and have legitimized power to make decisions and allocate resources, but such decisions must reflect and balance network members’ interests and sustain good relations. Unilateral decisions failing to address such interests are problematical, leading to a collective decision-making process that is subtle and opaque.

206 Table 7.3

International Business Negotiation Chinese organizational/institutional framework and managerial roles, and propositions on business negotiations

Factors

Propositions

General proposition

(1) Aspects of the institutional/organizational context and the conception and nature of managerial roles will mediate between the antecedent factors and frame negotiation processes, behaviours and outcomes. (2) Chinese negotiators will expend more energy on building and maintaining relationships with constituencies associated with the negotiation than counterparts. (3) Chinese negotiation teams will be larger and more diverse than counterparts’ teams. (4) Negotiators, in making decisions, will take greater account of others in the network of relationships who are not necessarily present in the negotiation. (5) Chinese negotiation team composition will vary as a function of diffuse leadership and decision making. (6) Chinese negotiators will seek to take account of a wider range of issues concerned with labour, welfare and government social policy than counterparts. (7) Chinese negotiators will seek to balance the interests of multiple constituents, who will also implicitly influence negotiation outcomes in directions that reflect their interests. (8) The power and authority of Chinese negotiators is circumscribed by the interests of multiple constituents. (9) Chinese negotiating teams will be more numerous and diverse than counterparts. (10) Chinese negotiating teams’ composition may change during the course of negotiation. (11) Chinese negotiators will engage in more ‘internal’ negotiating and bargaining with interested parties than counterparts. (12) The responsibility and authority of Chinese negotiators will be diffuse and collective in nature.

Maintaining relationships Leadership and decision making

Societal obligation

Multiple interested parties

Negotiation team

Diffused decision making


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Implications for negotiations. Decision making may be diffuse and extend beyond a Chinese negotiation team. Decisions and processes must reflect multiple interests. Negotiation teams tend to be large, and decision processes take account of network members who are not present. Furthermore, team composition may change, the key decision makers are not apparent to outsiders, positions may need to be renegotiated to ensure network acceptance, and decision processes may take place outside formal negotiation settings. Planning and decision-making processes and behaviours in a negotiation are affected. Societal Obligation The personalism, diffuseness, and paternalism of Chinese organizational systems means that management has obligations beyond sheer operational concerns and has to contend with a highly complex and socially embedded context. Implications for negotiations. Business negotiations need to be concerned not only with typical, substantive business issues, but also with social and welfare issues and with ensuring that outcomes are in line with government concerns for maintaining social stability, improving employment and facilitating social infrastructure development. The outcomes that will be sought through negotiation are affected. Multiple Interested Parties In China, not only focal negotiating enterprises are involved, but also many other bodies, particularly political bodies, state agencies and other parts of the bureaucratic machinery. Although the reform process continues to simplify this network of interdependent bodies and give more enterprise and managerial autonomy, the interorganizational context remains more complex than in the West. Implications for negotiations. Chinese negotiators have to navigate the bureaucratic intricacies (Child, 1994) and consider the various interests involved. The bargaining power of an enterprise cannot be determined independently; it is a function of its relationships and guanxi with other bodies, such as municipal, regional, and state bureaus; Party organs and cadres; trade corporations; banks; other state enterprises; suppliers and other trading bodies; labour and union representatives. Both prenegotiation planning and ongoing, contingent planing are affected.

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Negotiation Team Negotiation team composition can be considered as part of the negotiation framework, particularly in view of multiparty involvement. Teams typically consist of the second in command from each focal enterprise, representatives of various bureaus and interested corporations, technical specialists, interpreters and, increasingly, lawyers (Chen, 1995). The real authority and key decision makers may not actually be part of a team (Tung, 1982; Stewart and Keown, 1989; Wagner, 1990). Implications for negotiations. As noted, Chinese negotiation teams tend to be large, and team composition may change during negotiation, either as a way to get input on an issue from different parties or as a tactical ploy. Negotiation planning and control of the setting are again affected. Diffused Decision Making Decision-making authority may be spread within the bureaucratic maze (Coll, 1989; Chen, 1993). Extensive and convoluted diffusion of responsibility engenders caution and delays in making decisions and reaching agreements. Internal negotiations among the Chinese parties involved may be necessary to secure consensus. This complex internal bargaining system persists in the Reform context, where scarce and valued resources are freed somewhat from central control and have to be managed and bargained over (Wagner, 1990). Any achieved consensus must be approved and/or altered as an international negotiation proceeds, generating further caution and delay (Eiteman, 1990). Implications for negotiations. There will tend to be more internal negotiations between different elements and constituencies on the Chinese side. The responsibility and authority of Chinese negotiators will be diffuse and collective. Negotiation planning is again affected by these considerations, as is the time frame for negotiations.

NEGOTIATION PROCESS AND BEHAVIOUR Negotiation is treated as an endogenous construct in our framework: processes and behaviour patterns are held to be shaped by the


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antecedent conditions, either directly or as mediated through the negotiation framework. There has been extensive coverage of these issues in the Western literature (e.g., Walton and McKersie, 1965; Pruitt, 1981; Raiffa, 1982; Wall, 1985; Thompson, 1990; Shi and Gibson, 1995), but little examination and investigation of them within the Chinese context. As Adler, Brahm and Graham noted, only ‘a small amount of information regarding the negotiating behavior of the Chinese exists’ (1992: 453). Aspects of process and behaviour have been prefigured in our discussion of the antecedent conditions. Here, we briefly articulate some distinctive aspects of Chinese negotiation processes and behaviour patterns. Conceptions of Negotiation The broad parameters of negotiation – an interactive process in which two or more parties with mixed motives attempt mutual movement towards a common agreement (see Weiss, 1996) – are as applicable in the Chinese case as in any other. However, the distinctiveness of the Chinese context in terms of each of the factors discussed above implies that the very conception of negotiation and the basic process involved differ substantially from those in the West (Pye, 1982). Western models of the negotiation process tend to reflect either a bargaining perspective (Walton and McKersie, 1965; Rubin and Brown, 1975; Pruitt, 1981; Raiffa, 1982), or an integrative, problem-solving one (cf. Adler, Brahm and Graham, 1992). In both there is a tendency to focus on outcomes and their determinants rather than on the process itself (Weiss, 1996). They also reflect a Western proclivity for abstract, monocausal reasoning and centre on positions, strategies and proceeding towards an agreement via successive rounds of concession trading. The underlying Western cognitive structure is held to be analytical, linear, logical, orderly and explicit. The Western model does not square with descriptions of Chinese negotiation processes or a cognitive style that is synthetic, intuitive, subjective, situational, contextual, analogous, dependent and implicit. It also fails to resonate with a Chinese contextual/holistic orientation and the preference for non-linear, non-sequential, multicausal, polychronic modes of cognition and action structuring. Chinese negotiators view negotiation as a search for a common goal and the unearthing of the mutual benefit held to be inherent in the situation (Kirkbride, Tang and Westwood, 1991; Chen, 1993). For the Chinese, compromise is linked more to the need to avoid conflict and sustain harmony than to the Western idea

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of trade-offs. As Pye puts it, they ‘see less inherent merit than Americans do in the concept of compromise. Instead, [they] prefer to hold up for praise ideals of mutual interest, of joint endeavors, and of commonality of purpose’ (1982: 77). Context Framing and Expectation Structuring That the Chinese prefer to deal with broad principles that set a contextual frame for a negotiation before tackling substantive issues has been widely noted (Frankenstein, 1987; Ghauri, 1988; Kirkbride, Tang and Westwood, 1991). Doing so will involve securing acceptance from the other side of mutual interests and goals and attempting to contextualize the negotiation historically, socially, morally, and as part of an expected ongoing and extended relationship (Kirkbride, Tang and Westwood, 1991). They tend not to tackle issues piecemeal but rather to address all issues holistically (Lee and Lo, 1988; Wagner, 1990). The Chinese will seek to position the other side as the possessor of things needed by China that they should willingly contribute. This depends upon first establishing the others as ‘friends’: from a Chinese perspective, friends should help and assist. Establishing general principles is partly strategic and partly a genuine response to holistic inclinations. Chinese negotiators will invoke the ‘agreed on’ principles as a negotiation moves on to more concrete issues (Kazuo, 1979; Pye, 1982; Coll, 1989). Chinese negotiators try to get the other side to reveal their positions without giving their own away in return. This follows earlier resistance to dealing with specifics. However, the other side may begin to reveal things in an effort to generate movement. The Chinese will also continue extracting as much information as possible from the other side and be insistent on quite detailed material, especially on technical issues (Ghauri, 1988). Chinese negotiators tend to adopt wide, even extreme, initial positions (Coll, 1989; Stewart and Keown, 1989). Entering a negotiation expecting to explore issues and locate points of mutuality, they anticipate compromise being necessary and thus give themselves room to manoeuvre (Kirkbride, Tang and Westwood, 1991). Negotiation Planning Sun Tzu stresses planning and its significance in The Art of War (Griffeth, 1971; Wee, Lee and Bambang, 1991). Planning is the preparation that any good negotiator, regardless of context, engages in: establish-


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ing contact, gathering information about and assessing the other parties, determining specific needs, forming negotiating teams and initial schedules, working out budgets. The Chinese emphasize assessing the credibility and credentials of counterparts. Included are judgements not only of the other parties’ potential contribution to the specific enterprise, but also of their potential contribution to China’s modernization and political acceptability.The Chinese, sensitive to the institutional and interorganizational context, will begin to secure internal network commitment and cooperation from other organizations and bureaus. They may seek to contact many potential foreign parties and extract as much information as possible without making commitments to enter substantive negotiations. Control of Negotiation Setting The Chinese will try and control the structure of a negotiation. Doing this will include choosing the location, physical arrangements, timing and agenda (Tung, 1982; Frankenstein, 1987; Eiteman, 1990; Chen, 1993, 1995). Noted for manipulation of time and schedules, they resist others’ imposition of schedules and either construct their own, or leave it open and vague. The ‘home court’ advantage will be used to manipulate the time–cost concerns of foreign counterparts. Time pressure (often self-induced by Western inclinations to fix schedules) has been shown to affect negotiation processes, behaviours and outcomes (e.g., Lewicki et al., 1994). It softens demands and lowers achieved benefits (Rubin and Brown, 1975). Chinese negotiators usually have a longer time orientation and use time pressure to force counterparts to make concessions or compromises as their predetermined schedules reach closure (Blackman, 1997). Fostering Trust and Relationship Building In the early phases of a negotiating process, the Chinese primarily assess the other side, making judgements of sincerity and trustworthiness, and build relationships. The early ceremonies, rituals and social activities are neither pure etiquette nor mere displays of hospitality (although they are that too). Once established, a strong relationship that is viewed as unchanging and reliable is a better basis for further dealings than a legal framework or a contract (Chen, 1995). The establishment of trust takes time, and so the early parts of the negotiation may be quite extensive as the Chinese test the sincerity of the other side (Ghauri, 1988; Lee and Lo, 1988). Ideally, these

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opening phases should result in the establishment of a relationship in which the parties can be labelled as ‘friends’. This is partly rhetorical and strategic. Communication As noted earlier, Chinese culture is a high-context communication culture: the meaning of any act of communication is embedded in its context; particularly, in this case, in the relationship structures rather than in the words themselves. The Chinese communication style is implicit, subtle and indirect. Chinese negotiators may not express positions and points of argument as straightforwardly and transparently as Western counterparts. Furthermore, the indirectness is partly pursued to avoid confrontation and to preserve harmony and face. Chinese negotiators are patient and not aggressive in communication, especially in the public domain. They may use third parties and informal communication channels to reveal their true opinions and intentions. Issues may be addressed in language that seems vague to the counterpart. Only as negotiation progresses do specific concerns and issues become gradually clarified and finalized. Concession Trading Concession trading often happens rapidly once a general package is accepted, with quick trading on outstanding issues. As Deverge noted, ‘It is therefore all important that a proper general framework be worked out, leaving the details to the end when they will be easily dealt with in the spirit of mutual concessions and face-giving’ (1986: 35). Chen (1995) construed this tactically, suggesting a manipulation of expectations by dragging out negotiations, leading the other side to feel that progress is not being made, and making them uncomfortable so that they lower their expectations. The sudden signalling of a willingness to reach an agreement by the Chinese engenders a sense of gratitude and a trading of concessions favourable to them (cf. Hendryx, 1986; Kirkbride, Tang and Westwood, 1991; Wagner, 1993). Reciprocation leads Chinese negotiators to expect concessions to be returned. Manipulating Tactics Following Kazuo (1979), we can refer to some of the more general tactics as ‘swaying tactics’. These are not directly related to either the


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substance of the negotiation or to concession extraction: ‘Rather they aim to undermine the position and prestige of the other negotiators and in some cases to influence and modify their outlook’ (Kazuo, 1979: 530). Blaming or shaming tactics may be used, often with historical contextualizing aimed at embarrassing the other party through some reference to a past ‘error’ or transgression on the part of their country or company (Kazuo, 1979; Pye, 1982; Ghauri, 1988; Osland, 1990; Chen, 1995). More generally, the Chinese will identify the weaknesses and vulnerabilities of the other side and exploit them (Kazuo, 1979; Chen, 1993). They may also try to generate sympathy and dependency by referring to China’s state of development or other difficulties. Flattery of the other party is another tactic: praising their development, the status of their company, the quality of their technology and the skills of their personnel (Chen, 1993; Kirkbride, Tang and Westwood, 1991). Kazuo referred to such tactics as ‘rectification’ since they are attempts to rectify the others’ thinking about China and Sino–foreign relations, to get them to appreciate China and properly recognize its position and needs. Adaptation Francis (1991) and Adler and Graham (1989) obtained empirical evidence of adaptation in cross-cultural negotiations. Although these studies did not involve Chinese subjects, we assume that experienced Chinese negotiators, recognizing that differences exist between their own and foreigners’ negotiating behaviour, will make similar, moderate adaptations to the Western approach. The Chinese are flexible and adaptive to changes and new situations and have a natural, culturally informed tendency to be patient and less aggressive in interactions. However, such adaptations can be constrained by politics and ideology. The negotiation may be subject to monitoring and control from government agencies and cadres. However, the mediating effect of adaptation to the counterpart’s styles is not sufficient to erode the impact of a distinctive Chinese managerial orientation on the negotiation process.

NEGOTIATION OUTCOMES The final construct is negotiation outcomes. The pragmatic interest in negotiations is naturally related to outcomes and increasing

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understanding so as to improve them. There is, however, the difficulty of different perceptions of what constitutes an appropriate outcome and this may be attenuated by cross-cultural/national differences. There will, naturally, be specific, substantive outcomes in terms of price levels, delivery dates, technology transfer and so on, governed by the specifics of contract provisions. Here we focus again on differences in outcomes from a cultural and/or societal perspective. Relationships and Agreement The Chinese contextualism and relationship orientation contributes to wariness about codifying agreements and resorting to legal formulations. The quality of the established relationship is the guarantee of the honouring of an agreement. Recourse to legalistic solutions or overreliance on formal written contracts implies that the parties have not been able to establish proper relationships and intimates a lack of trust, and thus loss of face and reputation (Chen, 1993). An agreement is not considered to be set in stone but viewed more as a mutual understanding between negotiating parties who have established a relationship, and as such it is quite permissible and expected that issues be re-examined and modified. The Chinese expect a relationship formed over an important negotiation to have significance and extensionality. The diffuse nature of Chinese relationships means that the relationship cannot be contained within the parameters of one specific deal (Kirkbride, Tang and Westwood, 1991). Economic and Social Goodness Parties judge the relative worth of negotiation outcomes and evaluate them against opening plans and expectations. This is normal; but in the Chinese case, there is the complication of the many constituencies with interests in the outcome of negotiations (various bureaus, other corporations, labour representatives, banks and so on). Negotiation outcomes must be at least minimally acceptable to the various parties, implying a constituency view of negotiation success (Blackman, 1997; Pye, 1982). Of prime importance is not merely whether a negotiation achieves business outcomes acceptable to an enterprise, but whether it delivers outcomes that match political and social goals.


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Satisfaction and Trustworthiness As Phatak and Habib (1996) noted, there are intangible negotiation outcomes as well as tangible ones. For example, a measure of satisfaction has been a feature of negotiation outcomes. An intangible outcome of particular concern to the Chinese is establishing a relationship between negotiating parties that has quality continuance. There is a preference for doing business with known quantities, with ‘old friends’, and each negotiation is potentially the start of a long-lasting relationship. Parties to a successful negotiation become potential elements in a guanxi network, and this has high value. Tentative Agreement and Negotiation Continuance As noted earlier, any formal signed agreement should not be considered either final or inviolable. If negotiation has been successful, in Chinese terms, then a relationship of trust will have been established, and this will guarantee the honouring of the contract. The Chinese view agreements flexibly, and there may be subsequent attempts to alter (negotiate) terms. Even while a negotiation is in full progress, it is not uncommon for the Chinese side to exhume issues the other side thought were resolved. This reflects the contextual/holistic orientation of the Chinese: an issue cannot be fully settled until it has been properly considered in relation to all other issues (Zhang, 1995; Blackman, 1997). Finally, a negotiation agreement is valueless unless it is implemented; thus, measures of commitment to implement the agreement are necessary.

IMPLICATIONS AND CONCLUSION In view of the importance of understanding and improving international business negotiations and the deficiencies in previous models and research, we present a framework for indigenous research on negotiation from the Chinese perspective. Our framework is in deliberate counterpoint to existing research, which is almost exclusively cast in Western, if not US, terms. We believe such an emic approach to be justified given the current imbalance and deficiencies in knowledge about international negotiations. Increased emic understanding has its own merits, but it is also a first step in a search for the truly etic properties of international negotiations.

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The framework details the specific components of an integrated and comprehensive approach to studying negotiations from a withinculture perspective. In particular, it accounts for neglected antecedent factors and the mediating institutional/organizational and managerial context. We sought to specify the relationship between those variables and aspects of negotiation processes, behaviour and outcomes. The detailed discussion and the propositions clearly indicate where research effort needs to be directed in the Chinese context, and they begin to specify the variables and indicators that require operationalization. The model was developed with specific reference to the conditions that prevail in mainland China. This context has its own specificities, but there are broad areas of commonality with other Chinesedominated societies, in particular with regard to the underpinning cultural factors and the common Confucian heritage. Empirical application of this framework in other Chinese societies should bring to the surface subcultural differences between the PRC, Taiwan, Hong Kong and Singapore, and thus aid exploration of cultural variation (Triandis and Albert, 1987) and the relative influences of culture, environment and institutions on business negotiations (Thomas, 1992). Furthermore, although the framework was developed in and for the Chinese context, it may have implications and applications in other indigenous cultural settings. We hold that the broad structures (or higher level of abstraction) of the framework are sufficiently etic to serve as a viable model for elaboration and operationalization in other cultural contexts. Obviously, the specific factors (lower level of abstraction) and their contextualized meanings will be different in other settings. If the structure and relationships represented in the model occur in various cultural contexts, universal (etic) properties may be indicated (Boyacigiller and Adler, 1991). Practically, empirical investigation of the framework can be accomplished through a multifaceted, staged approach. Space curtails a detailed account of an appropriate research design or methodology, but some important issues can be signalled. There is growing awareness of the methodological difficulties attendant upon cross-cultural research, and important contributions on such studies in the Chinese context have helped clarify the issues (Berry, 1990; Boyacigiller and Adler, 1991; Xie, 1995). In operationalizing the constructs, existing measures and instruments may only be deployed where measures have demonstrated functional and conceptual equivalence (Triandis et al., 1972; Berry, 1990). In using any instrument developed outside the emic context, it is critical that content and predictive validity, mea-


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surement equivalence (Mullen, 1995) and construct equivalence (Sekaran, 1983; Berry, 1990; Singh, 1995) be thoroughly investigated and assured. Qualitative studies are necessary in the early phases of the research to explore the meanings, attributes and qualities of the constructs. A sophisticated statistical technique such as multiple-group structural equation modeling (LISREL) is needed to test the stated propositions effectively and explore this complex model fully.

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Part III Chinese Organizational Behaviour


8 Guanxi in the Chinese Context Anne S. Tsui, Jiing-Lih Farh and Katherine R. Xin

With China emerging as a world economy, there is a corresponding interest in guanxi, believed by both foreign managers and local Chinese leaders to be critical for business success in this context. Guanxi is a particular kind of interpersonal relationship or connection that serves as a form of social currency. It provides managers with access to scarce information, resources or influence. This chapter defines the conceptual domain of guanxi, reviews recent research relating various bases of guanxi to employment outcomes, and concludes with specific suggestions for future research. In recent years, much attention has been paid to the importance of relationships for doing business in China. The term guanxi (pronounced kuan-hsi) has appeared in both the popular and academic literature, referring to a special type of relationship in the Chinese context (Jacobs, 1980; Yang, 1994). It is well known that relationships based on guanxi and the use of guanxi are endemic in Chinese business (Lockett, 1988; Alston, 1989; Hall and Xu, 1990; King, 1991; Yang, 1994); therefore, a knowledge of guanxi is critical to understanding workplace social relations and has performance implications for both indigenous Chinese firms and MNCs operating in the Chinese context (Tsui, 1997). Our objectives for this chapter are (1) to clarify the conceptual domain of guanxi; (2) review the research findings about the effect of guanxi bases on employment relationships; and (3) suggest future directions for guanxi research.

THE CONCEPTUAL DOMAIN OF GUANXI The word guanxi in the Chinese language, and in the popular business magazines, is quite loose in its meaning. Tsui and Farh (1997) found a number of definitions in the literature. The word can refer to: (1) a relationship between people who share a group status; (2) two 225

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(or more) people’s relationship to a common third party; (3) a connection between people involving frequent contact; (4) a connection between people involving little direct interaction; or (5) friendship without a common background. This list suggests that guanxi can refer to the basis for a relationship (for instance, common background) as well as to characteristics of the relationship itself (for instance, communication and friendship). In some cases, the word is also used to refer to the quality of the relationship between two or more individuals. Yang (1994) stated that guanxi refers to relationships between people and can be applied to husband–wife, kinship and friendship relations. It is a dyadic relationship that is based implicitly (rather than explicitly) on ‘mutual interest and benefit’. Xin and Pearce (1996) simply referred to guanxi as managers’ interpersonal connections. These multiple meanings do not facilitate understanding or study. There is, however, a common thread among most of the definitions: that is, they refer to a certain type of interpersonal relationship, one that is personal and built on particularistic criteria. Tsui and Farh (1997), in an attempt to improve conceptual clarity, adopted the definition by Jacobs (1980). They defined guanxi as the existence of direct particularistic ties between two or more individuals, ruling out connection through a third party. An example of a direct particularistic tie is that between two individuals who were classmates at the same college. Underlying a particularistic tie is the assumption that the two individuals share some common experience or heritage. Tsui and Farh argued that this definition had the advantage of clarity and furthermore could facilitate systematic research. This narrow definition, unfortunately, also loses the richness with which most managers and scholars have come to endow the term. King thought either ‘particularistic ties’ or ‘personal network’ carried the meaning of guanxi but that ‘neither fully grasps the complicated and rich meaning of the word’ (1991: 68). However, simply to define guanxi as relationship makes it indistinguishable from other terms such as friendship or relationship between a supervisor and subordinate. Therefore, guanxi should refer to a special relationship due to the existence of particularistic ties. This means that the nature of the relationship should be distinguished from its bases. A relationship that cannot be traced to the sharing of particularistic ties would not fall into the domain of guanxi. Even though in everyday use the term may refer to a relationship itself, for conceptual clarity it is important to focus on the relationship that is contingent upon the

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existence of some basis of guanxi. Tsui and Farh (1997) introduced a framework of guanxi that included bases, mediating mechanisms and outcomes. Their framework is based on a definition of guanxi as existing only when there are direct particularistic ties between two individuals. To clarify the conceptual domain of and the meaning of guanxi, we propose a modification of the Tsui and Farh framework. This revised framework is shown in Figure 8.1. It includes bases for guanxi, the different modes of relationship associated with different bases, psychological bonds as proximal outcomes of the different modes, and career and business success as distal outcomes. Our revised framework could be used to clarify and interpret current writings on guanxi. Each component of the model is described below. Guanxi Bases of Relationship Guanxi is a relational concept and not an attribute of the individual. Guanxi bases involve some sort of family or achieved relationship between the two parties and they usually involve some extent of inter-

䉴

Figure 8.1

䉴

Distal Outcomes

Felt Obligation Interpersonal Trust Interpersonal Liking Identification

䉴

Career and 䉴

Loyalty

Business Success

-

Other Guanxi Bases Shou-jen

Proximal Outcomes

䉴

------䉴 ----------------------------- -------

No Guanxi Bases Sheng-jen

䉴 ---- --------------- ----------------------------------䉴䉴

Family Ties Chia-jen

Mode of Relationship

䉴

Bases of Guanxi

Favouritism

Friendship

A conceptual framework of guanxi and work outcomes in Chinese organizations Source: Adapted from Tsui and Farh (1997).

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personal interaction. Examples of guanxi bases include individuals’ having worked together previously (either as coworkers or as supervisor and subordinate), having studied together (former classmates), having been neighbours, having been a teacher or student to each other, or being members of the same family (immediate or extended). Native origin is also a basis of guanxi because coming from the same home town implies having the same ancestral roots. Some of these guanxi bases, such as natal origin, do not necessarily imply that two individuals sharing this background are acquainted. Two individuals could discover a common background by accident (for instance, through introduction by a third party). Regardless of how they discover the common tie, they still share a direct particularistic tie. However, when two people are connected because both are connected to a third party by particularistic ties, they do not share a basis for guanxi. For example, if Mr Chang is a relative of Mr Chen, and Mrs Chang and Mr Hui were high-school classmates, Mr Chen and Mr Hui are not in a guanxi relationship because there is no direct relationship between them. In this case, Mr Chen and Mr Hui have an indirect tie. In the present discussion, we define guanxi as requiring direct ties. However, indirect ties do play an important role in an individual’s social network. The role of indirect ties in an individual’s guanxi network will be discussed in the section on future research directions. Figure 8.1 shows that two categories of guanxi bases exist. The first is family guanxi ties, and the second includes all other direct particularistic ties. Each type of guanxi base leads to a different mode of relationship, which we discuss next. Guanxi Modes of Relationships To understand the modes of relationship and how they arise out of guanxi, one must first understand the cultural roots of guanxi. These roots reside in the Confucian legacy. According to Confucianism, an individual is fundamentally a social or relational being. Social order and stability depend on a properly differentiated role relationship between particular individuals (King, 1991). Confucius defined five cardinal (dyadic) role relations (called wu lun): emperor–subject, father–son, husband–wife, elder–younger brothers and friend–friend. The term wu lun in the Confucian ideology is


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analogous to the contemporary concept of guanxi. Yang described wu lun as follows: as a highly formalistic cultural system . . . [requiring] each actor to perform his or her role in such a way that he or she should precisely say what he or she was supposed to say, and not to say what he or she was not supposed to say. In order to be a good role performer, the actor usually had to hide his or her free will . . . This is why Chinese have been said to be situation-centered or situationally determined. (Yang, 1993: 29–30) Under the heavy influence of Confucianism, the Chinese often view themselves as interdependent with the surrounding social context, and it is the ‘self in relation to other’ that becomes the focal individual experience. This view of an interdependent self is in sharp contrast to the Western view of an independent self. In the West, each human being is seen as an independent, self-contained, autonomous entity who (1) comprises a unique configuration of internal attributes (traits, abilities, motives, and values) and (2) behaves primarily as a consequence of these internal attributes (Markus and Kitayama, 1991). In line with the emphasis on differentiated relationships, attention to others in China is highly selective, and there is a strong tendency to divide people into categories and treat them accordingly. The bases of guanxi determine how others are categorized. Yang (1993) described the three major categories of interpersonal relationships in China: chia-jen (family members), shou-jen (familiar persons such as relatives outside the family, neighbours or people in the same village, friends, colleagues or classmates), and sheng-jen (mere acquaintances or strangers).These three categories have completely different social and psychological meanings to the parties involved and are governed by different sets of interpersonal rules. The chia-jen (family) relationship is characterized by permanent, stable, expressive connections in which the welfare of the other is part of one’s duty. The general rule of exchange is that one does his or her best to attend to the other’s needs with little or no expectation of return in the future. Such unconditional protection and loyalty is focused on the family, surrounded by circles of decreasingly potent identities of the lineage group (Redding, 1990). It has been well observed that one of the most distinctive features of Chinese societies is their family orientation (Bond and Hwang, 1986; Yang, 1993). In

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China (as in some other cultures), loyalty to (and the related favouritism towards) family is an obligation, and it is rendered largely without an obligation of reciprocity. The sheng-jen (stranger or mere acquaintance) category includes all those with whom one has no prior or current interactions. They could include members of one’s local community, fellow employees in a large company, or customers of a business with whom one rarely interacts and with whom no other connection is shared. Interactions with sheng-jen, if any, are superficial and temporary and are dominated by utilitarian concerns, focusing on personal gains and losses. The defining characteristic of this relationship is instrumentality without affection, unlike the relationship with chia-jen, which involves primarily affection, or that with shou-jen, which has both an instrumental and an affective component. The shou-jen is neither a chia-jen nor a sheng-jen, but is someone with whom one has a friendship that may range from superficial to extremely intimate. A coworker or subordinate falls into this category. The relationship is a mixture of that with chia-jen and sheng-jen, and takes both expressive and utilitarian forms. For example, favouritism is often followed by an expectation of reciprocity (Hwang, 1987; King, 1989). Depending on the bases of guanxi, an interpersonal relationship could fall into any of these three categories. In the traditional Chinese setting, guanxi is relevant only for the chia-jen and shou-jen categories. However, recent research using Chinese in Taiwan (Li, 1993; Li and Hsu, 1995) has shown that some feelings of connection can occur between strangers when they share common attributes, such as gender, occupation or religion. Because both individuals identify with the common attribute, they feel connected to each other. This is the identification process found in US research (Tsui, Egan and O’Reilly, 1992). Therefore, through the identification process, the sheng-jen category can be further differentiated into two groups: sheng-jen with common identity and sheng-jen without common identity. Strangers are treated differently depending on whether there is any commonality in some attributes. People in the sheng-jen category will be treated with affection and viewed positively when they share a common identity of importance. Individuals in the sheng-jen category without common identity, on the other hand, are treated with discretion and caution. Table 8.1 summarizes the dominant principles of interactions and ways of social treatment for each of the four categories of relation-

Anne S. Tsui, Jiing-Lih Farh and Katherine R. Xin Table 8.1

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Guanxi bases and interpersonal relationships in the Chinese context

Categories of relationship

Dominant principles of interaction

Ways of social treatment

Bases for guanxi

Family (chia-jen)

Responsibility and obligation

Close kin

Familiar person (shou-jen)

Generosity and reciprocity

Unconditional protection and loyalty Trust, social accommodation and favouritism

Strangers with common identity (sheng-jen)

Utilitarian exchange with depersonalized affection

Favouritism

Strangers without common identity (sheng-jen)

Utilitarian exchange without affection

Discretion and caution

Distant kin, former classmate, former teacher–student, former supervisor– subordinate, former coworker or former neighbour No particularistic ties but possible shared demographic attributes (e.g., age, sex, education, alma mater) None

Sources: Adapted from Tsui and Farh (1997).

ship as well as the guanxi bases that might be relevant for each category. As shown, family ties are the primary and only bases for individuals in the chia-jen category. For relationships with the shou-jen category, a variety of bases are involved. No particularistic ties exist for individuals in the sheng-jen category, though some strangers could share some demographic attributes. The three modes of interpersonal relationship depicted in Figure 8.1 can vary in intensity, depending on the number of common ties between individuals and the extent of affect that has developed between them. For example, a person can refer to the guanxi with one old classmate as being very good but to that with another old classmate as being not so good. Good guanxi in this case refers to the strength of the friendship that exists between them. Another person could refer to the guanxi with one family member as being very inti-

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mate or strong but to that with another relative as being very distant. Good guanxi in this case refers to the extent of role obligation one feels towards the family member in question. As noted above, people can also identify with each other when they have no particularistic tie but do share a valued common attribute. These three modes of relationship – felt obligation friendship and identification – serve as mediating processes that link guanxi bases to interpersonal (proximal) and work (distal) outcomes in the Chinese context. As shown in Figure 8.1 and further elaborated in Table 8.1, felt obligation primarily arises out of guanxi with family members (solid line). Friendship can also arise out of guanxi with family ties (dotted line). Social identification, however, can arise out of all guanxi bases (research confirms that family is a major source of identification for Chinese people), but is especially relevant for demographic commonality with strangers or sheng-jen (solid line). Therefore, identification applies to all three categories of relationship but is the primary mode of relationship with individuals in the sheng-jen category (solid line). In addition to identification, role obligation mediates guanxi based on family ties and outcomes. Because of role obligation, an individual will act more favourably towards a family member than a non-family member. An uncle, for example, will probably choose his nephew for a summer job in his company over another young man who is equally or more qualified. Beyond identification, friendship mediates guanxi with shou-jen and outcomes. Further, shou-jen with intimate relationships (that is, intimate friends) may be adopted as ‘family’ members, and favourable treatment of them could become a felt obligation without anticipation of reciprocity. Proximal and Distal Outcomes of Guanxi Bases and Modes of Relationships Proximal outcomes that may be affected by guanxi through modes of relationship include increased interpersonal trust, interpersonal liking, loyalty and favouritism. These interpersonal outcomes involve preferential actions towards each other among the related people. These preferential actions can be beneficial to an individual’s career or business success. Career outcomes may include attaining a certain job, being assigned to a preferred position, receiving a favourable evaluation from a supervisor, and having a high-quality working relationship with a supervisor or others. Business outcomes may be the attainment of useful information or valued resources, whether


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material, financial or human. They could also include the financial success of a firm. The ultimate goal of discovering, developing and maintaining guanxi in the employment setting is instrumental.

RESEARCH EVIDENCE ON GUANXI Systematic research on the influence of guanxi in the Chinese business and employment setting is just beginning. Some researchers have defined guanxi as the quality of relationship, without reference to particularistic ties. For example, Xin and Pearce (1996) asked managers to name eight to ten individuals who were useful in their businesses. They then asked how important each connection was to the manager. They found connections were more important in private companies than in collectives or SOEs. This study, like others, did not measure the base of ties between the managers and their connections; thus we do not know whether connections based on particularistic ties were more or less important than connections without such ties. Leung and Yeung (1995) found that guanxi, defined in terms of the quality of relationship, contributed to the success of business negotiations with Chinese business people. Xin (1996), using interview data from China, found a number of guanxi variables to be related to the performance of entrepreneurial firms in China. The variables included the nature of the guanxi connections (social versus work-related, without specific reference to the type of particularistic tie), the mechanisms used to maintain these connections (for instance, renqing, or giving gifts), and trust in the connection. As this short review shows, many different definitions of guanxi have been used in extant research. In the next section we review and summarize the findings of those studies that define guanxi as a particularistic tie. Effects of Guanxi Bases on Interpersonal Trust Using a sample of 560 supervisor–subordinate dyads in an insurance company in Taiwan, Farh, Tsui, Xin and Cheng (1998) analysed the effect of guanxi base and demographic similarity on five outcomes. These were trust in the supervisor by the subordinate; supervisor’s rating of the subordinate’s performance; subordinate’s actual sales performance; subordinate’s organizational commitment; and his or her intention to quit the company. In this sample, most supervisors and subordinates did not have direct particularistic ties to each other.

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Only 3.4 per cent of the dyads were former classmates; 3.2 per cent were relatives; 2.9 per cent had the same last name; 3.4 per cent had the same natal origin; 2.1 per cent were former colleagues; and 2.5 per cent were former neighbours. Significant effects by guanxi bases were found for only one outcome: subordinate’s trust in the supervisor. Trust was higher when the subordinate was a relative of the supervisor and when they were former neighbours. The researchers obtained these results even after controlling for the effects of demographic similarity as well as the simple demographics of both supervisor and subordinate. There were also some surprising effects on demographic similarity. Male sales agents expressed more trust in their female supervisors than male agents in their male supervisors. Subordinates trusted their supervisors more when the supervisors had more education than the subordinates compared with when the supervisors had less education than the subordinates. Though these findings do not support the identification effect, they suggest the importance of demographic factors in the employment relationship. Farh et al. (1998) also reported results from studying a second sample of 32 business executives and their relationships with eight to ten persons, yielding a total of 205 horizontal or lateral dyads. These executives were interviewed using a structured interview guide. Each executive described the primary guanxi base (‘How did you first establish a tie with the connection?’) with each person, their trust in that person, and their perception of the relationship’s importance for their business success. The executives mentioned only three particularistic ties: former classmate (10.7%), relative (4.4%), and same natal origin (2.4%). Three demographic similarity variables were also included: in 71 per cent of the horizontal dyads, the members were of the same gender; in 43 per cent they had the same educational level; and in 28 per cent, ages were similar. Significant results were obtained on all three guanxi bases for trust in the connection as expressed by the executive for all three particularistic ties. The three guanxi variables accounted for 43 per cent of the unique variance in business executives’ trust in their connections. Being related, having been classmates in the past, and being of the same natal origin were important bases for the trust that these business executives expressed in their connections. These results are consistent with the model in Figure 8.1. These connections were trusted because they fell into the chia-jen and shou-jen categories. None of the demographic similarity variables was significant.


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Guanxi Bases, Supervisor–Subordinate Relationships and Work Outcomes Another study on guanxi bases was conducted in Taiwan involving a sample of 175 managers and their supervisors (Xin, Farh, Cheng and Tsui, 1998). Among the subordinates, 44 per cent were themselves managers, with a majority of the remainder holding professional positions. The companies represented by the sample were diverse and included car assembly plants, oil refineries, and electronics, computer, textiles, food and chemicals companies. In this sample, 73 per cent of the dyads were comprised of same-gender members, 19 per cent had identical company tenure, and 18 per cent had a similar educational level. In terms of guanxi bases, 43 per cent reported the same natal origin or dialect, 9.6 per cent were former colleagues, 1.7 per cent were kin, 1.1 per cent had the same last name, and only 0.6 per cent were former neighbours. Outcomes investigated in this study included the quality of the relationship between a supervisor and a subordinate as reported by both members of the dyad, the subordinate’s organizational commitment, and the subordinate’s performance as rated by the supervisor. Significant results were found for two guanxi bases and one demographic variable in this sample. Guanxi in terms of having been former colleagues and speaking the same dialect (suggesting the same natal origin) were positively associated with a high-quality supervisor–subordinate relationship as perceived by the subordinate and the subordinate’s commitment to the organization. Having been former colleagues was positively associated with the supervisor’s perception of a high-quality relationship with the subordinate. Guanxi based on former colleagueship was associated with the supervisor’s favourable evaluation of the subordinate’s performance. This study confirmed the importance of former colleagueship and same natal origin for favourable work outcomes in vertical dyads. The lack of significance of the other particularistic ties could have been due to their infrequency in these vertical dyads. The study also found tenure similarity to be important. When members of a vertical dyad had similar lengths of company tenure, they tended to give each other a higher level of mutual support, a key characteristic of a high-quality relationship in a vertical dyad. This study (Xin et al., 1998) also included a sample of 168 vertical dyads in 42 state-owned plants in two cities in mainland China. At each plant, two senior managers were interviewed. Two of their subordinates were also interviewed. The 42 plants were in a variety of

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industries, including car assembly, car parts, electronics, computer software, construction, textiles and paper. In this sample, 38 per cent of the dyads had members who were similar in company tenure; 61 per cent had members identical in gender; and 42.6 per cent had members similar in educational level. Guanxi ties were again not too prevalent, with 1.8 per cent of the dyads reporting they were kin, 4.3 per cent that they were former neighbours, 5.6 per cent that they were former classmates, 8 per cent that they had the same natal origin, and 22.1 per cent that they had the same party affiliation (i.e., both belonged to the Communist Party). Outcomes included the quality of the relationship in the dyad, subordinate’s organizational commitment, and supervisor’s assessment of the subordinate’s performance. Results showed that two guanxi bases were significant for all four outcomes and two demographic similarity variables were significant for one of the four outcomes. Sharing a natal origin and having the same party affiliation were positively associated with a high-quality relationship in a dyad, as perceived by both members, and also with commitment and performance. Similarity in tenure or in gender was positively associated with a highquality relationship as perceived by the subordinate only. This study further confirmed the importance of guanxi bases in the Chinese context, but the effect of demographic similarity tended to be weak and inconsistent. Though they did not study employment relationships, Bian and Ang (1997) established the importance of both direct and indirect guanxi ties in job mobility. The authors found that in both China and Singapore, people found jobs through direct ties more frequently than through indirect ties. However, when job changers and their ultimate helpers were unconnected, they tended to be linked through intermediaries to whom both were strongly or moderately (rather than weakly) connected. Again, in this study, specific types of particularistic ties were not measured. Summary Table 8.2 summarizes the research results based on the four samples from the two studies that focused on direct and particularistic ties. As shown, six guanxi bases were found to be instrumental in affecting various work outcomes. They are being related to each other; belonging to the same political party; being former colleagues; being former classmates; being former neighbours; and sharing a natal origin

Anne S. Tsui, Jiing-Lih Farh and Katherine R. Xin Table 8.2

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Guanxi, demographic similarities and work outcomes in China

Sample

Independent variables

Outcomes

560 insurance agents and their supervisors (Taiwan)

Relatives Former neighbours Gender difference Education difference

Trust in the supervisor

205 executives and their connections (mainland China)

Related to each other Same natal origin Former classmate

Trust in the connection

175 managers and their subordinates (Taiwan)

Same natal origin Former colleagues Tenure similarity

High-quality relationship between supervisor and subordinate Subordinate commitment Subordinate performance

168 senior managers and their subordinates (mainland China)

Former classmate Gender similarity Tenure similarity

High-quality relationship with supervisor

Same natal origin Same party affiliation

High-quality relationship between subordinate and supervisor Subordinate commitment Subordinate performance

(either speaking the same dialect or having ancestors from the same province or township). The outcomes affected by these guanxi bases included trust in a supervisor or business associate (usually outside the company), a positive and supportive relationship between a supervisor and subordinate, subordinate commitment, and favourable assessment of a subordinate’s performance by a supervisor. There were some demographic similarity effects, suggesting that social identification based on demographic attributes also operates in the Chinese setting, though its effects are much weaker than those of guanxi bases. The results also suggest that guanxi is more pervasive and important in lateral than in vertical dyads. Employment regulations sometimes prevent the hiring of individuals on the basis of guanxi, in both Taiwan and China. However, managers have discretion in building and using guanxi connections, especially to those not employed in the

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same company. Therefore, the frequency of particularistic ties is lower in supervisor–subordinate dyads than in lateral dyads. Further, it appears that guanxi bases have a stronger effect in executive vertical dyads than in lower-level supervisor–subordinate dyads. Perhaps the guanxi bases provide access to resources and information that are more important for executives than for rank-and-file employees. Clearly these are preliminary studies, and their findings are tentative. These findings, though preliminary, underscore the importance of guanxi in the Chinese work context. Much more research is needed to understand how guanxi bases and the three modes of relationship can influence organizational outcomes for both local and foreign companies operating in China. Studies to determine how the three modes of relationship mediate the link between guanxi bases and outcomes (proximal or distal) should also be performed. Further, existing studies, such as those reported in this chapter, have focused on dyads. However, as Chapter 9 will point out, understanding guanxi is critical for understanding the networks of relationships that contribute to the success of overseas Chinese entrepreneurs. Thus, conceptual and empirical work should be expanded to go beyond dyads to include networks. In addition, guanxi relationships based on indirect ties should also be explored. In the next section we elaborate on each of these directions for future research.

FUTURE RESEARCH DIRECTIONS Modes of Relationship Discriminating between the three modes of relationship is an interesting and promising departure from the current research focus on the quality of relationship, which is indistinguishable from outcomes such as loyalty, favouritism, trust or liking (see Figure 8.1). A focus on the three modes would require measuring the extent of felt obligation, friendship and identification. Figure 8.1 provides the basis for a number of testable hypotheses: for example, research could test the hypothesis that felt obligation will be associated with family guanxi bases but not with other guanxi bases such as being classmates or former colleagues or being demographically similar. Research could also affirm a link between friendship and non-family guanxi ties, the absence of a link between friendship and demographic similarity, or


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a weaker link between friendship and family ties. Further research is needed to show that a particular mode of relationship only mediates the link between certain guanxi bases and outcomes. Such research would be equivalent to answering the call to open up the ‘black box’ in demography research (Lawrence, 1997). The Changing Meaning of Guanxi in China The guanxi bases we have reviewed in this chapter are rooted in the traditional rural and agrarian Chinese society. Some of these traditional guanxi bases may now be irrelevant in modern life, others may gain strength, and still other non-traditional guanxi bases may emerge to meet the social needs of contemporary China. For example, under the one-child policy, future generations of Chinese will have few relatives, so the role of family and relative ties is likely to wane in scope or even in strength in the future. Meantime, as work and education take centre-stage in modern life, guanxi through work or school connections may grow in importance. In terms of non-traditional forms of guanxi, we have seen the importance of party membership as an influential tie in state-owned companies in China (Xin et al., 1998). Redding (1990) noted the powerful bonding due to ethnicity in Chinese communities overseas where they are a minority, an important observation also discussed in Chapter 9 below. Another issue related to the changing meaning of guanxi is the changing values of many Chinese people. Perhaps traditional guanxi bases are meaningful only for those who identify with traditional Chinese values. As new bases of guanxi emerge, we also need to understand the psychological processes that link them to outcomes. Guanxi Networks The importance of networks for individual and firm success has been well argued (e.g., Granovetter, 1973, 1982, 1985; Burt, 1982, 1983, 1992). Networks with characteristics such as weak ties (Granovetter, 1973) and structural holes (Burt, 1992) have been shown to provide individuals with more resources and advantages than networks that are dense or redundant. King (1991) considered guanxi building to be the Chinese version of network building, which he considered a universal phenomenon. In the Chinese context, networks may consist of guanxi ties to a greater extent than they do elsewhere because of the social significance attached to particularistic ties in Chinese culture.

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Future research could investigate the characteristics of managers’ networks in terms of proportions with particularistic ties and the extent of density, redundancy and weak versus strong ties. It would also be interesting to explore whether networks with certain guanxi ties are more useful for career and business success. Presumably, connections with guanxi ties should be more intimate than connections without any particularistic ties. The role of these intimate guanxi ties, relative to structural network attributes such as structural holes and density, could be ascertained as well. Role of Indirect Ties A guanxi network probably includes both direct and indirect ties. According to network theory (Granovetter, 1973; Burt, 1992), a network with a combination of direct and indirect ties should be more useful than a network with predominantly direct ties. Presumably, direct ties are most likely to be redundant in the information they carry, but indirect ties may provide access to new information or resources. Bian (1996) reported that job seekers, while able to find jobs from direct ties, were more likely to obtain better jobs through indirect ties. This observation is consistent with Granovetter’s (1973) view that weak ties provide non-redundant information about jobs. Lin (1982, 1990) further emphasized other resources that are embedded in weak ties: power, wealth and prestige. However, it clearly is not a matter of either/or; it is reasonable to argue that both direct and indirect ties are potentially instrumental for furthering an individual’s or a business’s goals. As Bian (1996) described it, indirect ties may be useful in spreading information, while direct ties may be ‘advantageous in accessing influence that is more costly and more difficult to obtain’. Although he found indirect ties led to better jobs, he also found that jobs were channelled through direct ties more frequently than through indirect ties. Further, job seekers and their indirect ties were indirectly connected through intermediaries to whom both were strongly connected. Of course, most foreign managers operating in China have few connections with particularistic ties. Cultivation of indirect ties may be the only recourse. Future research could compare the extent of direct and indirect ties in the networks of local and foreign managers and in the networks of managers in local and foreign firms. Research could also compare the relative usefulness of direct and indirect


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ties for managers in different industries with different ownership structures. Outcomes at the Firm Level By focusing on the guanxi networks of top managers, we can potentially relate guanxi to outcomes at the firm level. Do firms do better when their top managers have rich guanxi ties? King (1991) proposed that guanxi is part of the ‘stock knowledge’ of Chinese adults in their management of their everyday life. By extension, guanxi could be a resource that business executives can use to advance the interests of their firms. Executives with extensive guanxi networks should be in a better position to garner resources, gain access to information and people, and protect against the unreasonable demands from bureaucrats that may occur in situations with less developed institutional structures. Xin and Pearce (1996) proposed that guanxi is a substitute for formal institutional support. They reasoned that structural support is more available to state-owned and collectively-owned firms at the township level than to private or foreign firms, so a guanxi network takes on more importance for private-sector firms because of the lack of a reliable rule of law. Indeed, the private-sector managers they interviewed attributed a higher level of importance to business connections than did managers of either of the other two types of firms. Unfortunately, the authors did not measure the actual composition or characteristics of the networks, or the actual performance of the firms. Yeung and Tung (1996) reported a correlation between connections and a firm’s long-term financial performance. Luo (1997) used a proxy for guanxi (spending by marketing) and argued that guanxi-based business variables were related to a venture’s accounting and market performance. Xin (1996) found social connections to be associated with the performance of entrepreneurial firms in China. These studies, however, did not measure actual guanxi bases, so research is needed to relate specific guanxi bases or features of a guanxi network to meaningful outcomes (performance or others) at the firm level. Summary As has been shown, there are many interesting and promising avenues for future research on this topic. Systematic scientific study of guanxi in the Chinese context is in its infancy. The prevalence of guanxi and

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its usefulness in advancing individual and firm interests has yet to be established through further conceptual and empirical work.

CONCLUSION In the beginning of this chapter, we stated three objectives. We aimed to clarify the conceptual domain of guanxi in China and why it is important. In addition, through both a conceptual framework and a review of current research, we attempted to show how guanxi may influence business relationships and career and business success in China. We suggested many interesting directions for future research. Although the cultural root of guanxi dates back to Confucian teachings which are over 2500 years old, scientific study has barely scratched the surface of this complex phenomenon.

References Alston, J. P. 1989. ‘Wa, guanxi and inhwa: Managerial principles in Japan, China and Korea’, Business Horizons, 32(2): 26–31. Bian, Y. 1996. ‘Getting a job through a web of guanxi’, in B. Wellman (ed.), Networks in the Global Village: 255–77. Boulder, CO: Westview. Bian, Y. and Ang, S. 1997. ‘Guanxi networks and job mobility in China and Singapore’, Social Forces, 75: 981–1005. Bond, M. H. and Hwang, K. K. 1986. ‘The social psychology of Chinese people’, in M. H. Bond (ed.), The Psychology of Chinese People: 211–66. New York: Oxford University Press. Burt, R. S. 1982. ‘Toward a structural theory of interlocking directorates’, Social Networks, 1: 415–35. Burt, R. S. 1983. Corporate Profits and Cooptation: Networks of Market Constraints and Directorate Ties in the American Economy. New York: Academic. Burt, R. S. 1992. ‘The social structure of competition’, in N. Nohria and R. G. Eccles (eds), Networks and Organizational Structure, Form and Action: 57–91. Boston, MA: Harvard Business School Press. Farh, J. L., Tsui, A. S., Xin, K. R. and Cheng, B. S. 1998. ‘The influence of relational demography and guanxi: The Chinese case’, Organization Science, 9(4): 471–88. Granovetter, M. S. 1973. ‘The strength of weak ties’, American Journal of Sociology, 78: 1360–80. Granovetter, M. S. 1982. ‘The strength of weak ties: A network theory revisited’, in Peter V. Marsden and N. Lin (eds), Social Structure and Network Analysis: 105–30. Beverly Hills, CA: Sage.


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Granovetter, M. S. 1985. ‘Economic action and social structure: A theory of embeddedness’, American Journal of Sociology, 91: 481–510. Hall, R. H. and Xu, W. 1990. ‘Run silent, run deep – Cultural influences on organizations in the Far East’, Organisation Studies, 11: 569–76. Hwang, K. K. 1987. ‘Face and favor: The Chinese power game’, American Journal of Sociology, 92: 944–74. Jacobs, J. B. 1980. ‘The concept of guanxi and local politics in a rural Chinese cultural setting’, in S. L. Greenblatt, R. W. Wilson and A. A. Wilson (eds), Social Interaction in Chinese Society: 209–36. New York: Praeger. King, A. Y. 1989. ‘An analysis of renqing in interpersonal relations’, in K. S. Yang (ed.), The Psychology of the Chinese: 75–104. Taipei, ROC: Kui-Kuan Books (in Chinese). King, A. Y. 1991. ‘Kuan-hsi and network building: A sociological interpretation’, Daedalus, 120: 63–84. Lawrence, B. S. 1997. ‘The black box of organizational demography’, Organization Science, 8: 1–22. Leung, T. and Yeung, L. L. 1995. ‘Negotiation in the People’s Republic of China: Results of a survey of small businesses in Hong Kong’, Journal of Small Business Management, 33(1): 70–7. Li, M. C. 1993. ‘Analysis of Chinese self-other relations: A fairness judgement perspective’, Indigenous Psychological Research in Chinese Societies, 1: 267–300 (in Chinese). Li, M. C. and Hsu, C. S. 1995. ‘In-group favouritism and development of communal identity: The case of college students in Taiwan’, Indigenous Psychological Research in Chinese Societies, 4: 150–82 (in Chinese). Lin, N. 1982. ‘Social resources and instrumental action’, in P. Marsden and N. Lin (eds), Social Structure and Network Analysis: 131–47. Beverly Hills, CA: Sage. Lin, N. 1990. ‘Social resources and social mobility: A structural theory of status attainment’, in R. Breiger (ed.), Social Mobility and Social Structure: 247–71. New York: Cambridge University Press. Lockett, M. 1988. ‘Culture and problems in Chinese management’, Organisation Studies, 9: 475–96. Luo, Y. 1997. ‘Guanxi and performance of foreign-invested enterprises in China: An empirical inquiry’, Management International Review, 37(1): 51–71. Markus, H. R. and Kitayama, S. 1991. ‘Culture and the self: Implications for cognition, emotion, and motivation’, Psychological Review, 98: 224–53. Redding, S. G. 1990. The Spirit of Chinese Capitalism. Berlin: de Gruyter. Tsui, A. S. 1997. ‘The human resource challenge in China: The importance of guanxi’, in D. Ulrich, M. R. Losey and G. Lake (eds), Tomorrow’s HR management: 48 Thought Leaders Call for Change: 337–44. New York: Wiley. Tsui, A. S., Egan, T. D. and O’Reilly, C. A., III. 1992. ‘Being different: Relational demography and organizational attachment’, Administrative Science Quarterly, 37: 549–79. Tsui, A. S. and Farh, J. L. 1997. ‘Where guanxi matters: Relational demography and guanxi in the Chinese context’, Work and Occupations, 24: 56–79. Xin, K. R. 1996. ‘Guanxi and entrepreneurial success: Observations from

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Chinese small businesses’, paper presented at the Academy of Management annual conference. Boston. Xin, K. R., Farh, J. L., Cheng, B. S. and Tsui, A. S. 1998. ‘Guanxi in vertical dyads: Evidence from Taiwan and the PRC’, paper presented at the research conference Management and Organizations in the Chinese Context, January, HKUST. Xin, K. R. and Pearce, J. L. 1996. ‘Guanxi: Connections as substitutes for formal institutional support’, Academy of Management Journal, 39: 1641–58. Yang, K. S. 1993. ‘Chinese social orientation: An integrative analysis’, in L. Y. Cheng, F. M. C. Cheung and C. N. Chen (eds), Psychotherapy for the Chinese: Selected papers from the First International Conference: 19–56. Hong Kong: The Chinese University of Hong Kong. Yang, M. M. H. 1994. Gifts, Favors, and Banquets: The Art of Social Relationships in China. Ithaca, NY: Cornell University Press. Yeung, I. U. and Tung, R. L. 1996. ‘Achieving business success in Confucian societies: The importance of guanxi (connection)’, Organizational Dynamics, 25(2): 54–65.

9 Guanxi and the Dynamics of Overseas Chinese Entrepreneurial Behaviour in Southeast Asia John E. Butler,1 Brad Brown and Wai Chamornmarn

This chapter focuses on the degree to which guanxi linkages and networks that are built using guanxi are important to the entrepreneurship and commercial success of many overseas Chinese in Southeast Asia. A model of various factors’ influences on their use of guanxi is developed. Research proposals concern the sources of overseas Chinese entrepreneurs’ business ideas and business information, and the extent to which guanxi explains their high rates of business startups and the performance of their firms. China has played an important historical role in Southeast Asian commerce. The extent of these tangible trade links is often viewed as a measure of China’s influence in the region (e.g., Villibhotama, 1991; Reid, 1993). The dominance by the overseas Chinese of private-sector commerce in the region has also been seen as a measure of China’s influence (Campbell,1923;Shepherd,1941;Purcell,1951;Skinner,1957, Wickberg, 1965; Lim, 1981). The factors underlying the success of the overseas Chinese and the nature of their immigrant experience have been extensively researched (e.g., Bonacich, 1973; Waldinger, Aldrich, and Ward, 1990; Sender, 1991; Reid, 1997). However, Hamilton and Waters (1997) pointed out that much of the existing research fails to recognize that entrepreneurial success is path dependent. Most Chinese in Southeast Asia are not entrepreneurs and are not wealthy (Hirschman, 1988; Heidhues, 1996). However, as a group, they have achieved higher levels of success in commerce than has the indigenous population, and this makes the paths and management practices they use to achieve these higher rates of success important. 245

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Overseas Chinese Entrepreneurial Behaviour

Interest in Chinese management techniques increased with the opening of the Chinese economy and its recent high rate of growth (Lockett, 1988; Child, 1994; Boisot and Child, 1996). The Southeast Asian overseas Chinese have been using many of these techniques since they began commercial activities in the region, although practices have changed and have been adapted to local circumstances. Thus, contrasting the management practices of overseas Chinese and Chinese business people to identify common and unique elements that are related to entrepreneurial and commercial success would be extremely valuable. Research on Chinese management suggests that networks, relationships and guanxi are essential elements of business success in China. However, relationships and connections are valued by managers everywhere, and they have been important to the entrepreneurial and commercial success of the overseas Chinese (Kraar, 1994; Chen, 1995; Suryadinata, 1995). The difference is that guanxi, China’s special version of relationship building, extends far beyond business relationships (Ruan, 1993; Kipnis, 1997). Guanxi facilitates trust and imposes implicit standards of business behaviour (Hamilton, 1996; Farh, Earley and Lin, 1997; Kipnis, 1997; Tsui and Farh, 1997), which facilitates business and network operations (Zhao and Aram, 1995; Kiong, 1996; Kuo, 1996; G. Wong, 1996). At the national level, guanxi relationships have also been linked to economic growth and business success (Kao, 1993; G. Wong, 1996; Luo and Chen, 1997). This observation has led to an increased interest in how the Southeast Asian overseas Chinese operate their businesses and the degree to which they benefit from guanxi. This chapter focuses on the degree to which guanxi and its variations are important to the level of entrepreneurship and commercial success of overseas Chinese individuals in Southeast Asia. Existing network analyses of the overseas Chinese have examined interlocking directorships, but management factors that underlie the formation of these networks have received less attention (e.g., Ingram, 1971; Akira, 1989). Guanxi might facilitate direct and important interactions that contribute to the network-building activity of the overseas Chinese. However, different national, cultural and political contexts have affected the evolution and development of their business methods. They have had to function in an entrepreneurial context that required them to adapt Chinese cultural and business practices to the prevailing norms of the host country.

John E. Butler, Brad Brown and Wai Chamornmarn

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The chapter begins with a general discussion of the impact that networks have on entrepreneurial behaviour and success. Guanxi is introduced and discussed in terms of its impact on and relationships to social and business networks. The issue here is the degree to which guanxi is important and the degree to which it has been adapted to suit local conditions. Particular attention is focused on how guanxi-type behaviour fits into the Southeast Asian entrepreneurial context. A model of how these various factors may have influenced the prevailing business practices of the overseas Chinese is then developed. Research proposals are presented that are related to the sources of entrepreneurs’ business ideas, business information and the extent to which guanxi and networks are important to the performance of their firms. We conclude with a discussion of issues for future research.

NETWORKS AND ENTREPRENEURSHIP Social network research was initiated because trait research failed to provide satisfactory explanations of why some people became entrepreneurs and others with similar traits continued working for nonentrepreneurial organizations. Social networks have been shown to play an important role in business start-up and success (Birley, 1985; Jarillo, 1989; Reynolds, 1991). Entrepreneurs use their social networks to find out about opportunities, test ideas, gain access to specialized expertise and obtain financial resources (Aldrich and Zimmer, 1986; Aldrich and Waldinger, 1990b). Individuals with broad nonreinforcing networks, which contain numerous weak ties, are more likely to be exposed to new ways of thinking and numerous business ideas (Granovetter, 1973). In other cases, such as immigrant groups, networks provide information about which types of businesses offer the best prospect of success and advice on how to enter these businesses (Aldrich and Waldinger, 1990b; Hansen, 1995). For instance, Korean immigrants in the USA are heavily involved in the grocery business (e.g., Light, 1972; Bonacich and Light, 1988; Aldrich and Waldinger, 1990a, 1990b), and the Chinese in Thailand were heavily involved in rice milling (Butler and Chamornmarn, 1995). The composition of social networks also has an impact. Individuals with social networks composed of people with technical and business knowledge are able to call on those networks for specialized infor-

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mation. This opportunity increases a start-up firm’s probability of success and reduces the likelihood that the entrepreneurs will make technical errors. The process can work both formally and informally, although such technical networks usually develop from personal social networks. During the early operational phases of a business, networks tend to change. Social networks can still be useful, but networking with other firms also becomes important. The efficiency with which entrepreneurs construct these new interbusiness networks is important. They need to know whom to include and when to include them because these networks provide industry-specific information that impacts directly on the performance of their growing firms. In countries with longer industrial histories, many of these relationships have been institutionalized, so that one joins clubs rather than building networks. However, in Southeast Asian countries network-building activity is common and guanxi may help to facilitate the process.

GUANXI We use the definition of guanxi that was developed by Tsui and Farh (1997), with an extension that applies to the commercial activities of the overseas Chinese community. They defined guanxi as referring ‘to the existence of direct particularistic ties between two or more individuals’ (Tsui and Farh, 1997: 60). They noted that ‘ties through intermediaries’ should not be included because inclusion would infringe on the conceptual domain of networks. We dealt with networks more directly and with ways guanxi facilitates the building of effective networks. Guanxi plays a role in developing new direct ties and helps maintain established ones. Direct links also increase the number of potential indirect links. Both types of links directly affect the size of an individual’s social network, which is an essential factor in using networks for entrepreneurial advantage. In some respects, the role that guanxi plays in the overseas Chinese community is similar to its role in Chinese society (Chen, 1994). In China, guanxi acts informally: people use unofficial relationships ‘to get things done, from simple tasks to major life choices’ (Ruan, 1993: 19). This is possible because of ‘the Chinese emphasis on a hierarchy or ordered relationship and on harmony among those relationships’ (Hamilton, 1996: 47). For instance, the Ming dynasty benefited from guanxi by prescribing norms of behaviour in areas where it


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could not afford to maintain a presence (Farmer, 1990; Furth, 1990; Woodside, 1990). Direct relationships probably always had some commercial value in China, but the introduction of economic reforms in post-Mao China encouraged use of guanxi in ways that fostered commerce (e.g., Tsang, 1994; Zhao and Aram, 1995; Wing and Yiu, 1996). Guanxi was already being used by the overseas Chinese for commercial purposes. They even developed ways to communicate the concept. For instance, the overseas Chinese in Thailand use the phrase nee bhun khun as the vernacular translation for guanxi. In addition, market systems and legal codes did not emerge at the same speed as economic growth did in China or in the Southeast Asian countries. This lag helps explain why guanxi has become a useful management tool in this new environment (Xin and Pearce, 1996). The Chinese have also been able to use guanxi to pursue personal interests. The intricate web of relationships provides a wide array of social communities to serve as guanxi (e.g., Ruan, 1993; Bian, 1994). In contrast to Western groups, where membership is usually defined, Chinese groups tend to be tied together with ‘social relationships that are without formal boundaries; sometimes a home town, sometimes a home district, sometimes a home province, and other times an entire region serve as the definition regionally’ (Hamilton, 1991: 53). This ability to change boundaries to fit the situation has advantages in a commercial setting, especially when one is establishing new business ties. Economists have attributed great significance to legal codes and market mechanisms in explaining the economic growth of countries (North and Thomas, 1973; North, 1990). Hamilton (1996), in a detailed historical analysis, showed how in the East kinship assumed the role that markets played in the West, and collegiality acted in much the same way that commercial laws did in the West (e.g., Baker, 1979; Hamilton, 1990). In this role, guanxi may provide some operational efficiencies that help account for its importance in commercial relationships (Mann, 1987). As a commercial mechanism, guanxi exists strictly as a mutually beneficial entity, although this relationship reflects what occurs in Chinese society. Commercial relationships are typically organized around delayed reciprocity and operate by ‘drawing on connections or networks to secure favors’ (Luo and Chen, 1997: 1). However, social and friendship relationships are built around the notion that favours and reciprocity are linked. The Chinese use the word renqing to

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describe this expectation and see cultivating renqing as a ‘prerequisite to establishing relationships’ (Tsui and Farh, 1997: 62). This obligation to provide mutual ‘insurance’ to others with whom you are connected acts to thwart opportunistic behaviour. The consequences of violating these unspoken, unwritten social norms can be isolation and societal censure (Luo and Chen, 1997). Especially in commercial transactions, the Chinese must consider the costs of reciprocity when requesting assistance. Thus, to effectively use guanxi to build a network of supporting actors, a person has to have a level of prestige capable of sustaining a large number of reciprocal obligations (Redding and Ng, 1982). This reciprocity also acts to maintain relationships because one party or the other is likely to always have some type of ‘credit balance,’ which provides a strong incentive to maintain existing relationships. Business-to-business networks are also important for successful firm operation and represent the organizational institutionalization of personal social relationships. They enhance new firms’ prospects for success by providing information, advice and access to informal alliances that can lead to higher levels of performance (Butler and Hansen, 1991; Brown and Butler, 1993, 1995). For instance, businesslevel linkages helped the overseas Chinese in many countries to gain business knowledge. Doing this required stepping beyond direct guanxi linkages, because links with Chinese they did not know and with non-Chinese were required for commercial success. These intermediate links often resulted from introduction to others by persons with whom they were directly linked. This process also depicts a critical link between guanxi and networks. How guanxi assists in network formation is a central theme of this chapter, although business culture has seldom been cast as an explanatory variable in network construction and maintenance. This is because most cultures do not have an established cultural linchpin such as guanxi that can link personal relationships to an effective social network capable of facilitating commercial success. In addition, social network research has tended to focus on the size, diversity, density and strength of links within networks (Granovetter, 1973, 1985; Burt, 1992; Borch and Arthur, 1995), rather than factors that facilitate. Thus, although entrepreneurship research has provided support for the impact of networks on entrepreneurial success, little research has addressed the factors that facilitate the development of these networks.


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GUANXI AND THE OVERSEAS CHINESE About 20 million ethnic Chinese currently live in Southeast Asia (K.S. Wong, 1995), representing 5 per cent of the region’s population. Activities associated with colonial administrations and recent economic development have resulted in ethnic Chinese communities being associated with commercial activities. Their degree of commercial success has not been uniform throughout the region, but there are similarities in their business practices. These include developing and maintaining links to politicians, other businesses, potential benefactors and sources of financing. Much previous discussion of Southeast Asian overseas Chinese has focused on Indonesia, Malaysia, Thailand, Singapore and the Philippines (e.g., Lim and Gosling, 1997). It is in these five countries that the overseas Chinese have enjoyed their greatest commercial success (Owen, 1971; Brown, 1997). Myanmar, Vietnam, Laos and Cambodia also have overseas Chinese communities that are more closely associated with commerce than is the local population. The overseas Chinese were a major presence in Vietnam (Wang, 1937), and they are beginning to re-establish their commercial presence. Some of the overseas Chinese are returning to Cambodia and opening businesses. Chinese names are also beginning to reappear on businesses, which suggests that business owners see some value in advertising their Chinese identity. In Myanmar, the overseas Chinese have been subject to some governmental restrictions in recent years, but they have assimilated to a greater degree than other immigrant groups by learning the language, marrying Burmese and building links to local government and military leaders. For instance, Myanmar’s former military leader, General Ne Win, is partially Chinese (Alexander, 1974). The ability to exploit ethnic links and build links to important politicians may explain why overseas Chinese individuals from Singapore, Malaysia and Thailand have been able to engage in JVs in Myanmar. The ability to build political links is extremely important to business success in most Southeast Asian countries. Initially, the Chinese had to become adept at this because they were restricted from directly seeking elected office in several countries. The overseas Chinese in Thailand were the first community to master this type of link building because of Thailand’s status as an independent country. It would be nice to think that hard work and perseverance explain the progress

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of the overseas Chinese from being miners and rubber plantation workers to being successful entrepreneurs. However, making this type of move was extremely difficult and required access to resources. Political connections provided one way to obtain these resources (Akira, 1989). Many overseas Chinese made their initial political links by serving as tax or revenue farmers for the king; later, they could use their links to government leaders to facilitate their own or their offspring’s business success. Tax farming required individuals to bid on the right to collect taxes on certain items such as gambling, birds’ nests, opium and sugar cane. The overseas Chinese were disproportionately represented in the ranks of the tax farmers. Akira (1989: 70) noted that the Thai word to describe this profession, chae sua, is a ‘transliteration from the Hokkien dialect word cho-sua’, which means a wealthy Chinese merchant. Guanxi benefited Chinese people bidding to become tax collectors. They could afford to make higher bids because the reciprocal nature of guanxi meant that fellow overseas Chinese would be more likely to come forward with tax payments. Tax farmers could keep anything collected over the bid amount. Many of the most prominent families in Thailand can trace their success back to an earlier generation that obtained a tax-farming concession, as can be read in, for instance, the 1973 Cremation Book of Jambol Phin Chunhawan or the 1980 Cremation Book of Jang Lwong Posyajinka.2 Political links could also be exploited in other ways. Success as a tax farmer often led to royal honours or appointments. Links were further strengthened through marriages: for instance, Phra Apaiwanich was an overseas Chinese who obtained the tax collector concessions for birds’ nest (1980 nangsue ngan sop, identified above). He used the profits to buy land, mostly in central Bangkok, some of which his family still owns. As the wealth of the family increased, they were able to develop political links that could be further exploited. Since land had to be acquired from the king, establishing political links was an essential first step. Another birds’ nest tax collector was Yieng Saehao, an overseas Chinese who was so successful as a tax collector that the king appointed him governor of Songhla province in 1875. Eight of his descendents would subsequently serve in this position, in addition to receiving other governmental concessions (1973 nangsue ngan sop, above). As the governors influenced regional concession awards, this appointment as provincial governor was extremely important.


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Using royal marriages as a way to maintain political connections is best illustrated by the case of Chamroen Krukrit, who was able to arrange royal marriages for two of his offspring. In addition, one of these marriages produced two children who served as prime ministers of Thailand. In this rare case, royal links built in the period of absolute monarchy had tremendous impact during the subsequent period of elected governments, according to the 1975 Cremation Book of Jamren Krukrit. Building links to elected and non-elected political leaders became extremely important as the nature of regional governments changed. Democracy replaced the absolute monarchy in Thailand in 1932, and this happened elsewhere when colonial rule began to disappear after the Second World War. In Thailand, the overseas Chinese made a practice of providing powerful politicians with minority equity positions in their firms and seats as directors (Akira, 1989). These grants often helped the firms get government contracts or concessions. These were extremely important because SOEs dominated the economy. The overseas Chinese broadened their political networks by serving on the boards of friends’ businesses, thus gaining access to the political leaders on those boards. This is one reason why board appointments tended to be reciprocal arrangements. The Thai-Hua group, which was founded by U Chu Liang, an overseas Teochiu Chinese, provides a good example of how this arrangement worked. U Chu Liang formed a number of firms, always with overseas Chinese. His most famous company sold Tiger Balm, which was supposed to cure a variety of diseases when spread on one’s forehead. He was also so active in the overseas Chinese community that the Japanese imprisoned him during the Second World War (1976 Cremation Book of U Chu Liang). In 1950, U Chu Liang diversified his business interests by founding the Bangkok Metropolitan Bank with six other Teochiu Chinese. Almost all of the capital was raised from the Teochiu Chinese community in Bangkok. Bangkok had a sufficiently large number of Teochiu Chinese to allow overseas Chinese from Fukien province to maintain a regional association. However, a way had to be found to link the new bank to those who could be useful, and Phraya Thongwanit Montri was selected as chairman of the board because of his political position (Akira, 1989). Today, the need for political links is changing, but they are still seen as useful. In Thailand and the Philippines, ethnic Chinese are now active politically in various parties. They have also enjoyed some

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success, with several ethnic Chinese recently serving as Thai prime ministers and many occupying senior government and military positions. In the Philippines, an ethnic Chinese has served as president, and Sino-Filipinos have achieved other high-level positions (Palanca, 1995), although there is a divide between the older established mestizo Chinese and the more commercially active overseas Chinese who arrived after 1850 (Wickberg, 1965, 1997). This means that overseas Chinese had direct guanxi links with elected politicians who were also overseas Chinese. In Indonesia and Malaysia, overseas Chinese have economic power, but they still tend to be focused on establishing links to non-Chinese politicians rather than on direct political participation. Although the nature of political links is changing, and their importance has perhaps diminished somewhat in Southeast Asia, business connections are still very important. The Chinese originally came to Southeast Asia because there was a local labour shortage. However, they soon began starting small businesses. For those unable to develop political links, another option was to build connections to foreign firms.The most effective way of doing this was to serve as a comprador for a European firm. Compradors’ business connections and profits were often the basis for founding their own businesses (Norman, 1907; Wong, 1965; Ding, 1970). Compradors were a commercial link between non-Thai-speaking foreigners and local Thais. They relied on their networks of associates to bring customers or clients to European firms and received commissions for their services. Many of the prominent business leaders of today can trace their families’ economic prominence back to an ancestor who served as a comprador. In addition, many of these Thai compradors had guanxi links to each other and other Chinese. A large number of them attended Assumption School, which was largely populated by overseas Chinese studying commerce. A typical case is that of Kosit Vejjajiva, who studied at this school and then joined the East Asiatic Company as a dock worker. He later rose to the posts of both import and export comprador. When the various regional Chinese associations decided to merge, he became chairman of the Chinese Associations of Bangkok. Although he spent his entire career with the East Asiatic Company, his descendants gained prominence in both the business and political arena (1966 Cremation Book of Kosit Vejjajiva). Research on business practices in China (e.g., Jacobs, 1980; S.L. Wong, 1985, 1996; Blau, Ruan and Ardelt, 1991), Hong Kong (e.g.,


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S.L. Wong, 1988, 1996) and Taiwan (e.g., Hamilton and Kao, 1990; Cheng-Shu, 1996; Namazaki, 1996) has supported the ongoing importance of guanxi and networks. Business research on the overseas Chinese in Singapore has shown that family connections and network building are important aspects of business success (e.g., Chan and Chiang, 1994; Kiong, 1996). The Chinese business communities in Thailand have also been found to rely heavily on personal networks of friends, business associates, classmates, and family (Kao, 1993; Butler and Chamornmarn, 1995). Business success strongly motivated the overseas Chinese to build and maintain guanxi relationships. However, this early success also resulted in some resentment, which may have affected the degree to which they relied on guanxi. For instance, a series of anti-Chinese newspaper articles appeared in Thailand in which the Chinese were characterized as the ‘Jews of the East’ (Landon, 1941: 38–43). These articles were published as a pamphlet (Muang Thai Theun Geud) in 1914 under the name Asavabahu, the pen name of King Vajiravudh. Later, when Indonesia and Malaysia gained independence, there were similar incidents of anti-Chinese behaviour (Alexander, 1974). This precarious condition of belonging and yet not belonging has resulted in these overseas Chinese communities’ developing specialized business practices, which include relying on guanxi and building useful networks. This may explain why guanxi continues to be valued by the overseas Chinese community. The need to rely on guanxi is not as compelling as it once was because information is now available and reliable, commercial and government financing is accessible, and business practices have changed. As a sometimes resented minority in some countries, the overseas Chinese may still feel more comfortable resorting to guanxi links. However, Thailand and the Philippines are quite accepting of the Chinese and their commercial and political success. If overseas Chinese in those locations still benefit from guanxi practices, it would suggest that guanxi’s commercial value goes beyond being a mechanism that is ethnically based. Thus, an essential issue is the extent to which guanxi relationships are valuable beyond the historical and institutional contexts that resulted in their emergence and use in China. Overseas Chinese would have naturally resorted to guanxi when they first arrived in their new countries, but its continued use would suggest that guanxi and associated networks provide tangible business benefits.

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MODEL AND RESEARCH PROPOSITIONS The previous discussion suggests that guanxi brings value to an entrepreneur in a variety of ways. The model depicted in Figure 9.1 attempts to capture some of the links mentioned in the previous discussion as they apply to the Southeast Asian Chinese. The Southeast Asian context is especially important because different countries have treated and assimilated the overseas Chinese in different ways, which means that guanxi may be valued for different reasons in different countries. Importance of Guanxi Business Start-ups

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Guanxi is depicted as playing two entrepreneurial roles. In the first instance, guanxi facilitates the formation of social networks that increase the probability of business start-ups. This happens because the overseas Chinese place a strong emphasis on trust built through

Social Networks

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Business Start-ups

Business Networks

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Business Success

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Guanxi as a Faciltator

Contextual Factors 䊏

Commercial Laws

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Governance System

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Assimilation

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Size of Community

Figure 9.1

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Guanxi as a Substitute

Model of guanxi as a factor in entrepreneurial success


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family and kinship networks and so have many direct guanxi-created social contacts. These can be exploited to establish intermediary contacts that result in larger social networks. As discussed earlier, indirect links have been found to be extremely important, which makes the role of guanxi in facilitating larger social networks important. Members of other ethnic groups, who may have fewer direct contacts or contacts without reciprocity expectations, will have a harder time building extensive social networks. Not all individuals with extensive social networks will decide to start businesses, but when a large social network is in place, it can be intentionally or unintentionally exploited. Those without these networks must expend time and energy to build them or start businesses without the tangible and intangible forms of support that they provide. The Chinese who came to Southeast Asia during the nineteenth century would have relied on the same type of guanxi relationships as existed in China. As discussed earlier, these proved extremely important to the overseas Chinese compradors. However, the link between guanxi and contemporary business success is more complex and requires that guanxi be used to build social networks that embody useful business connections or provide useful business information. This link between social networks and business success is extremely important, as is the degree to which guanxi-linked relationships facilitate network construction. These networks can provide information or financial support for a business start-up. Even overseas Chinese not actively searching to start businesses may hear about lucrative opportunities and decide to exploit them. In fact, the reciprocity involved in guanxi links implies that the provider of information about a new business opportunity may benefit by encouraging others to act. Thus, the overseas Chinese should have higher rates of business start-ups and of success than other ethnic groups. Even within the overseas Chinese community, those with more sources of guanxi should be more likely to found businesses. Proposition 1: Overseas Chinese will place a higher value on business-related information received from their guanxi-based links than on information from network links without guanxi. Proposition 2: Overseas Chinese with more guanxi-based relationships will have higher rates of business start-ups than those with fewer or no such relationships.

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Importance of Guanxi for Business Success Guanxi is also important to ongoing business success because it builds business-level networks. A new business requires an entrepreneur to access new sources of information and resources, because the individual’s social network is unlikely to contain all the links needed to run a business effectively. In Southeast Asia, business education was rather limited in scope until quite recently. Knowledge about basic accounting, machine operation, sources of supply and managerial skills had to be acquired informally. Some guanxi relationships are useful for business purposes because the individuals have business experience or guanxi links of their own capable of providing useful information. Thus a business-level network emerges that consists of people with whom the entrepreneur has either direct or indirect links. In the early days of Southeast Asian commerce, guanxi would be especially useful because the likelihood of reciprocation was high, and few other sources of information existed. Today, business schools, published supplier directories and government offices responsible for developing and assisting commerce reduce but do not eliminate the business role of guanxi in Thailand and the Philippines. In other countries, such as Indonesia and Malaysia, the overseas Chinese prefer to use guanxi because sources of support such as government programmes often assist only indigenous ethnic groups. Proposition 3: Overseas Chinese entrepreneurs will have businesslevel networks with more guanxi-based connections than other entrepreneurs. Proposition 4: Overseas Chinese entrepreneurs with more guanxibased connections in their business networks will be more successful than other entrepreneurs.

Guanxi as a Network Substitute As depicted in Figure 9.1, guanxi also can directly substitute for social and business networks. Some individuals cannot build networks because time, status or some other factor limits their ability to expand beyond their direct links. For instance, many early overseas Chinese entrepreneurs entered business as itinerant merchants. Moving from place to place, they could not construct large networks. Today, when


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overseas Chinese start businesses in Laos, Myanmar, and even China, they cannot build networks fast enough to meet the needs of their new businesses. These modern-day mobile entrepreneurs use guanxibased relationships as substitutes for networks. In these cases, guanxi can be employed directly to access information or support services, which might not be possible for members of ethnic groups from other countries. In these developing economies, there are numerous business opportunities. Foreigners doing business in these countries need the same types of support that they would need in more economically developed countries or regions. However, they are less likely to be positioned to turn direct links into a social network or to be able to develop and maintain a business-level network. Language, culture, income, status and the small amount of time they spend in a foreign country limit their ability to build effective networks. Overseas Chinese have the option of using guanxi-based relationships to help minimize the disadvantages of trying to start and operate businesses in a developing economy. Proposition 5: Overseas Chinese operating in less-developed economies will use guanxi more extensively than overseas Chinese in welldeveloped economies. Guanxi as a Substitute for Institutional Codes The model also contains a series of contextual factors that relate to Southeast Asia. The lack of commercial laws and regulations has encouraged overseas Chinese to use guanxi. The situation in the region has been improving, and it is now possible to rely on commercial codes in Malaysia and the Philippines. Several other countries, such as Laos and Vietnam, have adopted elaborate commercial codes, and there is an ongoing effort to develop a more comprehensive commercial code in Thailand. The region is interesting because economies and commercial codes have not developed in parallel. Some of the least economically developed countries have recently adopted rather sophisticated commercial codes, which means it is possible to isolate the degree to which guanxi may substitute for legal codes. However, resorting to legal action is slow and expensive in most of these countries, and it is not considered a good way to resolve disputes. The varying nature and ease of use of these commercial codes

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should affect the degree to which overseas Chinese rely on guanxi. Thus, guanxi is essential in some countries but is also often a preferred option in countries where it is not essential. Proposition 6: Overseas Chinese operating in countries with lessdeveloped legal codes will use guanxi more extensively than overseas Chinese in countries with well-developed commercial codes. Guanxi and Governance Systems The governance systems used by firms in this region also affect the degree to which guanxi is useful and used. Many overseas Chinese firms have grown to be very large and have diffused stock ownership. However, overseas Chinese firms still have extremely concentrated ownership structures when compared to Western firms. Their managers are also their owners, which means many of the agency issues that relate to managers pursuing interests opposed to those of owners do not arise. Governance in Western firms takes the form of rules and regulations and compensation schemes designed to ensure that managers work in the interest of owners. In overseas Chinese firms, the role of the family is more important to central governance than such mechanisms. Since family relationships are considered the most important and permanent in Chinese society, they reduce governance issues in a firm. ‘Loyalty (and related favoritism) to a family is an obligation, and is rendered without an anticipation of reciprocity’ (Tsui and Farh, 1997: 61). However, this also means that family-member managers understand that the financial success of the firm and the general welfare of the family are connected. Managers in many overseas Chinese firms are either family members or guanxi-linked to the owners. Thus loyalty is less affected by compensation-based motivation than by family obligations or the reciprocity of expectations associated with other types of guanxi links. Some of the research discussed previously has suggested that firms’ guanxi-based governance systems have actually limited growth, but they may have had positive impacts on other aspects of performance (e.g., Tsang, 1994; Hamilton, 1996). In addition, the growth relationship may operate in the opposite direction: the managerial growth needs of larger firms may have forced them to hire managers with whom the owners had no guanxi links (Cheocharnpipat, Butler and Lee, 1997).


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Proposition 7: Overseas Chinese firms with family governance systems will resort to guanxi more than Chinese firms with corporate governance systems. Assimilation, Minority Status and Guanxi The overseas Chinese have not always found themselves welcomed in Southeast Asia. The recent riots in Indonesia are current manifestations of this resentment. Countries in the region vary in their treatment of the ethnic Chinese, and to a degree this is related to the degree to which the latter have been able to assimilate. Guanxi served as a useful tool in all countries, but as the Chinese became fully assimilated in some countries they were able to tap non-guanxi-based avenues for support. Since the overseas Chinese are well assimilated in the Philippines and Thailand, they have full access to such avenues of support as government programmes. This is less true in Malaysia and Indonesia, where guanxi and networks may be the only option for the overseas Chinese because government programmes often intentionally exclude them. In Thailand and the Philippines, overseas Chinese entrepreneurs have the option of using guanxi. Business people in Thailand, where many ethnic groups comprise the country’s population, tend not to rely on ethnicity, claiming to be Thai rather than Siamese, Chinese, Laotian or Indian, for example. Government aid programmes may be targeted towards particular groups in these countries, but the groups are defined by age, income or regional needs rather than ethnicity. In Indonesia or Malaysia, however, Chinese people find assimilation quite difficult, and in these countries guanxi links are probably the only option available. Proposition 8: There will be fewer guanxi-based connections in the networks of overseas Chinese in countries where they are welcomed and assimilated than there will be in other countries. The use of guanxi by the Chinese in a society where they are the majority differs from its use where the Chinese are a minority. In Southeast Asian countries other than Singapore, the Chinese have had to operate as minorities, and they have developed or retained techniques that help them do this effectively. To the degree that guanxi is an important source of social and business support, it should be most prominent where the overseas Chinese are a minority. In Indonesia,

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the Chinese comprise a very small percentage of the population and are unassimilated. They are also unassimilated in Malaysia but comprise a large percentage of the total population. The Chinese in Thailand and the Philippines are between these extremes, although both countries have assimilated the overseas Chinese into their economic and political mainstreams. When the Chinese are a majority population, or at least a large minority, guanxi operates much as it does in China: that is, people resort to guanxi, but in an unconscious fashion at times. Overseas Chinese will seek out guanxi connections more explicitly and conscientiously in settings where they are a minority. This active searching for guanxi links is a unique characteristic of minority status but is extremely important to the level of entrepreneurial behaviour the overseas Chinese engage in when they are a small minority, with other factors held constant. Proposition 9: There will be more guanxi-based connections in the networks of overseas Chinese in locations where they are a minority than in locations where they are the majority. Obviously, the logic of the model here is based on the commercial success of the overseas Chinese in Southeast Asia. These entrepreneurs, like all successful entrepreneurs, retain successful practices and discard those that bring no return. Thus, each proposition suggests that this community of entrepreneurs uses guanxi and builds networks because these practices are associated with high levels of performance.

CONCLUSIONS This chapter began with a discussion of the direct role that China has played in the commercial development of Southeast Asia and then moved to a discussion of overseas Chinese entrepreneurial success in the region. Guanxi and the networks developed by the overseas Chinese have played a major role in the entrepreneurial success of this community. The movement from immigrant workers performing manual labour to successful entrepreneurs required that they exploit their guanxi links with other overseas Chinese while building new links to those with political power. Brief histories of several individuals showed how links to those with political power helped them achieve commercial success.


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Building links to colonial administrations and local rulers provided commercial opportunities and profits that the overseas Chinese used to open their own businesses. Overseas Chinese entrepreneurs also developed strong political links that could be useful in obtaining government concessions or contracts. This ability to develop commercially useful political links continues to the present time, although it is more important in countries where the overseas Chinese have yet to gain access to elected office. Direct guanxi links are often used to establish political contacts, which can then be included in the social or business networks of an entrepreneur. The overseas Chinese were also able to use guanxi links while serving as compradors for European firms. Their ability to expand direct guanxi links into large networks allowed them to bring business to those foreign firms. It also allowed many compradors to develop successful businesses of their own. The overseas Chinese continued to resort to guanxi once they started their own businesses as a way of obtaining information, supplies and customers. These business practices continue today, and overseas Chinese businesspeople continue to use guanxi. In some cases they do this out of necessity, such as when conducting business in less economically developed regions. However, in many cases overseas Chinese prefer guanxi-based contacts, especially those that are family based, when it comes to filling senior-level management positions in their firms. In the model presented in this research, both direct guanxi links and the larger networks developed from these links are theorized to play major roles in business foundings and commercial success. We also theorize that the use of guanxi by overseas Chinese individuals is affected by local conditions, especially those related to minority status, ability to assimilate, and the effectiveness of local commercial codes. In general, the model suggests that the overseas Chinese have enjoyed high levels of entrepreneurial success in Southeast Asia in part because of their ability to use and adapt guanxi to the commercial and political environment of the region. The model was employed to develop a series of propositions that need empirical testing. In addition, we need more specific knowledge of how the overseas Chinese use guanxi and the degree to which it is copied by members of other ethnic groups. As changes occur in Southeast Asia, the degree to which guanxi is used or is effective may also change. Other moderators may become relevant, while those we have enumerated become less relevant. It would also be useful to examine direct links among other Southeast Asian ethnic groups. The notions of family and reciprocal

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obligations are present in most of the region’s ethnic groups, although they have not been linked to commercial activities. Thus, it would be important to examine guanxi by contrasting it with these other forms of family and reciprocal obligation to try to further isolate the components that are most linked to entrepreneurial behaviour

Notes 1. 2.

John E. Butler conducted this research while a visiting associate professor at the Department of Management of Organizations, HKUST. A Thai family assembles a cremation book (nangsue ngan sop) when a family member dies. The book contains, among other elements, a biography and a family history. The cremation book of prominent people may be published and distributed.

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10

Teamwork in China: Where Reality Challenges Theory and Practice1 Xiangming Chen, James W. Bishop and K. Dow Scott

This chapter examines theoretical and conceptual issues concerning teamwork in China. We discuss the increasing importance of teamwork in China’s business organizations and its relationship to the changing Chinese culture and economic environment. By placing teamwork in China in a cross-cultural context, we develop a conceptual model and associated propositions describing how individual attitudes and values influence teamwork. Are Chinese people willing to work in teams? What factors will motivate or inhibit their doing so? These questions have become increasingly significant as China’s management practices and employee relations are undergoing considerable changes at the end of the twentieth century. At the core of these transformations is the extent to which Chinese companies have absorbed and adopted Western management principles and practices. Since teamwork has been widely practised and found to be generally effective in Western companies, especially US companies, many Western companies hope to use teamwork in China. Motorola has taken a lead in introducing teamwork in China by putting 80 to 90 per cent of the employees at its Tianjin plant into teams; the plant also fielded four entries among the 24 finalist teams at the worldwide finals of Motorola’s Total Customer Satisfaction (TCS) competition in 1998 (Sheridan, 1998). However, there is little evidence to show how well teams will be received in China, given its very different cultural traditions. To fill this void in the literature, we have launched a teamwork study in United States-invested enterprises (USIEs) in China. This chapter presents the theoretical model for the study.We begin by discussing the increasing importance of teamwork for Chinese management and its 269

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relationship to the changing Chinese cultural and economic environments. Then we present a conceptual model of how individual values and employee attitudes influence the willingness to work in teams.

TEAMWORK IN CHINA The PRC presents a timely, complex and instructional context for the study of teamwork. First of all, traditional Chinese culture may influence modern teamwork in competing ways. On the one hand, the collectivist orientation of Chinese culture may promote such crucial aspects of teamwork as a common purpose, task interdependence and a group orientation. The importance of relationships in this collectivistic society would also suppress individual interests for the good of work groups (teams). Moreover, traditional Chinese culture and society feature strong vertical relationships of filial piety, paternalism and hierarchy and strong pressures for conformity, maintenance of face and social control (Redding, 1990). These vertical relationships would promote teamwork if teams were formed by managerial authority and had strong appointed leaders. Thus, traditional Chinese values may facilitate teamwork. On the other hand, the rigid social hierarchy emphasized by Confucian principles could prevent fully autonomous and flexible teamwork; the very elements of Chinese culture that create and sustain group attachment and group conformity also maintain top-down control, which contravenes the principles and practice of true teamwork. During the Maoist period, these Confucian cultural and social traditions were reinforced by the Communist ideology and politicized system of workplace control, which also made workers politically, economically and socially dependent on SOEs (Walder, 1986). These factors led to risk aversion, factionalization of the workforce, mistrust of coworkers and personalized favouritism, which contradict Western teamwork norms of risk-taking and responsibility. Therefore, if these Confucian and Communist ideologies persist, they will create strong barriers to teamwork. However, the current economic and organizational changes associated with China’s opening to foreign investment are creating a new environment in which these traditional values may play a less important role. Approximately 150 000 Chinese enterprises employing 17.5 million workers now have foreign involvement (People’s Daily, 1998). Although approximately 70 per cent of these enterprises are financed

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by overseas Chinese capital, which comes especially from Hong Kong and Taiwan, many of them are JVs with large Western MNCs or are wholly owned by the latter. There are close to 20 000 Chinese-US JVs or wholly US-owned companies, many of which employ thousands of local Chinese staff. The introduction of Western management styles and practices to China through these Western-invested enterprises may be having a cumulative effect on the traditional Chinese management system and employee orientation. Child (1996) found that Western partners have been at least somewhat successful in introducing technology, technical management and certain standardized procedures into China. Marketing techniques and formal systems for assigning managerial responsibility and for reporting have been successfully transplanted, but HRM practices may be more difficult to introduce. A general rejection of Western human resource practices would spill over to teamwork. Thus it is difficult to predict how much Western management practices have affected attitudes towards teams. However, China is also changing in other ways that make acceptance of Western practices more likely in the future. With the loosening of state control over the daily lives of the Chinese people, the move towards a more market-driven economy and the success of the one-child policy, new attitudes are developing. Compared to the older generation, young employees are generally more self-centred, more individualistic, less political, and more receptive and adaptive to Western management. This is especially true because jobs in foreign firms pay well and provide opportunities for career advancement. One goal for our research was to examine how differences in the acceptance of traditional Chinese values influenced the acceptance of teamwork in Western-invested companies.

TEAMWORK IN CROSS-CULTURAL PERSPECTIVE Cross-cultural research suggests that cultural values will influence the willingness and ability to work in teams. Hofstede’s (1980) individualism–collectivism dimension refers to the degree to which people in a country prefer to act as individuals as opposed to being members of groups. Because teams are collective entities, this dimension is important to any study of how cultural values influence employees’ orientation towards teamwork. Hofstede’s power distance dimension may also be important. Power distance refers to the acceptance of uneven

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distribution of power within organizations. Variations along power distance are reflected in how employees differ in their acceptance of job titles, status, hierarchy and behaviour towards supervision, responsibility and decision making. Power distance may interfere with teamwork. Using alternative conceptual frameworks and individual-level data, scholars have identified subdimensions of Hofstede’s main dimensions and demonstrated subtle variations along these dimensions: for example, Triandis (1995) argued that culture as reflected in individualism–collectivism has temporal, geographic and situational variations. Triandis, Chen, and Chan (1998) drew conceptual distinctions between the horizontal and vertical types of collectivism and individualism and developed a method for measuring them. Chen, Chen, and Meindl (1998) developed a culturally contingent model of cooperation which specifies variations between and within collectivist and individualist cultures in terms of such cooperation mechanisms as group identity, trust, accountability and reward distribution. Furthermore, the individualist–collectivist distinction has been used broadly to study various teamwork-related attitudes and behaviours. Boyacigiller and Adler (1991) argued that the level of commitment of employees in a collectivist society may arise from their ties with managers, owners and coworkers, but that the commitment of employees in an individualist society may be due to the jobs themselves or to compensation systems. Empirical studies by Earley (1989, 1993) showed that collectivist and individualist cultural values have different effects on social loafing and performance, but these effects vary between in-group and out-group members and are moderated and mediated by such variables as accountability, perception of individual and group efficacy, and anticipated performance outcomes. Thus these studies based on theories of cultural differences suggest that although the impact of cultural values on employee attitude and behaviour varies between and within societies in important ways, the withinculture differences have been not been studied enough and thus deserve special attention.

US-BASED RESEARCH AND THE CHINESE CONTEXT US-based research has often focused on commitment to teams and organizations. Commitment is a multidimensional phenomenon, and


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defining the dimension of commitment under examination is important when assessing worker attachment (Reichers, 1985). Using this perspective, Becker and Billings (1993) showed that an individual’s level of commitment to a work team and to the global organization can vary substantially. Furthermore, valued organizational outcomes such as job performance, intention to quit and willingness to engage in helping behaviour have been associated with varying levels of organizational and team commitment (Bishop and Scott, 1997). The established antecedents of team and organizational commitment include satisfaction with supervision and coworkers (Brief and Aldag, 1980), role conflicts (Morris and Snyder, 1979), task interdependence (Morris and Steers 1980; Mathieu and Zajac, 1990), perceived team support, perceived organizational support, and leader–member exchange (Eisenberger, Huntington, Hutchinson and Sowa, 1986; Wayne, Shore and Liden, 1997). Although existing research in the USA has identified clear determinants of commitment to teams, it should not be assumed that these same relationships will hold in China. Through interviews with managers in three USIEs in China, we have found that they do not have work teams that function as they do in operations in the USA. Chinese employees in these USIEs, however, have been introduced to the concept and certain practices of teamwork, and they generally identify with their functional departments (for instance, manufacturing, marketing or sales) or their work sections in a factory as their primary work groups. Thus the Chinese working in USIEs are at the first stage of a ‘teaming’ process. As a result, factors that influence their team orientation or willingness to work in teams can be assessed. In addition, we are interested in whether the factors influencing teamwork orientation also influence commitment to an organization. This secondary focus is important for two reasons. First, although USbased research has shown that team commitment and organizational commitment are closely related, they are subject to different determinants (see the next section). Second, organizational commitment is a critical HRM issue for USIEs. Unlike SOEs, which severely restrict labour mobility but have little corporate identity to generate employee commitment, USIEs differ from one another and recruit in a relatively open and free labour market, so commitment to them can vary considerably. Therefore, employee commitment could play an important role in a USIE.

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A CONCEPTUAL MODEL AND MAIN HYPOTHESES The conceptual model relating employee attitudes and individual values to team orientation and organizational commitment is shown in Figure 10.1. Box A contains constructs that have been clearly identified as determinants of team and organizational commitment in US companies. We expect these attitudes to be important predictors for Chinese employees too. However, their effects may be influenced by the individual values shown in box B. As we explained before, although China has traditionally had a collectivist culture, with an authoritarian political ideology based on rigid hierarchy and strong risk aversion, economic and social transformations over the last two decades have created an increasingly individualist culture among the younger generation, who are also less receptive to hierarchy and less risk averse. Because USIEs generally appeal to, and hire, younger employees, employees in USIEs could be more accepting of teamwork. Thus, we treated these variables as individual differences – values that individuals within one culture may hold to varying degrees – and explored their effects in the model. Box C shows two dependent variables, team orientation and organizational commitment. Although organizational commitment was a secondary focus here, it was an important variable. In field interviews we found that some employees in the USIEs had changed jobs several times prior to beginning their current jobs. This labour mobility, coupled with a strong individualist orientation, might weaken organizational commitment among employees. Although boxes A, B and C form the core of our conceptual model, their impact on organizational outcomes (box D) was also considered. We developed two sets of propositions based on this model. In the first set, we describe the differential effects of employee attitudes on teamwork orientation and organizational commitment, without assuming any moderating effect of the individual difference variables. For related US-based research, Bishop and Scott (1996) reported that satisfaction with supervision (a positive relationship) and resourcerelated conflict (a negative relationship) were significantly related to organizational commitment but not to team commitment, while satisfaction with coworkers (a positive relationship) and intersender conflict (a negative relationship) were significantly related to team commitment but not to organizational commitment. Task interdependence was positively and significantly related to both, with no significant differences between the relationships.

B Chinese Cultural & Contextual Factors

A Employee Attitudes • Perceived group support • Perceived supervisory support • Perceived organizational support • Task interdependence • Satisfaction with supervision • Satisfaction with coworkers • Leader-member exchange (LMX)

• Collectivismindividualism • Risk aversion • Hierarchy • Ownership structure (Wholly owned vs. joint venture)

Teamwork Orientation Organizational Commitment

Direct effect Figure 10.1

C

D • Performance • Citizenship Behavior • Turnover intention

Moderating effect

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Linkages among employee attitudes, teamwork orientation, organizational commitment and performance, as moderated by the Chinese culture and context

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Drawing on social exchange theory (Blau, 1964) and the norm of reciprocity (Gouldner, 1960), researchers have associated perceived organizational support (POS: the degree to which an organization values an employee’s contribution and cares about his or her wellbeing) with organizational commitment (Eisenberger et al., 1986; Wayne, Shore and Liden, 1997). Differences in the relationships between POS and organizational commitment and between POS and team commitment have not been empirically tested, however. In the light of field theory (Lewin, 1943), social exchange theory and the norm of reciprocity, we expected that, because the team is more salient than the organization, perceived team (group) support will be positively and more strongly related to team orientation than to organizational commitment in USIEs. Proposition 1: Perceived group support will be positively and more strongly related to teamwork orientation than to organizational commitment, with moderators held constant. Field theory also states that a more distant element may have a greater influence on an individual’s reaction than an adjacent one if the features of the former are more salient to that individual, leading to the expectation that POS will be positively and more strongly related to organizational commitment than to team commitment. Unlike SOEs, USIEs are generally market-oriented and distinguished by their names, reputations and policies allowing voluntary employee departures. Therefore, we suggest that: Proposition 2: Perceived organizational support will be more strongly related to organizational commitment than to teamwork orientation, with moderators held constant. In a work team environment, the facilitator or supervisor ‘is a representative of the company to many employees and is often viewed as an extension of it’ (Ogilvie, 1987: 341). Therefore, perceived supervisory support generally leads to stronger organizational commitment than team commitment. During our recent visits at two USIEs, most of the Chinese employees we interviewed indicated that their immediate manager’s or supervisor’s personal style and support were some of the most important reasons for their staying with a company. The fit between the literature and interview evidence leads us to propose that:


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Proposition 3: Perceived supervisory support is more positively and strongly related to organizational commitment than to teamwork orientation, with moderators held constant. The second set of propositions concerns the effects of individual values on the relationship between employee attitudes and team orientation and organizational commitment. The most important moderator is individualism–collectivism. By treating this construct as a moderating variable, we took a different approach from that based on Hofstede’s work (cf. Hofstede, 1980, 1997) because we focused on variation within one culture rather than variation across cultures. Although collectivism or individualism may vary substantially between cultures, it also varies within cultures over time.2 In China, significant within-country variation is expected. Although others have done it, we did not hypothesize a positive effect of collectivism on teamwork orientation in China. We resisted this simplistic and potentially untenable assumption because the dimensional and temporal variations of collectivism–individualism could interact in complex ways in today’s China given the rise of more individualistic values and behaviours in the post-1978 era of reforms. Therefore, we see two ways in which collectivism may moderate the effect of perceived group support on teamwork orientation. Proposition 4: The positive effect of perceived group support on teamwork orientation will decrease as individualism increases (or collectivism decreases). Proposition 5: The positive effect of perceived organizational support on teamwork orientation will be weaker when employees identify with their respective work groups instead of with this company. US-based research (Morris and Steers, 1980; Mathieu and Zajac, 1990; Bishop and Scott 1996) has shown that task interdependence has a positive effect on team commitment. The reasoning is that the more employees perceive their tasks as interdependent, the more likely it is that they will cooperate and engage in teamwork.Task interdependence, however, may not translate into teamwork orientation in China because of a risk-averseness which is rooted in the traditional conservative culture and perpetuated by the lingering influence of the once suppressive Communist system. A risk-averse employee who is

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conditioned to do what he or she is told to do is likely to avoid or resist task interdependence which is crucial to teamwork. Therefore, we propose that: Proposition 6: The positive effect of task interdependence on teamwork orientation will be weaker as risk aversion increases. Since US-based research (Brief and Aldag, 1980; Bishop and Scott, 1996) has reported that satisfaction with supervisors and coworkers was positively related to team commitment, we were interested in exploring how this relationship might be moderated by Chinese culture. In a recent study of China and Taiwan (see Chapter 8) Tsui, Farh and Xia found that leader–member exchange mediated the effect of guanxi in the supervisor–subordinate dyad on subordinates’ organizational commitment. Although these factors might foster team and organizational commitment, Chinese employees may resist teams if they have a strong sense of organizational hierarchy and associate the latter with status and power. The acceptance-of-hierarchy variable probes both the Confucian concept of social hierarchy based on vertical relationships and the Communist reinforcement of that cultural tradition through hierarchical political control at the workplace. We propose that: Proposition 7: The positive effects of satisfaction with supervisors and coworkers and leader–member exchange on teamwork orientation and organizational commitment will be weaker as acceptance of hierarchy increases.

LINKING TEAMWORK ORIENTATION TO PERFORMANCE AND OTHER OUTCOMES As we indicated earlier, our model is designed to describe the determinants of a teamwork orientation among Chinese employees that may make them mentally and behaviourally ready to work in formal teams should they be introduced. This focus, however, does not obviate the importance of examining whether and how an emerging teamwork orientation may affect performance and other organizational outcomes. Previous research in the USA has linked high levels of commitment to the group and the organization to such desirable organizational outcomes as job performance, organizational citizen-


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ship and intention to remain with an organization (Becker, 1992; Bishop and Scott, 1997; Bishop, 1998). More specifically, Bishop and Scott (1997) showed that performance was positively and more closely related to team commitment than to organizational commitment; intention to quit the organization is negatively and more closely related to organizational commitment than to team commitment; and willingness to help team members is significantly and positively related to both organizational commitment and team commitment. The direction and strength of these relationships could be quite different in the Chinese context. If Chinese employees in USIEs lack team orientation and organizational commitment owing to the cultural barriers discussed earlier, they are more likely to have lower performance, a stronger desire to quit and lower citizenship behaviour. Lower performance could result from an unwillingness to engage in cross-functional teamwork that creates synergy across the boundaries of intra-organizational units. If turnover intention is related to low organizational commitment, it could be attributed to an increasingly free and competitive labour market and an individualistic and opportunistic mentality among younger Chinese employees. Therefore, we suggest that: Proposition 8: Teamwork orientation and organizational commitment will be positively related to performance. Proposition 9: Teamwork orientation and organizational commitment will be negatively related to turnover intention.

EMPIRICAL ANALYSIS AND FUTURE RESEARCH This model will be systematically tested using recently collected survey data on determinants of team orientation and organizational commitment in China.3 This model will allow us to compare those determinants to determinants in other cultures and to identify moderators that are specific to Chinese culture. In this way, the model’s generalizability can be evaluated and the need for contextualized results can be assessed. We see this study as establishing a conceptual model and necessary baseline for future research on what we have conceptualized as a teaming process. Our model is sufficiently flexible to permit a

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modification of existing variables and incorporation of new ones. This flexibility will let future research focus on how the teaming process will evolve, either to resemble the US style or to remain somewhat China-specific. Results from this research will help interested management practitioners to assess whether emerging teamwork in USIEs in China could be an effective ‘third alternative’ that blends the best of US and Chinese principles and practices.

Notes 1.

2.

3.

An earlier version of this chapter was presented at the research conference Management and Organizations in China sponsored by the Center for Research on Organizations at HKUST, January 1998. This research was supported by a grant from the Center for Human Resource Management at the University of Illinois. We would like to thank Elizabeth Weldon for providing cogent and helpful comments on an earlier draft. Wei Huang contributed able research assistance. Despite the generally accepted statement that Chinese culture is collectivist, there have been historical counterclaims. ‘The Chinese are a heap of loose sands’ was attributed to Sun Yat-sen, the founding father of the Republic of China. And a traditional saying goes, ‘One monk will shoulder-carry his water; two monks will hand-carry their water with a pole; and three monks will have no water.’ We have already collected the data for testing this model through a 1998 survey of over 700 Chinese employees at four USIEs in southern and central China. The data will be analysed using structural equation modelling. This statistical technique will allow for multiple dependent variables and for the multiple dependency relationships likely to exist in work team environments and hypothesized in our model.

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Walder, A. G. 1986. Communist neo-traditionalism: Work and Authority in Chinese Industry. Berkeley, CA: University of California Press. Wayne, S. J., Shore, L. M. and Liden, R. C. 1997. ‘Perceived organizational support and leadermember exchange: A social exchange perspective’. Academy of Management Journal, 40: 82–111.

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Choice of Influence Tactics: Effects of the Target Person’s Behavioural Patterns, Status and the Personality of the Influencer Haifa Sun and Michael H. Bond1

A model of influence tactics with two dimensions, contingent control and gentle persuasion, was tested with data from 372 Chinese managers. Status, target’s behaviour and influencer’s personality were measured; the Big Five personality dimensions and personality facets drawn from Chinese culture measured the latter. Personality was associated with tactics choice, with the Chinese facets explaining additional variance after effects of the Big Five were partialed out. The influence process, a dynamic force in organizational life, has occupied a central place in psychological and organizational theories over the past few decades (Podsakoff and Schriesheim, 1985). As Falbe and Yukl (1992) concluded, influence can be used to motivate subordinates’ commitment and extra effort, to obtain cooperation and support from peers, to influence superiors to provide necessary support and resources, and to implement innovations, policies and strategies. Existing research has been designed to identify the tactics used to influence others and the factors that determine their use. In this study, we tested the impacts of status, influencer’s personality and target’s characteristics on the choice of influence tactics among Chinese managers in the PRC. 283

284

Choice of Influence Tactics

CHINESE INFLUENCE TACTICS Sun and Bond (1999) integrated items from the Profile of Organizational Influence Strategies (POIS: Kipnis, Schmidt and Wilkinson, 1980) with items developed to reflect Chinese culture in order to create the Influence Tactics Profile (ITP). One hundred and ninetysix managers from mainland China completed the questionnaire, indicating the frequency with which they actually used each tactic to deal with either superiors or subordinates at work. After factor analysis with a principal components factor extraction and varimax rotation, scree plots indicated two dimensions of influence, contingent control (CC) and gentle persuasion (GP). CC included 17 tactics from four POIS factors (sanctions, exchange of benefits, assertiveness and upward appeal) and two new items reflecting Chinese culture: ‘using organizations outside of the company’ and ‘isolating the person (target)’. The items composing CC were characterized by the semantic format: ‘If you do not comply, I will punish you; if you comply, I will reward you.’ These tactics were forceful and contingent upon targets’ behaviours. GP consisted of six tactics from the ingratiation and rationality dimensions of the POIS and nine new items reflecting Chinese culture. These reflected feeling and ideological management, which are not represented in the POIS; examples are ‘letting this person (target) know that I put the good of the company first’ and ‘praising this person (target) to others when he is not present’. GP tactics were more nurturing, rational and feeling-oriented. In particular, influencers used GP in a way which allowed targets freedom to decide whether or not they wished to comply with demands. With the ITP as a starting point, the present study was designed to (1) refine and expand the ITP by adding items that reflect Chinese culture and (2) test the effects of the status and personality of an influencer and the behavioural patterns of a target on the use of CC and GP.

STATUS AND TACTICS Most previous studies (Kipnis, Schmidt and Wilkinson, 1980; Erez, Rim and Keider, 1986; Yukl and Falbe, 1990; Schermerhorn and Bond, 1991; Xin and Tsui, 1996) have found that the status of a target strongly affects choice of tactics. Using an American sample, Kipnis,

Haifa Sun and Michael H. Bond

285

Schmidt and Wilkinson (1980) discovered that assertiveness, sanctions, exchange and upward appeal were significantly more likely to be used in downward influence attempts than in upward ones, and that assertiveness, sanctions and exchange were more frequently used in downward than in lateral influence attempts. Schermerhorn and Bond’s (1991) investigation of Hong Kong Chinese and American managers showed that strong and directive tactics, such as assertiveness, blocking, exchange, upward appeal and sanctions, were more likely to be used in downward than in upward influence attempts in both cultures. Thus, we expected to find greater downward use of CC than upward or lateral. In contrast, differential use of GP was not expected. Existing evidence suggested that influencers would use GP frequently regardless of status (Schmidt and Kipnis, 1984;Yukl, Falbe and Joo, 1993), because the use of GP gives respect to targets and allows influencers to obtain compliance at low cost. In addition, its use may communicate high levels of interactional justice, thereby generating cooperation (Tyler and Bies, 1990). Therefore, we proposed that superiors will generally use GP as frequently as possible. Since subordinates possess less power than superiors and are obliged to comply with superiors, they would use GP frequently in achieving their goals.Pairs of peers are more likely to use GP to deal with each other as they have an equal and cooperative relationship.Because influencers of whatever status should employ GP as frequently as possible, the frequency of use should be high, and the differences in influencers’ use of GP will be minimal. Hypothesis 1: Contingent control (CC) will be used more frequently in downward influence attempts than in upward and lateral influence attempts. In contrast, gentle persuasion (GP) will be used equally frequently with all three targets. TARGET’S BEHAVIOUR AND TACTICS An influencer’s perceptions of a target’s personality should also influence the choice of tactics. However, only a few studies have addressed this or related questions. Bond (1983) first linked a target’s personality with a perceiver’s behavioural intention towards that target. Bond’s study and, later, Bond and Forgas (1984) showed that a target’s conscientiousness predicted a perceiver’s intentions to engage in trusting behaviour; the target’s extroversion and agreeableness predicted the perceiver’s intentions to associate with the

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target. If ‘perception is for doing’, as Gibson (1979) asserted, then perception of a target’s personality should likewise channel the influence tactics one deploys to gain compliance from a target. After interviewing both Chinese managers and employees and reviewing Chinese dictionaries, we chose two typical behavioural patterns that characterize managers with whom people deal in organizational life. The behavioural patterns were labelled ‘Black Face God’ and ‘Mr. Always Says OK’. The ‘Control Target’ was stipulated as a point of comparison.The Black Face God is a label applied to a person who is arrogant, easily irritated and easily offended. He or she is not concerned about other people’s feelings and puts unnecessary pressure upon others. According to the reciprocity rule (Gouldner, 1960; Gudykunst and Ting-Toomey, 1988; Cialdini, 1993), if targets behave in a certain way, influencers will respond to them in the same way. Therefore, it is suggested that CC will be used more than GP to influence a Black Face God. Mr. Always Says OK is the label for someone who is agreeable and compromising, tolerant, conflictavoidant, and easily affected by others. He or she will be more likely to use GP than CC to deal with others, so GP will be used more than CC to influence Mr. Always Says OK. The Control Target is the person with whom influencers have a direct working relationship and with whom they interact most frequently. Generally, the Control Target can be seen as a mixture of the Black Face God, Mr. Always Says OK and other types of targets, and will use CC and GP at a frequency between the other two. Thus, Hypothesis 2: Contingent control will be used more frequently to deal with the Black Face God than to deal with the Control Target and more frequently with the Control Target than with Mr. Always Says OK. Gentle persuasion will be used less frequently to deal with the Black Face God than with the Control Target and will be used more to deal with Mr. Always Says OK than with the Control Target.

INFLUENCERS’ PERSONALITY AND TACTICS Personality may be a key determinant of the use of different influence tactics. Bond (1983) found a target’s personality influenced a perceiver’s attitude and behaviour. Does an influencer’s personality affect his or her use of influence tactics?


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In this study, to predict influence tactics we used the ‘Big Five’ personality dimensions (McCrae and Costa, 1987; Costa and McCrae, 1992), namely, neuroticism (N), extroversion (E), openness (O), agreeableness (A) and conscientiousness (C), a typology which has proved cross-culturally stable (McCrae and Costa, 1997). We also used the five facets from the Chinese Personality Assessment Inventory (CPAI): harmony, face, renqing, pessimism and flexibility/inflexibility (Cheung, Leung, Fan, Song, Zhang and Zhang, 1996); these reflect Chinese tradition. These two personality tests have been shown to complement each other in Chinese culture, thereby yielding a comprehensive measurement of Chinese personality (Cheung, Leung, Zhang, Song and Xie, 1997). A literature review indicated no strong evidence connecting personality traits with tactics. However, through analysing their characteristics, we can connect traits and tactics on a behavioural level. In terms of tactics, CC is coercive and can easily incur resistance from targets, while GP is nurturing and conflict-avoiding. In terms of personality, the traits used in current research could be classified into the following clusters: traits such as neuroticism and pessimism relate to emotional turmoil; agreeableness, harmony, face, and renqing are relationship-oriented; openness and extroversion relate to energetic personas and social experience; inflexibility and conscientiousness are rule-observant. There is some evidence that individuals with emotional turmoil will be more likely to rely on coercive means of influencing others (Tedeschi, Lindskold and Rosenfeld, 1985); individuals who are relationship-oriented and rule-observant will be more likely to rely on GP; those with social power can use both kinds of tactics, though GP should be their first choice and used more frequently. Thus, Hypothesis 3: Neuroticism and pessimism will significantly and positively relate to CC and negatively relate to GP. Inflexibility, conscientiousness, agreeableness, harmony, face, and renqing will negatively relate to CC and positively relate to GP. Openness and extroversion will positively relate to GP and CC. As the five facets of the CPAI which reflect Chinese tradition complement the Big Five of the Five Factor Inventory (FFI: Costa and McCrae, 1992), we predicted that these five facets would explain variance not explained by the FFI. Thus,

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Hypothesis 4: The five Chinese personality facets will account for additional variance after the effect of the Five Factor Inventory is assessed.

METHODS Sample Managers attending part-time management training workshops in Guangzhou finished the questionnaires during class time (N = 372). Of the respondents providing complete data, 93 per cent were between 20 and 49 years old; 179 were supervisors; 86, middle managers; and 20, upper managers. Two hundred and sixty-four had graduated from college, and 63 from senior high school. Males made up 64.5 per cent, and females 35.5 per cent, of the sample.The respondents were assured of their anonymity and did not sign their names. Measures Personality Respondents were asked to describe their personality using the short form of the Five Factor Inventory (NEO-FFI) developed by Costa and McCrae (1992) and translated by Ho (1994). They also completed the CPAI (Cheung et al., 1996). For neuroticism, extroversion, openness, agreeableness and conscientiousness (FFI), coefficient alphas were respectively 0.79, 0.67, 0.63, 0.62 and 0.71. For harmony, face, renqing, pessimism and inflexibility (CPAI), alphas were 0.69, 0.67, 0.55, 0.67 and 0.49. These alphas are acceptable, except for the 0.49 for inflexibility, which is marginally acceptable. The inflexibility scale has just four items, and a low number of items in a scale makes alphas seem to be low, even though the correlations among items are high (Pedhazur and Schmelkin, 1991). Thus, we retained the inflexibility scale. In addition, all items in the FFI and the CPAI had positive part-whole correlations. Target’s Behaviour and Status Respondents then were asked to think of one person with whom they were now working or had worked who corresponded to the target type specified. We created nine target types, three behavioural


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patterns (Black Face God, Mr. Always Says OK and Control Target) and three influence directions (upward, lateral and downward). The research, therefore, had a three-by-three between-subjects design. Respondents were asked to evaluate behaviours of the specified targets with a 12-item manipulation check scale, six items for the feeling dimension and six for the task-oriented dimension. The feeling dimension describes targets who treat the influencer modestly, helpfully, in a friendly way, gently, and with an empathic attitude and behaviour. The task-oriented dimension describes targets who do the job competently, responsibly, diligently, efficiently, and with a wealth of work knowledge. The 12 items of the manipulation check were factor-analysed (principal components and varimax rotation). The scree plot indicated two orthogonal factors, with task-oriented accounting for 45.7 per cent and feeling for 15.3 per cent of the total variance. Table 11.1 indicates the factor loadings of these 12 items on the two factors. Multivariate analysis of variance (MANOVA) showed that the manipulation check significantly distinguished the target labels (F2,193 = 11.6, p < 0.001). A univariate variance analysis indicated that the feeling dimension could significantly separate the labels (F2,193 = 26.4, p < 0.001). So did the task-oriented dimension (F2,193 = 5.55,

Table 11.1

Factor loadings of manipulation check items on feeling and task-oriented factors

Manipulation check items 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Be hostile and revenge-seeking Behave in a modest manner Criticize publicly Be willing and wait to help with your task Treat other warmly and friendly Apply unnecessary work pressure Do job competently Have wealth of work knowledge Work efficiently Act responsibly in tasks Be lazy on the job Have wealth of work experience

Alpha

Task

Feeling -0.72 0.81 -0.74 0.74 0.79 -0.67

0.78 0.86 0.76 0.68 -0.53 0.81 0.87

0.86

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p < 0.005). A Tukey test revealed that Mr. Always Says OK (M = 4.05) and the Control Target (M = 3.74) received significantly higher scores on the feelings scale than the Black Face God (M = 3.06). Mr. Always Says OK (M = 3.71) received a higher task score than the Black Face God (M = 3.27). The Control Target’s (M = 3.55) task score was not significantly different from those of the other two kinds of targets and fell between the two extremes. It is clear that Mr. Always Says OK generates a warmer feeling and is perceived to work more competently than the Black Face God. The Control Target was differentiated from the Black Face God on the feeling but not on the task dimension, and was not significantly different from Mr. Always Says OK on the feeling and task dimensions. This result suggests that the Control Target category included individuals closer to Mr. Always Says OK than to Black Face God. Influence Tactics The third part of the questionnaire consisted of the 45 tactics items; 34 were from the ITP (Sun and Bond, 1999), and nine were newly added after we consulted with Chinese social and industrial psychologists. These new items are associated with Chinese culture and include face, renqing, long-term perspective and interpersonal networking: for instance, ‘I remind this person that, for his long-term benefit, he should comply with my request’, reflects a long-term perspective. After reviewing other instruments measuring influence tactics in organizations, we added two extra items to the 34: ‘I will spread negative information about this person to others to decrease this person’s influence or to make him comply with my request’ (Ralston, Giacalone and Terpstra, 1994), and ‘I tell this person of my requirement and ask for his opinions to make him comply with my request’ (Yukl, Falbe and Joo, 1993). The POIS does not have items resembling these. The data on tactics were factor-analysed (principal components extraction and varimax rotation). A scree plot indicated two orthogonal factors. After eliminating items with factor loadings over 0.30 on both factors, we chose 35 and factor-analysed them again. Two orthogonal factors, with no double loadings, were obtained and accounted for 38.3 per cent of the total variance. Table 11.2 lists the items and their factor loadings. Twenty-one items loaded on factor 1: 11 from the POIS, three Chinese items from the previous study, and seven new items. The

Haifa Sun and Michael H. Bond Table 11.2

Factor loadings of tactics items on CC and GP in the whole sample*

Influence tactics 33. 14. 12. 31. 11. 29. 27. 32. 9. 19. 30. 24. 23. 7. 17. 5. 34. 26. 3. 13. 10. 20. 21. 22. 8. 4. 15. 28. 25. 18. 6. 16. 35. 1. 2.

†

Remind other that I control his social support Threaten to not promote the target Advise superiors to give target an unsatisfactory appraisal † Threaten to insult the target publicly Report to higher management as means of pressuring target † Use my network of contacts to help target ! Spread negative information about target † Remind target about his long-term benefit Remind target of my help in past to him † Attempt to isolate the target to reduce his or her influence † Remind him that we have worked together for years Scold the target Hint or threaten to fire the target Appeal to higher authority to pressure the target Provide job benefits in exchange for target’s compliance Threaten not to raise target’s salary † Not speak or see him until he does comply Give something to obtain target’s compliance Agree to target’s other request Ask higher management to handle † Use outside organization to influence the target Act friendly before requesting the target Present facts, figures, and information to target before request † Praise the target when he is not present † Inform other I value our relationship Request target humbly and politely † Strive to know more information than target $Tell target of my need and solicit his or her opinions Explain to target the reason for my request † Dress neatly and behave seriously in the presence of target Treat target fairly Sympathize with and apologize to target for requesting † Consider this person’s self-respect when working with him Make other feel important by noting only he can do task † Let target know that I put the good of the company first

Alpha

291

CC

GP

0.72 0.72 0.72 0.70 0.68 0.67 0.67 0.65 0.65 0.65 0.64 0.63 0.62 0.62 0.61 0.58 0.58 0.57 0.55 0.55 0.51 0.69 0.64 0.64 0.62 0.60 0.57 0.56 0.56 0.56 0.50 0.49 0.45 0.43 0.41 0.93

* Only loadings >0.30 are presented. Items with †are features of Chinese cultures, those with ! are from Ralston, Giacolone and Terpstra (1994); those with $ are from Yukl and Tracey (1992); and those without a mark are from the POIS.

0.83

292


newly added items referred to using a network of contacts to help the target, reminding him or her that target and influencer have been working together for a long time, and reminding the target to consider his or her long-term benefit. Three items expressed forcing compliance: threatening to insult the target publicly, reminding the target that an influential person who supports him or her is on the influencer’s side (controlling social support), and not speaking to or seeing the target until he or she does comply (isolating). As in the previous study, factor 1 was characterized by the semantic format, ‘If you don’t do X, I will punish you; if you comply, I will reward you.’ The label CC still fits this factor. Items in factor 2 described the influencer as behaving seriously, showing face-consideration, praising the target behind his or her back, stating that he or she valued the relationship with the target, treating the target fairly, and putting collective benefits first, individual benefits second. Other items involved using facts, reason, a friendly, humble and apologetic attitude, and making the target feel important. All the behaviours described are intended to persuade targets to comply without coercion. Thus the label GP is appropriate for this factor. Tactics were also factor-analysed for each influence direction. There were 121, 129 and 122 respondents involved in upward, lateral and downward influence attempts. The variance accounted for by factor 1 (CC) and factor 2 (GP) was 25.5 per cent and 14.4 per cent in upward; 26.6 per cent and 10.5 per cent in lateral; and 26.7 per cent and 10.6 per cent in downward. Procrustian congruence analyses were conducted for the pairs of the samples (McCrae, Zondeman, Costa, Bond and Paunonen, 1996). The congruence coefficients for CC were 0.97 for all three pairs; for GP, they were 0.93, 0.94 and 0.94 for the pairs upward and lateral, downward and lateral, and upward and downward respectively. The results strongly support the claimed congruence in factor structures across the three pairs of influence directions. Therefore, the frequencies with which the two basic types of influence tactics were used could be compared across influence directions.

RESULTS Status and Target’s Behaviour Only data concerning men influencing men were used to test the effects of status and the target’s behaviour on tactics used. Women


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were eliminated to control for the effect of gender. There were 198 male respondents in this sample. Missing values were handled with listwise deletion in all analyses reported in the following section. To test Hypotheses 1 and 2, we performed a 3 ¥ 3 MANOVA on the two dependent variables, CC and GP. This analysis produced two significant main effects (Fstatus [2, 193] = 5.07; p < 0.001; Fbehaviour [2, 193] = 2.82; p < 0.05). The interaction was not significant. Subsequent analysis of the main effect for status produced two significant univariate effects on CC (F2,187 = 9.15, p < 0.001) and GP (F2,187 = 5.84, p < 0.01). Consistent with Hypothesis 1, Tukey tests for differences across conditions showed that CC tactics were used more frequently for downward than for lateral and upward influence. Unexpectedly, GP tactics were also found to be used more frequently for downward than for lateral and upward influence. No differences between lateral and upward influence were found in these two conditions (see Table 11.3). Subsequent analysis of the main effect for target’s behaviour produced one significant univariate effect on CC (F2,187 = 4.93, p < 0.01). The target’s behaviour influenced the use of CC but not GP. Tukey tests for CC produced a significant difference when the Black Face God was compared to the Control Target; but, inconsistent with Hypothesis 2, the difference between the Black Face God and Mr. Always Says OK was not significant. Unexpectedly, the three behavioural patterns of targets were not differentiated from each other on

Table 11.3

The impact of status on CC and GP: Univariate tests*

Tactics

Downward influence (N = 67)

Lateral influence (N = 67)

Upward influence (N = 68)

F

p

Contingent control Gentle persuasion Effect of status on dependent variables

2.3* (0.93) 4.6* (0.71)

1.9† (0.78) 4.2† (0.91)

1.8† (0.76) 4.1† (0.98)

7.8† 5.8† 5.07‡

0.001 0.003 0.001

* Means with different subscripts differ significantly at the 0.05 level by the Tukey test. Standard deviations are in parentheses. † Univariate F; df = 2, 187. ‡ Pillais’s test F.

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the frequencies of influencers’ use of gentle persuasion tactics (see Table 11.4). Influencer’s Personality and Tactics Table 11.5 presents the correlations of the FFI and CPAI variables with respondents’ reported use of CC and GP. Table 11.6 shows the regression of influence tactics on the two sets of personality variables. Consistent with Hypothesis 3, openness was positively related to GP and CC, pessimism had negative correlation with GP; agreeableness was negatively related to CC; face and harmony were positively related to GP. Against our expectations, agreeableness had a negative relationship with GP, while neuroticism, inflexibility, conscientiousness, renqing and extroversion were not statistically significant. Complementarity of the Big Five and the Chinese Tradition Variables Table 11.6 also shows the results for Hypothesis 4. In the hierarchical regression, the Big Five comprised the first block and the five facets of Chinese tradition made up the second block. The five Chinese facets explained an additional 7 per cent of the variance in GP (F5,183 = 7.28, p < 0.01) after the predictive effect of the Big Five was accounted for. This result was consistent with the relevant part of Hypothesis 4. The five facets of Chinese personality variables did not

Table 11.4

Impact of the target’s behaviour on CC and GP: Univariate effects*

Tactics

Black Face God (N = 62)

Mr. Always Says OK (N = 62)

Control target (N = 72)

F

p

Contingent control Gentle persuasion Target’s behaviour

2.2* (0.87) 4.3 (1.02)

2.0 (0.87) 4.4 (0.87)

1.8† (0.78) 4.2 (0.83)

4.93† 0.82† 2.82‡

0.008 0.441 0.025

* Means with different subscripts differ significantly at the 0.05 level by the Tukey test. Standard deviations are in parentheses. † Univariate F; df = 2, 187. ‡ Pillais’s test F.

Table 11.5 Variable 1. Neuroticism 2. Extroversion 3. Openness 4. Agreeableness 5. Conscientiousness 6. Harmony 7. Renqing 8. Face 9. Pessimism 10. Inflexibility CC GP Mean SD

1 -0.42*** -0.02 -0.45*** -0.26*** -0.18** 0.15* 0.31*** 0.53*** 0.07 0.18** -0.04 2.56 0.60

2

0.21*** 0.18** 0.40*** 0.21*** 0.01 0.02 -0.18** 0.20** -0.02 0.19** 3.17 0.48

Correlations among FFI and CPAI variables, CC and GP* 3

-0.12* 0.37*** 0.00 -0.01 0.06 -0.01 0.29*** 0.17** 0.31*** 3.26 0.49

4

0.13* 0.22*** 0.00 -0.18** 0.37*** -0.07 -0.29*** -0.17** 3.52 0.47

5

0.22*** 0.13* 0.16** -0.14* 0.56*** -0.06 0.25*** 3.84 0.44

6

0.18** 0.25*** 0.04 0.06 -0.04 0.16* 3.71 0.68

7

0.25*** 0.21** 0.23*** -0.12* -0.01 4.00 0.56

8

0.44*** 0.23*** 0.07 0.22*** 3.36 0.67

9

0.19** 0.11 -0.04 2.88 0.73

10

CC

GP

-0.06 0.25*** 1.29 0.66

2.03 0.86

4.32 0.90

N = 196. * p < 0.05. ** p < 0.01. *** p < 0.001. a

295

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Choice of Influence Tactics Table 11.6

Results of hierarchical regression of influence tactics on FFI and CPAI variablesa

Block

Predictor

GP

CC

1. FFI

DR2 Neuroticism Extroversion Openness Agreeableness Conscientiousness DR2 Face Harmony Renqing Pessimism Inflexibility

0.16*** -0.05 0.07 0.21** -0.24** 0.04 0.07** 0.22** 0.14* -0.07 -0.19* 0.10 0.23***

0.11** 0.07 0.05 0.17* -0.24** -0.09 0.02 0.03 0.06 -0.14 -0.03 0.01 0.13**

2. CPAI

Overall R2 N = 194. * p < 0.05. ** p < 0.01. *** p < 0.001.

a

account for additional variance in CC after the FFI effects had been removed.

DISCUSSION Influence Tactics The two-dimensional structure of CC and GP was proved robust by its replication and its congruence across influence directions. Similar two-dimensional structures can be found in other social psychological research. Bond and Forgas (1984) established a two-factor structure for the behavioural intentions of both Chinese and Australians towards fellow students. The first factor, trust, was characterized by items such as ‘respect target person’, and ‘willing to work together with the target person in a class project’. The second factor, association, was composed of items such as ‘not dislike the target person’, and ‘not afraid of the target person’. Trust may correspond to GP,


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and association to CC. Similarly, Wiggins (1979) developed a twodimensional ‘circumplex’ of the interpersonal variables dominance and nurturance (Wiggins and Pincus, 1989). Likewise, Smith, Misumi, Tayeb, Peterson and Bond (1989) established the generality of the two dimensions of leadership style P (performance) and M (maintenance) across four different cultural groups. The two-factor structure is not only parsimonious in conceptualization, but also provides a basis for researchers’ linking their work across behavioural contexts and cultural groups (cf. Triandis, 1977: Ch.1). In content, CC is more direct and stronger than GP and puts contingencies upon targets’ behaviors. As Kipnis (1976) indicated, tactics can be usefully categorized into two kinds: (1) those that are direct and control others, and (2) those that are collaborative, with the influenced parties believing that they have some choice in responding to the request. CC is coercive and puts targets down by using regulations, rules, and other formal measures. When used inappropriately, given the role relationships, it is probably perceived to be insulting and to deny face (Brown and Levinson, 1987); countercoercion and escalation then set in. GP puts targets on an equal basis, even enhancing their status, and probably communicates high levels of interactional justice (Tyler and Bies, 1990). The differences between CC and GP in content and social meaning will produce different social consequences and make influencers with different status and personality types use them more or less frequently. Status and Tactics The finding that CC tactics were more frequently used in downward than in upward and lateral influence attempts is generally consistent with the results found in Western organizations (Kipnis, Schmidt and Wilkinson, 1980; Yukl and Falbe, 1990). Thus, superiors seem universally more likely to use strong and direct tactics than do lateral peers and subordinates. As superiors are given authority and organizations are hierarchically structured, superiors use CC legitimately, and its use will meet less resistance from targets. Subordinates have less position power and have to obey their superiors. However, superiors also used GP more with subordinates than with other targets, which is inconsistent with the prediction in Hypothesis 1 that higher usage is consistent with the role demands of leadership, whereby those in authority are required to exercise

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more influence over others to accomplish organizational tasks. None the less, GP is the influence tactic of choice relative to CC, since it generates less resistance and counterattack by the receiving party. Target’s Behaviour and Tactics The results empirically showed that influencers were more likely to use CC to deal with the Black Face God than to deal with the Control Target. Given that the Black Face God received a significantly lower score on the feeling dimension than did the Control Target, evidently the Black Face God provokes others’ repugnance and the expectation that he is uncompromising. The reciprocity rule then operates, derived from the reputation ascribed to the Black Face God from his prior organizational dealings. Mr. Always Says OK was not differentiated from the Black Face God on relationships with the tactics used by others, though the former had higher feeling and task scores in the manipulation check. There are probably dimensions other than feeling and task that affect influencers’ perceptions of Mr. Always Says OK and their choice of tactics. Such characteristics of Mr. Always Says OK might be conflict avoidance and irresponsibility, which were not measured by our manipulation check. Many personality characteristics can be ascribed to any target of influence. We believe that these traits generate expectations about how the target will respond to influence attempts. These expectations then channel the influence tactics used and the speed with which the influencer will shift from the less costly GP to the more resourcedemanding and aversive deployment of CC. The perceived nature of the other’s personality is a key component in all our social dealings (Miller and Turnbull, 1986), and information about the other should be included in research designs to give them greater ecological validity. Influencer’s Personality and Tactics Our study did not find influencers high in neuroticism to be more likely to use CC. Results from other studies have demonstrated that impulsive characteristics played a very important role in control phenomena (Tedeschi and Felson, 1994). It appears that this personality trait is not related to such control needs among the Chinese.


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Results also failed to support the hypothesis on extroversion. However, openness to experience was related to the use of both GP and CC. Openness is more typically associated with social-political attitudes (McCrae, 1996). One can perhaps speculate that because open influencers are more creative and permeable in their thinking, they are more versatile and motivated in using any kind of influence in realizing their visions. Leaders, it must be noted, are typically high in openness (Hogan, Curphy and Hogan, 1994). Contrary to the results for openness, agreeableness was negatively associated with both CC and GP. Agreeable people tend to be acquiescent rather than assertive. In fact, some of the items measuring agreeableness, such as ‘cooperating rather than competing’, and ‘not manipulating people’, reflect the reality that agreeable people tend to avoid the interpersonal conflict generated by attempting to influence others. They thus are more acted upon than acting upon others. Harmony, renqing and face can be called triply salient indigenous Chinese personality characteristics. This research revealed that two of these three traits, harmony and face, are related to the use of GP. It appears that those concerned with harmony and face tend to place value on interpersonal relations. Therefore, they prefer to use GP to gain compliance from their targets. Interestingly, high scorers in pessimism are associated with the use of GP (Table 11.6). Pessimistic people might not have the self-efficacy in using influence tactics so that they refrain from using even the more gentle persuasion tactics. The five facets of Chinese tradition, entered after the FFI effects had been extracted, significantly predicted GP use but not CC use. It is clear that the Chinese personality facets complement the FFI mainly by assessing aspects of Chinese people’s orientation towards harmonious feelings and relationships, both of which promote GP use. The salience of relationships may be less pronounced in individualistic cultures (Kwan, Bond and Singelis, 1997). However, we expect that tools for assessing relationship orientation in Western subjects would enable researchers to predict the use of influence tactics in China as well (cf. Kwan, Bond and Singelis, 1997).

CONCLUSIONS The current research suggests several rules about how influencers choose their tactics to obtain compliance from targets in Chinese organizational settings: (1) the authority bestowed by position pro-

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motes the use of the stronger tactics of contingent control to deal with targets. Resistance from low-status targets is lower than it is from those of equal or higher status, so that expected success in using such tactics without organizational cost can explain their use. (2) The reputation of a target as disagreeable and provocative leads to the use of more coercive tactics. (3) Personal competence, emotional proclivities and interpersonal orientations connected to the personality traits of influencers result in different types and frequencies of tactic usage. (4) Tactics and personality traits of influencers rooted in indigenous culture should be considered in explaining their choices of influence behaviour. The proposed research model and method enable the future study of other target behavioural patterns, other characteristics of influencers (such as their goals and beliefs), and the sequencing of tactic choices. The ITP measure of influence tactics refined in this study permits researchers to undertake culturally sensitive research in Chinese societies and can be used practically in both management evaluation and training. Future research will examine the grouping of tactics within factors and examine cultural variations in tactic use within Chinese cultures in different types of social-political contexts.

Note 1.

The authors wish to thank Drs Peter Smith, Jiing-Lih Farh, Kwok Leung and Darius Chan for their helpful comments at various stages of this research. We are grateful to Professors Jun Hu and Xiaoyang Tang, who are affiliated to two universities in Guangzhou, PRC, for providing us with access to respondents.

References Bond, M. H. 1983. ‘Linking person perception dimensions to behavioral intention dimensions: The Chinese connection’, Journal of Cross-Cultural Psychology, 14: 41–63. Bond, M. H. and Forgas, J. P. 1984. ‘Linking person perception to behavior intention across cultures: The role of cultural collectivism’, Journal of Cross-Cultural Psychology, 15: 337–52. Brown, P. and Levinson, S. 1987. Politeness: Some Universals in Language Use. Cambridge: Cambridge University Press. Cheung, F. M., Leung, K., Fan, R. M., Song, W. Z., Zhang, J. X. and Zhang, J. P. 1996. ‘Development of the Chinese Personality Assessment Inventory (CPAI)’, Journal of Cross-Cultural Psychology, 27: 181–99.


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Cheung, F. M., Leung, K., Zhang, J. X., Song, W. Z. and Xie, D. 1997. ‘Indigenous Chinese personality constructs’, Manuscript in preparation. Cialdini, R. B. 1993. Influence: Science and Practice (3rd edn). New York: HarperCollins College Publishers. Costa, P. T. and McCrae, R. R. 1992. NEO PI-R, Professional Manual. Revised NEO Personality Inventory (NEO-PI-R) and NEO Five Factor Inventory (NEO-FFI). Odessa, FL: Psychological Assessment Resources. Erez, M., Rim, Y. and Keider, I. 1986. ‘The two sides of the tactics of influence: Agent vs. target’, Journal of Occupational Psychology, 59: 25–39. Falbe, C. M. and Yukl, G. 1992. ‘Consequences for managers of using single influence tactics and combinations of tactics’, Academy of Management Journal, 35: 638–52. Gibson, J. J. 1979. The Ecological Approach to Visual Perception. Boston, MA: Houghton-Mifflin. Gouldner, A. W. 1960. ‘The norm of reciprocity: A preliminary statement’, American Sociological Review, 25: 161–78. Gudykunst, W. B. and Ting-Toomey, S. 1988. Culture and Interpersonal Communication. Beverly Hills, CA: Sage. Ho, E. K. F. 1994. ‘Validating the five-factor model of personality: The Hong Kong case’, unpublished bachelor’s thesis, Chinese University of Hong Kong. Hogan, R., Curphy, G. J. and Hogan, J. 1994. ‘What we know about leadership: Effectiveness and personality’, American Psychologist, 49: 493–504. Kipnis, D. 1976. The Powerholders. Chicago, L: University of Chicago Press. Kipnis, D., Schmidt, S. M. and Wilkinson, I. 1980.‘Intraorganizational influence tactics: Explorations in getting one’s way’, Journal of Applied Psychology, 65: 440–52. Kwan, V. S. Y., Bond, M. H. and Singelis, T. M. 1997. ‘Pancultural explanations for life satisfaction: Adding relationship harmony to self-esteem’, Journal of Personality and Social Psychology, 73: 1038–51. McCrae, R. R. 1996. ‘Social consequences of experiential openness’, Psychological Bulletin, 120: 323–37. McCrae, R. R. and Costa, P. T. 1987. ‘Validation of five factor model across instruments and observation’, Journal of Personality and Social Psychology, 52: 81–90. McCrae, R. R. and Costa, P. T. 1997. ‘Personality trait structure as a human universal’, American Psychologist, 52: 509–16. McCrae, R. R., Zondeman, A. B., Costa, P. T., Bond, M. H. and Paunonen, S. V. 1996. ‘Evaluating replicability of factors in the revised NEO personality inventory: Confirmatory factor analysis versus procrustes rotation’, Journal of Personality and Social Psychology, 70: 552–66. Miller, D. T. and Turnbull, W. 1986. ‘Expectancies and interpersonal processes’, Annual Review of Psychology, 37: 233–56. Pedhazur, E. J. and Schmelkin, L. P. 1991. Measurement, Design, and Analysis. Hillsdale, NJ: Erlbaum. Podsakoff, P. M. and Schriesheim, C. A. 1985. ‘Field studies of French and Raven’s bases of power: Critique, reanalysis, and suggestions for future research’, Psychological Bulletin, 91: 387–411. Ralston, D. A., Giacalone, R. A. and Terpstra, R. H. 1994. ‘Ethical perceptions

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of organizational politics: A comparative evaluation of American and Hong Kong managers’, Journal of Business Ethics, 13: 989–99. Schermerhorn, J. R. and Bond, M. H. 1991. ‘Upward and downward influence tactics in managerial networks:A comparative study of Hong Kong Chinese and Americans’, Asia Pacific Journal of Management, 8: 147–58. Schmidt. S. M. and Kipnis, D. 1984. ‘Managers’ pursuit of individual and organizational goals’, Human Relations, 37: 781–94. Smith, P. B., Misumi, J., Tayeb, M., Peterson, M. and Bond, M. 1989. ‘On the generality of leadership style measures’, Journal of Occupational Psychology, 62: 97–109. Sun, H. F. and Bond, M. H. 1999. The structure of upward and downward tactics of influence in Chinese Organizations. in J. C. Lasry, J. Adair and K. Dion (eds), Latest contribution to cross-cultural psychology, pp 286–299, Amsterdam: Swets and Zeitlinger. Tedeschi, J. T. and Felson, R. B. 1994. Violence, Aggression, and Coercive Actions. Washington, DC: American Psychological Association. Tedeschi, J. T., Lindskold, S. and Rosenfeld, P. 1985. Introduction to Social Psychology. St Paul, Minn.: West Publishing. Triandis, H. C. 1977. Interpersonal Behavior. Monterey, CA: Brooks-Cole. Tyler, T. R. and Bies, R. J. 1990. ‘Interpersonal aspects of procedural justice’, in S. J. Carroll (ed.), Applied Social Psychology in Business Settings: 77–98. Hillsdale, NJ: Erlbaum. Wiggins, J. S. 1979. ‘A psychological taxonomy of trait-descriptive terms: The interpersonal domain’, Journal of Personality and Social Psychology, 37: 395–412. Wiggins, J. S. and Pincus, A. L. 1989. ‘Conceptions of personality disorders and dimensions of personality’, Psychological Assessment: A Journal of Consulting and Clinical Psychology, 1: 305–16. Xin, K. R. and Tsui, A. S. 1996. ‘Different strokes for different folks? Influence tactics by Asian-American and Caucasian-American managers’, Leadership Quarterly, 7: 109–32. Yukl, G. and Falbe, C. M. 1990. ‘Influence tactics objective in upward, downward, and lateral influence attempts’, Journal of Applied Psychology, 75: 132–40. Yukl, G. and Tracey, J. B. 1992. ‘Consequences of influence tactics used with subordinates, peers, and the boss’, Journal of Applied Psychology, 77: 525–35. Yukl, G., Falbe, C. M. and Joo, Y.Y. 1993. ‘Patterns of influence behavior for managers’, Group and Organization Management, 18: 5–28.

12

Productivity Cultures and Competition in the Global Marketplace: Cases from Hong Kong Marshall W. Meyer

This chapter concerns the impact of firm-level productivity cultures on competition in the global marketplace. The focus is on two sets of questions for which I will provide suggested but not definitive answers, since definitive answers will require additional sustained research. In other words, I am defining some basic questions rather than pursuing answers to questions already debated in the literature. The questions are as follows. 1. How does the surrounding societal culture influence a firm’s attempt to create and maintain a productivity-focused organization culture? Some general issues include the nature of productivityfocused cultures, the influence of societal culture on the firm cultures and on the creation and management of those cultures.A specific issue concerns the influence of Chinese values and business practices on the productivity cultures of individual firms. 2. Does a firm’s desire to be a global company interfere with its ability to create strong local productivity cultures? The conventional wisdom in the West is that productivity gains are essential for success in global markets: unit costs must be driven down. The question pursued here is whether firm-level productivity cultures that drive unit costs down can be extended globally. Put somewhat differently, might the requirements of building a strong productivity culture which is effective in the local environment and the requirements of globalization be at odds? The outline of this chapter is as follows: to begin with, I review the literature pertinent to productivity cultures and then suggest two propositions about the impact of Chinese values and business practices on them. I then turn to the literature on globalization and the 303

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relationship of productivity to success in globalization. Next, I sketch the methods used in this research and describe the productivity cultures of two Hong Kong financial service organizations. One of these organizations, which I shall call Gung Ho Bank (GHB), is a Hong Kong-based bank which serves the mass market. GHB has the highest productivity in Hong Kong, and it is among the most profitable of all Hong Kong-based banks. The other bank, which I shall call Global Financial Services (GFS), is a global bank based in the USA. GFS caters to the upper tiers of the market, mainly customers needing the capabilities of a global bank. Over the next few years, GFS hopes to increase its worldwide customer base tenfold. To grow its customer base in Hong Kong, GFS must compete directly with GHB. As my analysis will show, these two banks use very different means to achieve productivity. A question I will raise is whether GFS can compete with GHB on productivity without the advantage of GHB’s strong productivity culture, which is rooted in the local culture. Can GFS rely on technology and global reach to accomplish in the Hong Kong market what GHB accomplishes with its local productivity culture?

REVIEW AND PROPOSITIONS Productivity Cultures Many managers believe that a culture emphasizing productivity is a key element of organization success. For example, according to Jack Welch, the company’s CEO, a productivity culture is a key element of GE’s success. In Welch’s view, a productivity culture allows people to be productive and frees them from unproductive routines. Welch (1990) is not particularly clear as to whether productivity cultures originate inside the firm or in surrounding societies. Although he cites Japan as an exemplar of a productivity culture (ignoring the notoriously low productivity of Japan’s service sector), his prescription for productivity is ‘speed, simplicity, and self-confidence’, which are qualities managed by firms rather than emanating from the culture of the surrounding society. Scholarly articles on firm-level productivity cultures appear occasionally. Many of the arguments tend to be circular: for example, productivity cultures are those having shared images of work settings as

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very productive; productivity cultures focus on the core issues of how work is being done and how things operate successfully rather than on peripheral issues (Akin and Hopelain, 1986). There is an established literature on whether the culture surrounding an organization (as compared with firm-level culture) influences its structure and functioning. An ongoing debate concerns whether organizational forms are culture-bound (Lincoln, Olson and Hanada, 1978; Child and Keiser, 1979) or culture-free (Marsh and Mannari, 1980). Less contentious is the question of whether day-to-day organizational functioning, as indicated by the power distance separating bosses from subordinates and the balance of individualism and collectivism, is shaped by the surrounding culture. Almost all the evidence points towards persistent cultural effects, even within global organizations (Hofstede, Neuijen and Ohayv, 1990). Some evidence indicates that specific mechanisms used to improve productivity may be shaped by the surrounding culture: for example, in indigenous Singaporean firms, productivity training increases with the extensiveness of personnel and planning systems, whereas in Western firms located in Singapore, productivity training increases with product and technological innovation (Foo, 1992). There is also an established literature on the impact of Chinese culture on management practices. Some threads of this literature include the following: first, Chinese managers rely heavily on guanxi (connections) rather than on impersonal channels to conduct business, and trust is present in business relationships to the extent that guanxi exists (Redding, 1990; Luo, 1997; Farh, Tsui, Xin and Cheng, 1998). Second, following from the tradition of guanxi, there is a preference for face-to-face communication, which sets an upper boundary on organizational size and limits the usefulness of management information systems in Chinese organizations (Martinsons and Westwood, 1997). Third, and critical for the present discussion, there is a preference for speedy, simple and low-cost solutions to business problems and, hence, the Chinese predilection to operate small and unglamorous businesses (Montagu-Pollock, 1991). Keeping Jack Welch’s prescription for productivity – ‘speed, simplicity, and self-confidence’ – and the Chinese preference for personal over impersonal relationships, face-to-face communication, and speedy, simple, low-cost solutions to problems in mind, I suggest a simple proposition: smaller and more cohesive Chinese firms will have an advantage with respect to customer service and productivity compared to their larger and less cohesive competitors. The practical

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implication should not be overlooked: in the race for productivity, large global firms may be at a disadvantage compared to smaller local firms utilizing Chinese business practices. Today, the race for productivity has been joined by GFS and GHB, both of which strive to hold or reduce costs while improving performance for the customer. GHB has consistently nurtured a productivity culture, a culture of efficient customer service, rooted in Chinese values. Throughout its 60-year history, GHB has been both acutely cost-conscious and committed to extraordinary levels of customer service. GFS, by contrast, has only recently focused on productivity. GFS strives to improve productivity using Western methods, mainly methods adopted from leading manufacturing firms. The current priorities of GFS include strategic cost management and a zero-defects programme aimed at reducing error to levels now routine in manufacturing. Thus, although attention to productivity is deeply embedded in the culture of GHB, it is a recent development and is heavily dependent on adoption of ‘best practices’ at GFS. Multinational Management Theory Multinational management (MNM) theory, which is in many respects an extension of organizational theory, seeks to explain the existence and behaviour of global firms. Because the number of global firms is limited, MNM theory is largely case-based. The theory tends to be somewhat less abstract than organizational theory, and its core propositions have generally not been tested with the same degree of rigour that is customary in organizational theory domains such as organizational population ecology. MNM theory, however, is an attempt to establish a rationale for the existence of global firms, and it also suggests some of the tensions inherent in the management of these firms. The Rationale for Global Firms According to MNM theory, global firms benefit from efficiencies that are due to economies of scale and scope, superior risk management due to cross-border diversification, and advantages in innovation due to their inherent diversity (Ghoshal, 1987). MNM theorists envisage second-order benefits of globalization as well. The scope of global firms advantages them in the game of ‘global chess’: global competitors are less vulnerable to predatory pricing than their local counter-

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parts because of the ability to retaliate anywhere. And global firms are significantly advantaged in winner-take-all industries where the aim is to establish a standard, whether it is the ‘QWERTY’ keyboard or the Microsoft-Intel standard in microcomputing, and hence extract near-monopoly rents (Arthur, 1989). The Tensions within Global Firms In MNM theory, the fundamental tension in global firms is that between integration and responsiveness, between large-scale, centralized operations driven by a global strategy and smaller-scale, decentralized operations driven by a multidomestic strategy. Firms choosing the global strategy seek economies of scale and, in some instances, positive returns to scale where world standards can be established. Those choosing the multidomestic strategy seek to meet the requirements of customers and, in some instances, regulators, and they seek economies of scale only secondarily (Bartlett, 1989). Some firms combine the global and multilocal strategies by globalizing some functions and localizing others. Pharmaceutical firms, for example, tend to globalize manufacturing activities while localizing the clinical trial, marketing, and sales functions. Productivity Cultures as a Problem for MNM Theory MNM theory has not addressed whether globally integrated firms pursuing the efficiency advantages of large scale and scope can also realize the advantages of strong productivity cultures. The question can be put somewhat differently: are the levels of communication, cohesion and organizational control in globally integrated firms sufficient to sustain strong productivity cultures or, contrariwise, are local competitors potentially if not actually advantaged with respect to communication, cohesion and organizational control, and hence with respect to productivity cultures? Globally integrated manufacturing firms such as GE and Hewlett-Packard appear to have developed strong productivity cultures worldwide. However, as will be argued below, globally integrated service firms that are both peopleintensive and customer-intensive may not able to develop productivity cultures that are as strong as their local competitors’ because large size and diversification hinder communication, cohesion and organizational control. The advantages of large scale and scope accruing to global firms, in other words, may under some circumstances be offset by disadvantages in their productivity cultures.

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METHODS The method used here was comparative case research. Data were gathered from interviews and direct observation at both GHB and GFS, spontaneous conversations with GHB customers, and documents supplied by both banks. Interviews were conducted with executives of GHB and GFS in June 1996, and February 1997. The executives included the GHB’s CEO and his counterpart at GFS, the general manager of retail banking, executives responsible for customer service and human resources, and branch managers in both organizations. All interviews followed a common template, although specific questions depended on the person interviewed and, importantly, on time constraints. The interviews covered the history, organizational structure, culture, control mechanisms, performance measurement and productivity of the two banks. I observed the main banking halls of the three largest GHB branches and several of its minibranches; I also observed two GFS branches. Both GHB and GFS shared numerous documents with me. These documents included organizational histories, annual reports, presentations describing the firms’ cultures and performance, and internal data on the financial and non-financial performance of both organizations. In addition, both GHB and GFS staff answered supplementary questions via fax and e-mail. The account of GFS is also based on familiarity with its operations worldwide. I am especially familiar with GFS’s retail operations in the USA and Latin America. The Productivity Culture of GHB GHB is among the largest financial service firms in Hong Kong, with more than 100 branches and 7000 employees in the special administrative region (and a small number of branches and employees elsewhere in China). GHB was founded in the 1930s as a ‘native bank’ and initially had three areas of business: gold trading, money changing and remittances. As with other native banks in the 1930s, GHB’s customers were largely relatives and friends of its founders (the founding chairman was the largest personal depositor), and GHB remained essentially unregulated until the early 1950s, when its shares were offered to the public. GHB has a history of paternalistic management. In the early years, GHB followed the custom of traditional Chinese employers by providing meals to its employees without

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charge. These meals were not skimpy and wages were not high: the cost of meals to the bank was about 70 per cent of the wages paid to employees. Today, two features of GHB stand out: the high level of productivity and the focus on customer service. GHB’s productivity surpasses that of its Hong Kong competitors. The standard productivity statistic in banking is the ratio of expenses to revenues.1 US banks strive for an expense/revenue ratio of 0.50 but typically fall in the range of 0.55 to 0.60. Most Hong Kong banks have expense/revenue ratios in the range of 0.30 to 0.38. GHB’s ratio is below 0.30, the lowest in Hong Kong. GHB’s expense/revenue ratio is sustained by the productivity of GHB’s people, not by extraordinarily high prices or advanced technologies. Queues usually move swiftly, and when they do not customers have the opportunity to examine displays of small luxury goods available through a GHB gift club. Transactions take place with astonishing speed: opening a new account takes about ten minutes, transferring funds by wire about 90 seconds. Tax loans are usually approved within 24 to 48 hours: the competition takes a week.2 GHB does not extract above-market margins and usurious fees from its customers, and neither does it use the most advanced technologies. The market for financial products is extremely competitive in Hong Kong, and GHB’s margins are similar to competitors. GHB’s fees, like its margins, are maintained at ‘competitive’ levels and are neither the lowest nor the highest in Hong Kong. GHB’s advantage is customer service, not high margins and fees and not technological wizardry. GHB is, if anything, a technological laggard. Personal computer-based banking, for example, is only now being implemented by GHB. GHB’s service emphasis is reflected its mission statement: ‘We are an ordinary bank for the ordinary people who want extraordinary service.’ According to a senior executive, ‘Everyone practises customer service . . . Everyone falls in line.’ Customer satisfaction surveys suggest that customer service is, in fact, practised throughout GHB. For six consecutive years, customer satisfaction levels at GHB have been the highest of any Hong Kong bank. Mechanisms Promoting Productivity and Customer Service An argument I wish to advance is that GHB’s culture, which is rooted in traditional Chinese values, is principally responsible for its high levels of productivity and customer satisfaction, and that the GHB culture, in turn, is sustained by control and measurement systems

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tracking customer service and costs closely and bottom-line financial results less intensely. I shall first outline the elements of the GHB culture and then turn to GHB’s control and measurement systems. GHB’s culture. GHB communicates the importance of efficient customer service to its people continuously.The culture blends traditional Chinese values with elements of Western management theory.The traditional Chinese values include courtesy, humility, intelligence, justice and trust. The elements of Western management theory include management by objectives, cost management and recognition of performance. New recruits, who are mainly high-school graduates, are taught the GHB culture (in Cantonese) from the first day on the job. The first week of training focuses exclusively on Confucian philosophy and the virtues needed to be a good person, not a good businessperson. Every recruit is given a copy of the ‘yellow book’, a guide written by GHB’s retired chairman, who is revered as the father of the bank. The yellow book outlines ‘the good virtues a young person working in the commercial field should possess’. The virtues are taught by allegory. One lesson asks, ‘What does a good person do when a guest comes to his door?’ The answer, of course, is that a good person gets up from his chair, opens his door and greets his guest. Lessons like this are then translated into business practice: for example, recruits are taught that customers should be greeted properly and that managers should approach customers rather than wait for customers to come to them whenever possible. In practice, GHB does not refer customers to managers to approve or complete complicated transactions. Instead, managers come to customers; usually, a manager will work alongside a teller when managerial assistance or approval is required, speeding transactions dramatically. The human side of business is given greater emphasis than the technical side throughout the training programme. The management of GHB believes that this training in personal character and values is unique among Hong Kong banks. Several mechanisms ensure ongoing socialization of employees into the GHB culture. Mentors are assigned to junior staff members and are expected to meet up with them after hours and to treat them to inexpensive meals. Three days a week, a short message broadcast throughout the bank before it opens reaffirms fundamental GHB values, especially ‘the eight golden rules’, which include mottoes such as ‘Greet customers by name’ and ‘Say thank you.’ And regular customer service seminars, which are conducted in the evening after normal working hours, further reinforce GHB values. These seminars,

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which are in principle voluntary, are attended by nearly all of GHB’s 7000 staff members, split into two groups of 3500 each. The seminar begins with relaxation exercises,3 which are followed by a discussion of the bank’s culture and recognition of outstanding customer service. The acts of outstanding customer service recognized in customer service seminars quickly become part of GHB’s lore. To illustrate, let me use an incident known throughout the organization: in the spring of 1996, two female employees were recognized for aiding an elderly woman who lost a heel from her shoe while on an escalator. The two employees helped the woman to a chair, found the heel, found a hammer normally used to stamp personal seals or chops on documents, and repaired the heel. The customer informed the branch manager of this incident, and it has now been communicated throughout the organization.4 GHB’s control and measurement systems. GHB uses powerful controls to promote the twin goals of customer service and productivity. Customer service is the responsibility of a Quality Assurance Department, which has several functions. One function is customer tracking: quantitative measurement of customer attitudes and behaviour. Another Quality Assurance function is monitoring specific behaviours expected of frontline staff.To illustrate: counter personnel (tellers) are expected to signal their availability to customers by raising the right forearm to a vertical position and then waving an open palm, a gesture that is considered to be friendly. All staff are expected to address customers by name and to treat customers with the utmost courtesy and respect. Certain Cantonese phrases considered to be ‘magic words’ are expected to be used during the course of transactions. Quality Assurance is also responsible for ‘customer care’, perhaps its most critical function. All customer complaints, other than complaints concerning fees, are reviewed at meetings attended by the CEO, the general manager, department heads and the customer care staff. Once the complaint is determined to be valid and its cause determined, employees whose behaviour is complained of are, in the words of a senior executive, instructed to ‘retake the examination for which you cannot be late’; in other words, they must drop everything to solve the customer’s problem. No one questions the cost of the ten-person customer care staff despite the small number of complaints: fewer than 1 per cent of customers complain each year, although the number of complaints has increased as GHB’s customers become wealthier and more demanding. The prevailing view of the customer care activity

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was expressed by a senior executive: ‘It is essential.’ The customer care staff also reviews commendations of employees, and employees receiving commendations are recognized in the GHB house journal. The Quality Assurance Department also contains a small unit responsible for the overall cultural development of GHB. One point should be emphasized. Although GHB tries through its Quality Assurance Department to provide high levels of service, it strives to provide uniform service rather than to customize service to fit idiosyncratic preferences. Thus, for example, tax loan applications are teleprocessed quickly and customers are telephoned immediately once their loans have been approved, a practice generally not followed by GHB’s competitors. The telephone message, however, is brief and entirely scripted: in other words, it is impersonal. Some Westerners find this aspect of GHB’s service unsettling even though they appreciate the speed and courtesy of GHB personnel. The quantitative performance indicators used by GHB are fairly sparse compared to those used by US banks. Customer satisfaction with key service interfaces is measured annually, and customer attrition is measured and customer profiles are monitored continuously. Direct productivity statistics are maintained for some functions (for instance, telephone banking) but not for others (for instance, branch counter service). Employee satisfaction is measured biennially. Bottom-line financial results are measured for individual products and for GHB as a whole, but there is no effort to measure bottom-line financial results for individual branches or customers. GHB’s management does not believe it worthwhile to allocate overhead and back-office costs to branches or customers. Instead, management sets aggressive targets for loans, deposits, gross margins (revenues) and direct costs (expenses) for each branch. Expenditures are scrutinized closely. The culture additionally supports ongoing performance improvement and re-engineering efforts. Everyone, from branch managers to senior executives, speaks of the need for improvement: ‘We’re trying to improve it’ is a nearly obligatory phrase, and staffing levels are very lean save for the customer care unit. The personal staff of GHB’s general manager, for example, consists of one secretary. GHB prefers to motivate good performance through recognition rather than bonus compensation, and it prefers not to rely on command authority to enforce customer service standards. For example, counter staff who ‘follow the rules’ in dealing with customers are recognized and awarded token (not substantial) bonuses. New employees are reviewed every six months, and more senior em-

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ployees are reviewed annually. Superior performance can result in an adjustment in base salary and in career advancement, and the criteria used in awarding salary increments and in advancing people are simple and transparent. Given the strong culture and controls on behaviour, there is no ambiguity as to what is expected, but once expectations are set managers are given considerable autonomy: for example, branch managers are normally permitted to make binding verbal commitments for secured loans. GHB also rewards loyalty. Employees with ten or more years of service have a high degree of job security. The Importance of the Hong Kong Setting Three features of Hong Kong are critical to an understanding of GHB’s culture of efficient customer service. The first is the environment of Hong Kong itself. Both time and space are scarce in Hong Kong. People dislike waiting in queues, especially in cramped bank lobbies. Speeding transactions meets the customer’s requirements and also improves productivity as a consequence. In contrast, there are settings outside Hong Kong where customers’ requirements and the requirements of productivity conflict: for example, in the provincial cities of Latin America, business is expected to be leisurely. A second feature of Hong Kong is its compactness and homogeneity. Hong Kong’s compactness makes it possible to assemble the GHB’s staff for customer service seminars. Hong Kong’s homogeneity – the population is overwhelmingly Cantonese-speaking – ensures that the expectations of staff and customers will be fairly uniform. GHB, in other words, is able to elicit predictable behaviour from its staff, and there is a high likelihood that customers will respond predictably to such behaviour. A third feature of the Hong Kong setting is the reliance on personal networks or connections (guanxi) in business transactions. Branch managers are expected to cultivate networks and to rely on knowledge gained from network connections rather than on procedures and credit-scoring algorithms when considering customers’ creditworthiness. Globality and Productivity at GFS Global Financial Services is not the largest financial services organization in the world, but it is among the most global. The retail network of GFS extends throughout the USA, Latin America, Europe and

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Asia, and the commercial side of the business operates in more than 90 countries. Historically, GFS has been extremely decentralized and responsive to local environments. Until recently, the two core businesses, retail banking and commercial banking, were organized geographically,5 and regional units of the two principal businesses were accountable to the corporation for bottom-line profitability (in GFS argot, profit-centre earnings, or PCE) and little else. In the last five years, however, GFS has moved rapidly towards centralization and global integration of its businesses. Centralization and integration are motivated in part by the strategy of providing uniform, high-quality products worldwide and promoting global brand recognition. GFS aims to become a household name, like Coke, Marlboro and Nike. Centralization and integration have also been motivated by the need to achieve dramatic reductions in unit costs as the industry becomes more competitive. GFS aims to reduce costs by realizing economies of massive scale and eliminating virtually all errors: the intention is to become a zero-defects organization. Significant cost reductions are essential if GFS is to expand profitably into the middle-market, which is now unprofitable or, at best, marginally profitable. Towards this end, back-office operations for both the retail and commercial sides of the business have been consolidated into a single worldwide organization. GFS’s staffing levels have been reduced by approximately 8 per cent in the past year because of this consolidation, and further staff reductions can be anticipated as more functions are consolidated. How GFS Motivates Productivity and Customer Service I shall first describe the global GFS culture and how it motivates (or does not motivate) productivity before turning to GFS’s control and measurement systems and their impact on customer service. Culture and productivity. GFS’s management of its corporate culture, productivity and customer service reflects both its history of extreme decentralization and the current press towards centralization. GFS’s culture is emergent rather than planned and enacted top-down, consistent with the history of decentralization. The culture is entrepreneurial. There are many stories of entrepreneurship; one example is the tale of an otherwise dormant traveller’s cheque business that sold billions of dollars of traveller’s cheques to Saudis during the Gulf War. When pressed, GFS employees in both the USA and Hong Kong describe the culture as sales-oriented: in other words, as placing a

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premium on meeting revenue targets. Many GFS employees also perceive the culture as diverse and fragmented, again consistent with the scope of GFS and its history of decentralization. Although GFS is US–based, less than half of its managers are US nationals, and most of them are multilingual. There is no formal cultural training at GFS. Indeed, in comparison with GHB, the GFS culture appears to be almost wholly unmanaged. Until late 1997, no one had responsibility for developing the organization’s culture. Today, one executive has responsibility for formalizing the behaviour standards (‘the GFS way’) to be used in performance reviews. Neither is the impetus for managing the culture directly related to any of GFS’s current productivity and quality initiatives; rather, it is aimed at recognizing managers both for the way they achieve results and for the results themselves: in GFS argot, recognizing the ‘how’ alongside the ‘what’ of performance and, in the argot of agency theory, recognizing and rewarding behaviour that is desirable but not formally contractable. Various productivity initiatives at GFS also reflect its history of decentralization as well as the current environment, in which the senior management regards US manufacturing firms such as GE, Hewlett-Packard, Intel and Motorola as exemplars whose methods should be emulated. A centralized corporate performance improvement (CPI) unit existed from 1993 until 1996. CPI supplied internal consulting, funded small-scale performance improvement projects, and disseminated the results of these projects throughout GFS. CPI was dissolved in 1996 and its functions dispersed to individual businesses. Less than a year later, however, GFS-wide ‘global fulfillment’ and ‘six-sigma’ programmes were initiated, the former aimed at eliminating excess overheads, the latter aimed at achieving quality at a level comparable to the best US manufacturing firms’. Aside from these initiatives, individual businesses remain free to use any productivity tools fitting their purposes. Process re-engineering and activitybased costing, for example, have been implemented extensively in GFS’s Latin America businesses but less extensively in the USA and Asia. A comparison between GHB’s and GFS’s approaches to productivity is instructive. Whereas GHB relies on its culture to achieve high levels of productivity, GFS relies on specific productivity tools, usually borrowed or adapted from manufacturing firms, to improve productivity. Whereas GHB’s productivity culture has remained consistent, although by no means constant, over time, the productivity tools used

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by GFS have evolved rapidly and will in all likelihood continue to evolve. And whereas GHB’s productivity, measured by the ratio of expenses to revenues, exceeds the norm for Hong Kong retail banks, GFS’s Hong Kong productivity falls short of the norm for Hong Kong, although it is better than the corporate ‘bogey’ of 0.5. Not only, then, do GHB and GFS take different approaches to productivity – GHB has nurtured a productivity culture, while GFS has used productivity tools – but there is also a substantial productivity gap favouring GHB. The comparison of productivity levels at GHB and GFS should be tempered by two facts, however. First, GFS’s Hong Kong revenues are constrained because GFS corporate management has limited its Hong Kong assets; in other words, GFS’s growth in the Hong Kong market has been restricted because of perceived political risk (prior to the handover of Hong Kong to China in 1997) and later because of perceived financial risk (due to the Asian economic crisis). Second, GFS’s assets are of higher quality than GHB’s: GFS has mainly premium customers (and charges premium prices), whereas GHB seeks ordinary customers (and charges competitive prices). Other things being equal, then, GFS’s credit costs (loan losses) should be somewhat lower than GHB’s.6 But other things are not equal. GFS has a larger credit card business than GHB which, in principle, should advantage GFS with respect to productivity (since the ratio of expenses to revenues is typically lower for credit cards than for branch banking) but disadvantage GFS with respect to credit costs (since a higher proportion of credit card debt than of consumer and mortgage debt is typically written off). Control and measurement systems. GFS relies on quantitative performance indicators to a greater extent than GHB. Financial performance (revenues less direct expenditures) is measured at several levels, from entire businesses (e.g., GFS’s Hong Kong retail branch system) and individual branches. Since 1995, extensive non-financial measurement has complemented GFS’s financial measures. Numbers of households, household growth and attrition, asset and liability balances, revenues per household, cross-sell ratios (products per household), ATM use and so on are monitored monthly for each business and branch. There are also ongoing customer surveys and employee surveys. The customer survey data are extensive (‘[The survey contractor] asks everything!’) and results are available monthly, again, at the business and branch levels. These quantitative indicators are used to assess the performance of the business, guide strategic choices, and

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determine bonus compensation for employees at all levels of the organization. Bonus compensation is very important for GFS employees. Bonuses rather than recognition and advancement are the main motivators of individual performance, even in Hong Kong. Bonus awards for branch managers are typically 20–25 per cent of base salary, and they are about half this percentage for other branch employees. The system used to determine bonus awards is complicated, has changed from year to year and, not surprisingly, has been a source of dissatisfaction throughout GFS. GFS manages customer service on a decentralized basis. As a matter of policy, customer complaints are resolved at the lowest possible level, usually by branch managers. Complaints sent to the chairman of GFS, called ‘presidentials’ are faxed to business heads, who forward them to branch managers for resolution. In this respect, the difference between GFS and GHB could not be greater. GHB maintains a centralized customer care unit that wields enormous influence in the organization, but comparable customer care units generally do not exist within GFS.7 Motivating Productivity and Customer Service in Hong Kong GFS’s Hong Kong retail business faces some of the same constraints affecting GHB. Retail spaces are cramped and rents are high. The spatial limitations make it difficult to build new branches or even to add teller stations within existing branches when doing so would be warranted by customer demand. GFS managers understand that Hong Kong customers are impatient, dislike queues intensely and expect very high levels of service. Staff members are told to ‘do anything to maintain customer satisfaction’. Within each of GFS’s Hong Kong branches, teamwork is both rhetoric and reality. One manager compared GFS branch staffs to families: ‘[Employees] eat together, work together, play together, socialize together.’ This comparison reflects the culture of Hong Kong – socializing is also encouraged at GHB – but it may also reflect the high percentage of women (70 per cent) in middle management positions in GFS’s Hong Kong retail operation. Despite the rhetoric of teamwork and the family atmosphere within branches, branches compete fiercely with one another for different forms of recognition. The ‘top three’ trophy and the ‘branch of the year’ award are especially coveted; the prize for the latter is a paid holiday taken together by the entire branch staff. GFS thus has

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adapted its Hong Kong retail operations somewhat but not completely to the local environment. And while GFS pursues scale economies and utilizes productivity tools, performance measures and bonus awards to ensure productivity, it leaves the management of customer service to individual businesses. Thus, the management of GFS’s Hong Kong retail operation tells employees to ‘do anything’ for their customers but not what to do, and it offers somewhat greater incentives for teamwork and cooperation (at least within branches) than is typical of GFS businesses elsewhere. The tension between integration and responsiveness is thus much more than an academic issue for GFS. Ideally, GFS should capture both the advantages of global integration and local responsiveness: it should leverage its global reach and reputation to draw customers while creating a productivity culture that learns from the Hong Kong setting. In fact, GFS cannot take full advantage of the Hong Kong location because it does not know how to create and manage a strong productivity culture. GFS’s Hong Kong retail operation is, instead, caught between the requirements of globalization, where productivity is pursued with productivity tools, performance measures and bonus compensation schemes believed to be culture-free, and the opportunities of Hong Kong, where the highest levels of productivity are achieved by inculcating an ethic of customer service that is consistent with the local culture but is deliberately managed by firms like GHB. Some Tentative Observations I began this chapter with two questions. The first question concerned the nature of firm-level productivity cultures generally and the influence of Chinese values and business practices on productivity cultures in particular. The comparison of the GHB with GFS suggests that distinctive firm-level productivity cultures do exist; both GHB and GFS are located in Hong Kong, and both strive for high levels of productivity, yet GHB alone trains people in the values of customer service and efficiency, reminds people of these values continually, offers recognition and career rewards for specific behaviours consistent with these values, and achieves extraordinary levels of productivity. The experience of GHB, moreover, demonstrates the role of Chinese values and business practices in shaping its productivity culture. GHB’s staff are trained to be exemplars of traditional Chinese values, and these values are reinforced almost daily. GHB’s operations, moreover, mirror traditional Chinese business practices in their

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speed (which is characteristic of almost all GHB processes), simplicity (which is also characteristic of most GHB processes), and reliance on guanxi (both in soliciting business and in assessing the creditworthiness of customers). The second question concerned whether the requirements of firmlevel productivity cultures and globalization are at odds in such a way that global firms may be disadvantaged compared to local firms with strong productivity cultures. The comparison of GHB with GFS suggests that there may be some tension between the requirements of productivity cultures such as GHB’s and the requirements of globalization on the scale of GFS’s. GHB is internally homogeneous and serves a relatively homogeneous clientele, whereas diversity is a hallmark of GFS. The culture of GHB is an extension and amplification of the values of a single surrounding culture, whereas GFS is surrounded by many cultures: the flag of the host country, not the home country, flies over GFS facilities worldwide. The Chinese culture surrounding GHB, moreover, values customer service and efficiency – not customer service at the expense of efficiency – and it can be readily transformed into a firm-specific productivity culture, whereas not all of the cultures surrounding GFS can be. All of this suggests that the advantages conferred by GHB’s strong productivity culture may be more local than global. It is unclear, for example, whether GHB could sustain its productivity culture were it to expand beyond the point where the entire staff could attend customer service seminars and learn customer service stories quickly and meaningfully. It is also unclear whether GHB could retain speed and simplicity in its processes were it to expand its geographic base dramatically. Table 12.1 summarizes the principal organizational properties of GHB and GFS. GHB began as a native bank; its core competence, consistent with Chinese preferences, is customer service and speed; it motivates people through cultural development, behaviour control and employment security; its customer base is local and homogeneous; and it is a superior performer locally but has not been tested on the global stage. GFS was one of the first US commercial banks to extend its business globally; its core competence is global reach, global branding, and a technology infrastructure that links businesses in more than 90 countries; it motivates people with productivity tools drawn from manufacturing, performance measurement and incentive compensation; its retail customer base is diverse; and it is a midpack performer locally in Hong Kong but one of the leading banks globally. A contingency model rather than a causal model of performance

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Productivity Cultures and Competition Table 12.1

Comparison of GHB and GFS

Organizational properties

GHB

GFS

Origins

Native bank

Global bank

Core competence

Customer service, speed

Global reach, global brand, technology

How people are motivated

Cultural development, behaviour control, employment security

Productivity tools, performance measurement, incentive compensation

Customer base

Local, homogeneous

Global, heterogeneous

Performance

Superior productivity and customer service locally/not tested globally

Midpack locally/key global player

is thus suggested: local performance in Hong Kong is contingent on a strong productivity culture emphasizing efficient customer service, whereas performance on the global stage depends on scale, technology and managerial tools such as performance measurement and incentive compensation that are somewhat independent of local cultural preferences. A larger point should not be lost. The MNM literature has framed the tension between global integration and local responsiveness as a choice between economies of large scale on the one hand and meeting diverse local requirements at the expense of scale economies on the other hand. The MNM literature does not address the possibility that prevailing values and business practices in some settings, such as China, define customer service as providing speedy, efficient solutions to problems and that some firms in these settings can amplify and extend these values and practices into powerful firm-specific productivity cultures. GHB appears to have done exactly that. This observation notwithstanding, major challenges remain for both GHB and GFS as the year 2000 approaches. The turmoil in Asian financial markets has revealed a vulnerability of GHB. Its assets, which are concentrated in Hong Kong, are at risk. GFS’s vulnerability is different. GFS aims for rapid growth, but growth will not be profitable unless dramatic improvements in productivity are achieved so that more of

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the middle market can be served profitably. How GHB will fare in the current economic environment and whether GFS can achieve substantial productivity gains against a strong productivity culture such as GHB’s remain to be seen.

Notes 1.

2. 3. 4. 5.

6. 7.

Revenues are balances times spreads (roughly, interest earned minus the cost of funds) plus fees. Expenses are operating expenses and do not include the cost of funds. The cost of funds, in other words, is reflected in revenues rather than treated as an expense. Hong Kong residents are required to pay income taxes in advance. There is no payroll withholding. The relaxation exercises involve massaging the shoulders of the person sitting in the row ahead. The incident, moreover, figures prominently in a presentation on GHB’s service culture that is given to prospective employees. GFS’s foreign exchange and cross-border transaction businesses are, of course, operated globally rather than regionally. Moreover, the backoffice operations of the commercial bank (but not of the retail bank) have been centralized for more than a decade. Credit costs – assets written off – are not considered in the expense/ revenue ratio. Profitability is revenues minus expenses and credit costs. In one of GFS’s Latin America retail businesses, however, a zero-defects team investigates and resolves all customer complaints. Although the zero-defects team has proved highly effective, it has been controversial because line managers feel that it compromises their authority.

References Akin, G. and Hopelain, D. 1986. Finding the culture of productivity’, Organizational Dynamics, 14: 19–32. Arthur, B. 1989. ‘Competing technologies, increasing returns and lock-in by historic events’, Economic Journal, 99: 116–31. Bartlett, C. 1989. ‘Building and managing the transnational: The new organizational challenge’, in M. Porter (ed.), Competition in Global Industries: 367–401. Boston, MA: Harvard Business School Press. Child, J. and Keiser, A. 1979. ‘Organization and managerial roles in British and West German companies: An examination of the culture-free thesis’, in C. J. Lammers and D. J. Hickson (eds), Organizations Alike and Unlike: 251–71. London: Routledge and Kegan Paul. Farh, J. L., Tsui, A. S., Xin, K. and Cheng, B. S. 1998. ‘The influence of relational demography and guanxi: the Chinese case’, Organization Science, 9: 471–88.

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Foo, C. T. 1992. ‘Culture, productivity, and structure: A Singapore study’, Organisation Studies, 13: 589–609. Ghoshal, S. 1987. ‘Global strategy: An organizing framework’, Strategic Management Journal, 8: 425–40. Hofstede, G., Neuijen, B. and Ohayv, D. 1990. ‘Measuring organizational cultures: A qualitative and quantitative study across twenty cases’, Administrative Science Quarterly, 35: 286–316. Lincoln, J., Olson, J. and Hanada, M. 1978. ‘Cultural effects on organizational structure’, American Sociological Review, 43: 829–49. Luo, Y. 1997. ‘Guanxi: Principles, philosophies, and implications’, Human Systems Management, 16: 43–51. Marsh, R. M. and Mannari, H. 1980. ‘Technological implications theory: A Japanese test’, Organisation Studies, 1: 161–83. Martinsons, M. G. and Westwood, R. I. 1997. ‘Management information systems in the Chinese business culture: An explanatory theory’, Information Management, 32: 215–28. Montagu-Pollock, M. 1991. ‘All the right connections: Chinese management has amazing advantages over “modern” methods’, Asian Business, 27: 20–4. Redding, S. G. 1990. The Spirit of Chinese Capitalism. Hawthorne, NY: de Gruyter. Welch, J. F., Jr. 1990. ‘Productivity cultures of the ’90s: Speed, simplicity, self-confidence’, Financier, 14(2): 27–31.

Part IV Managerial Perspectives


13

Overseas Chinese Management Style: Some Reflections Ronnie Chan

BACKGROUND With the exception of Japan and Korea, in East Asia many of the businesses are owned and managed by the so-called overseas Chinese. This group of ethnic Chinese, about 55 million strong, has been the economic driving force of their adopted homelands for the past few decades. If this group is considered as a single economic entity, it could rank as the third largest economy in the world, behind only the USA and Japan. In Indonesia and the Philippines, ethnic Chinese account for 3.0 and 1.5 per cent, respectively, of the population but control a significant majority of the economic output. The numbers are less dramatic in Thailand and Malaysia, but the economic influence of the overseas Chinese is still disproportional to their numbers. Powerful as the group may be, there is very little understanding of what makes it so successful. Did the overseas Chinese succeed because of a particular management style, or is their success a result of circumstances? Over the years, a number of books have been written on the networks of these people; Gordon Redding’s well-known The Spirit of Chinese Capitalism comes to mind. Invariably, the authors have been outsiders looking behind what some call the bamboo curtain. They can describe the apparent, but cannot probe deeper into the psyche of these Chinese entrepreneurs who are at the centre of the so-called Asian miracle. As a result, why these overseas Chinese and their companies have succeeded is still a mystery. 325

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Overseas Chinese Management Style

HOW IT ALL BEGAN I first learned about management from my late father, a very typical Chinese businessman. I was not even aware of any alternatives until I went to college overseas. After 16 years of studying and working in the USA, a period that included earning my MBA, I returned to Hong Kong to work in the family company in 1980. For the next two years, my father and I worked closely together. Every week we sat down together with the top management of the company and discussed business matters. What I saw in my father and his management team could not have been more different and distant from what I learned and observed during my years in the USA. Over time, I had learned enough to appreciate the difference between what the business school taught and what Hong Kong businesspeople (most, if not all, of whom were men) practised. In the ensuing years, I thought often about this discrepancy but, unfortunately, had no satisfactory answer to this puzzle. This was in the mid-1980s, when many of the most successful Hong Kong businessmen were operating very much like my father. They all made a lot of money, much more than any of my professors back at business school, and I am not about to argue with this kind of success. After I settled in Hong Kong, besides tending to the family business I also started travelling around Southeast Asia. I went to Bangkok, Jakarta, Manila, Singapore and other cities, and met many leading businessmen. I observed their practice and approach, and many of them reminded me very much of my father. The more I travelled, the more I learned. The more I learned, the more fierce became my mental tug-of-war between the two different management styles: what I was taught and what I saw in the USA, and what was being practised by the overseas Chinese. As I observed these successful businessmen, many of whom had become close friends, I came to the rather cynical conclusion that their skills and management knowledge were in no way commensurate with their wealth. I myself was no exception. So what was the secret? In time, I was able to understand some of the factors that accounted for their success, though I am still not able to articulate their specific style. Very simply put, overseas Chinese businessmen have developed their businesses within a very unique historical context, at a particular time and in a particular place where their skills are found to be appropriate. Many did not succeed, but the ones who did are much talked about in the world.

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PAST SUCCESS OF OVERSEAS CHINESE BUSINESSES: CIRCUMSTANCES MAKE HEROES Favourable Environment A major reason why we overseas Chinese businesspeople made a lot of money is related to one simple phenomenon: asset inflation. Take Hong Kong as an example. Real estate prices in Hong Kong have seen some incredible heights. I own a farm in New Zealand that is twice the size of Hong Kong Island, plus 8000 sheep, 500 cattle and a private slip, boats and all. The price of all that is not enough to buy my bedroom in Hong Kong! The Hong Kong stock market, despite its many strengths, was another form of asset inflation (until, of course, October 1997). This phenomenon was pretty much regionwide. It happened in Thailand, Indonesia, Singapore and to some extent Malaysia. The economies of the entire region have boomed at an incredible rate over the past decades (see Figure 13.1). A second factor is that there was little real competition in the countries where the Chinese settled. After the Second World War, all of East Asia was in ruins. While the indigenous people fought over political power, the economy was left to the ethnic Chinese. In Malaysia,

Favourable Environment • Booming regional expansion • Limited competition (local and foreign) • Large export markets • Favourable government policies

Strategies

䉴

䉴

Useful Chinese Traits • • • •

Drive to succeed Insecurity Family Thrift

Figure 13.1

• Flexibility/ entrepreneurship • Networking • Selection of industries (e.g., local industries, proportionally limited competition) • Conglomeration

Success 䉴

• Growth • Asset accumulation

Past success of overseas Chinese businesses: circumstances make heroes

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Thailand and Indonesia, exclusive licences were easy to obtain because the locals did not want them. This was the start of the monopolies and oligopolies. The overseas Chinese made cement, built flour mills, and obtained exclusive agency rights to foreign consumer goods (most coming from Japan) that the locals needed or were eager to buy. Many business opportunities were simply waiting to be exploited. There was, of course, no question about the importance of hard work, thrift and frugality, but ultimately there was also no domestic or international competition to speak of. A third factor was the USA, the largest consumer in the world. It acted as the world’s economic locomotive for all those post-war years and just sucked up goods produced in Asia. So Asia enjoyed a ready consumer and no competition to speak of. The overseas Chinese became the great middlemen. A fourth factor relates to the favourable government policies in the Chinese-dominated economies of Hong Kong, Taiwan and Singapore. In Singapore, the government is intricately involved in running the economy. It devises industrial policies and provides the necessary physical and social infrastructures for the players. This is what I term ‘positive interference’. Hong Kong, on the other hand, enjoys ‘positive non-interference’. The government treats all industries alike and only provides the necessary physical and social infrastructure. The policy is basically laissez-faire and companies are left alone to conduct their own affairs. Taiwan’s model is ‘non-positive non-interference’: the government hardly does anything ‘positive’ to help business. Physical infrastructure is inadequate and social institutions poor, but at least the government does not otherwise get in the way of commercial activities. Thanks to the extremely dynamic Taiwanese businessmen, this economy also has thrived. These factors seem to suggest, on the one hand, that the overseas Chinese have adapted well under different circumstances but, on the other hand, that they were the beneficiaries of favourable circumstances. Perhaps both are true to some extent, but an arguably defining characteristic of these overseas Chinese businessmen is flexibility. Is this it? Is the answer really this simple? Did they succeed because of their incredible ability to adapt to whatever circumstances surrounded them? I am afraid the story is a bit more complex. Some Useful Chinese Traits Clearly, the overwhelming need to succeed and succeed fast could be a major force in making the overseas Chinese businessmen extremely

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flexible. Time is always short and one must grab whatever opportunity comes along. What if an opportunity arises in an area where one has no expertise? Learn as you go! What if there are not the necessary resources? Find them, create them, or make do! What if there are barriers? Go over them, go around them, but never right through them: by virtue of their Confucian upbringing, confrontation is not in their blood. Others refer to this flexible character as the entrepreneurial spirit. For many years, Hong Kong thrived on this flexible economy. A factory making plastics could instead be producing garments overnight. Many tycoons started out by trading anything they could find to trade. Synergy in businesses is a foreign concept. Growth is the only road to success. The overseas Chinese are blessed (or cursed?) with unique cultural and historical traits. The term ‘overseas’ is itself indicative of the ‘refugee mentality’ and ‘minority syndrome’ that have so shaped the outlook and practices of this unusual group. Having left their homelands to settle in a foreign country, the fate of the overseas Chinese is not in their own hands: hence the tremendous drive to succeed and to amass wealth, which undeniably is the surest ticket to safety in times of urgency. As a result, the overseas Chinese work extremely hard, save a lot and strive to get rich fast! Many take these virtues to the extreme, and gratification can be delayed indefinitely. After all, diligence and thrift are Confucian values that are taught in Chinese schools, prevalent in Chinese society, and deep-seated in the Chinese psyche. In order to succeed, these ethnic Chinese businessmen knew they must build bridges to those who were powerful in their adopted homelands. Most likely these were indigenous people in government or in the military. Who you know is more important than what you know, particularly in less developed countries. These are relationship-based rather than rule-based societies. Personal relationships must be forged to get things done. The key to success is nimbleness and connections, rather than knowledge and expertise! In Thailand and Malaysia, many Chinese sons and daughters were married into families of the wellconnected locals who had political clout or connections (see Chapter 8 in this volume). Some Chinese changed their names in an attempt to integrate or as insurance against the anti-Chinese sentiment that flared up from time to time. The insecurity of their temporary homelands fuelled a short-term perspective. Expecting that trouble might come any day, they did whatever was needed to become rich fast. With few exceptions, overseas Chinese businessmen take a short-term, opportunistic view of

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business. Such a short time horizon means there is no possibility of – or need for – strategic thinking. In fact, given the strong desire to succeed quickly and the abundance of opportunities, who has time to think?

ESTABLISHED BUSINESS FORMULAS ARE NO LONGER ADEQUATE TO SUSTAIN SUCCESS: REASONS FOR PESSIMISM Over time, this lack of strategic thinking translates into a messy collection of unrelated businesses. The thinking was, ‘Why not?’ The result was ‘conglomerates’ comprising eclectic and often unrelated businesses. When these become too big and diverse, management gets out of control easily. Throw in typically lax financial control and you have a recipe for disaster (see Figure 13.2). Problematic Chinese Traits The Confucian teaching of maintaining close-knit families also reinforces distrust of non-family members. Blood is always thicker than

Increasingly Unfavourable External Environment

Challenges/Problems

䉴

䉴

• Intensified global and local competition • Unfavourable local environment • Limited export growth

Problematic Chinese Traits • Distrust of non-family • Hierarchical management style • Lack of drive among younger generations

Figure 13.2

• Lack of strategic thinking • Unrelated businesses • Lack of positioning in global industries • Lack of growth drivers (technology, brand name, etc.) • Lack of professional management • Succession problem

Established business formulas are no longer adequate to sustain success: reasons for pessimism

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water. I know of one family with ten unrelated businesses, each run by one of the ten sons! The father is immensely proud of this arrangement, and all his friends consider him fortunate. Hired help is not to be fully trusted, and promotions are primarily by loyalty and not merit. Invariably, ownership and management are one and the same, just as family and business are intertwined. In line with more Confucian teaching, the patriarch also calls all the shots and is rarely challenged. Professional management does not exist and is not welcomed. Such a management style is not necessarily all bad. Quick response time and no complicated bureaucracy are among its merits. The overseas Chinese management style is finely adapted to performing in highly unregulated, inefficient conditions normally associated with relationship-based (versus rule-based) societies but unfortunately not really anywhere else. As customer, competitor and regulatory changes sweep across Asia, established business formulas are no longer adequate to sustain wealth and market dominance at home, and they may bode even worse elsewhere. Unless these businesses change with the times, their future is not bright. There are ample reasons for such pessimism. First, the inherent weaknesses of these organizations are not easily surmountable. Shortterm orientation and lack of strategic thinking preclude meaningful research and development. Many, if not all, of these overseas Chinese business enterprises have remained in low-value production operations with no control over technology, brand recognition, or even distribution networks: for example, neither property development (big in Hong Kong and Thailand) nor local monopolistic industries, such as cement factories or flour mills, are portable. Market share based simply on mass manufacturing and trading can be easily wiped out by new competition. Original equipment manufacturing (a common strategy, for example, in textiles) does not build brand recognition and is even less likely to inspire loyalty. Management style also presents a natural barrier to growth. To put it bluntly, how many sons can one have to run various businesses? Many overseas Chinese conglomerates have reached a point where unless formal organizational structure and professional management are introduced, they face zero growth potential and are heading straight toward trouble. There is also the problem of succession common to all family enterprises. Probability is against these businesses: if not the sons, then the grandsons, may be incompetent. Even if, against the odds, the younger generation is armed with the proper

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intellect, its members usually lack the drive and the killer instinct of their forebears. They are simply not hungry enough. As brothers and sisters disagree and/or part ways, the business will lose impact. Family enterprises lasting over three or four generations are the exception and not the norm. Simply put, nature works against their continuity. Increasingly Unfavourable External Environment The overseas Chinese businessmen created and gathered wealth under a unique set of environmental conditions where guts and sweat were sufficient. In this way, they contributed to the prosperity of their economies, which in turn rewarded them generously with tremendous asset inflation. Unfortunately, these conditions are changing rapidly right in front of our eyes. Since October 1997, we have witnessed a tremendous case of asset deflation. Property values and stock prices are less than 50 per cent of their height just in Hong Kong. Elsewhere, such as Thailand and Indonesia, the drop has been even more severe. To meet the terms of rescue packages from the International Monetary Fund (IMF) and the World Bank, these countries are expected to create rules to govern business transactions. Though real changes will probably be some way in the future, the business environment surely will become tougher rather than easier for everyone, the overseas Chinese businessmen included. Competition is more intense, both locally and globally. Markets everywhere are maturing and becoming both more regulated and more efficient.With free trade giving way to fair trade, powerful multinationals with better technology, management and products are entering local markets. Moreover, the indigenous population is increasingly active in the business sector. After focusing on politics for decades, the locals are waking up to the fact that they should have a bigger piece of the economic pie. The ethnic Chinese face other problems. Their businesses have grown so large that they must move beyond their shores to maintain growth. But once away from home (for many, their temporary homes now have become permanent homes), they run into a new set of difficulties. Expansion into less developed countries means relationships and connections must be rebuilt from scratch. Ventures into more developed economies such as Hong Kong, Singapore or other Western countries call for adaptation to a much more regulated and

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transparent market environment. The more advanced the economy they enter, the greater the challenge to their success. The immediate challenges are daunting, both at home and overseas. The new environment calls not only for structural reforms, but also for a new set of skills, which could well run contrary to previous success factors. To deal with changes simultaneously in the family, within the company, in the local environment and in the international marketplace is tough for any manager, even the most professionally trained and seasoned. Will these challenges be prohibitive to the overseas Chinese or will they rise to the occasion, as they have done repeatedly in the past? The answer is anyone’s guess, but one thing is certain. Change in management style and approaches will be inevitable if they are to succeed, or even survive. Closer at Home: Mainland China The outcome of the scenario described above will also have farreaching effects on the Chinese mainland and its domestic management problems, particularly those of the SOEs. Let us say that the debt problems of the SOEs are miraculously taken care of tomorrow. What next? Say these behemoths have dropped all their historic baggage; how should they be managed and operated going forward? What does a competitive Chinese company look like? I don’t know because I have never seen one yet! We are all still learning and experimenting about doing business on the Chinese mainland. We put a little money here, a little money there. There is no strategy as such because there are not yet rules to guide strategy making or implementation. We learn as we go along. When I first went into China six or seven years ago, I decided to use all local Chinese managers. I got my fingers burnt and my hair singed! China was not quite ready for foreign firms (defined loosely as any firms having a parent company based in a location away from the mainland) to adopt full localization. Eventually, I had to borrow from the overseas Chinese, particularly the Taiwanese. When my private company, the Morningside Group, ventured into China, we started the Morningside Productivity Center and brought in trainers from Taiwan for our Chinese staff. It is now working better, but we are teaching the mainland Chinese to manage by the overseas Chinese approaches. I am not sure if this is the optimal solution: only time will tell.

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IN SEARCH OF A CHINESE MANAGEMENT STYLE: REAL HEROES CAN STAND THE TEST OF TIME While change is inevitable, blind application of the Western model, if there is such a thing, to overseas Chinese enterprises will not work either. Similarly, you cannot apply the Japanese model, hook, line and sinker to a Western company and expect miracles. There is always something to learn from all models but you cannot take in all 100 per cent: there must be the appropriate modifications. We need to take elements from each, put them into the proper context, and fit them into our own cultural background and into the environment in which we operate, which is neither as efficient nor regulated as in the West (at least not for the time being). As one mentally scans the commercial landscape of East Asia (outside Korea and Japan), one can hardly find a sizeable Chinese enterprise which is a major force in any significant global industry. According to a 1990 Fortune survey of Pacific Rim businesses, only one Chinese enterprise made the list of the top 150 based on size. What limits the growth of the overseas Chinese companies? Is it the circumstance which also favoured their growth through recent history? The overseas Chinese are known to have survived many adversities. The current economic downturn puts their perseverance once more to the critical test. Can they stand the test of time? In my mind, the jury is still out on whether some of companies will prove sustainable in the long term if some fundamental changes are not made in the way they run and manage their businesses. One encouraging development is the younger generation of owners, many of whom are Western-educated, like myself. We are not managing like our fathers, yet we are also not like our Western counterparts. Perhaps the new generation of overseas Chinese businessmen and businesswomen is developing a hybrid management style that combines the best features of both the East and West. What is this hybrid style? This is a new puzzle to be resolved (see Figure 13.3). Need for Change If flexibility, agility, adaptability and frugality were Chinese traits that in part accounted for the success of the overseas Chinese in the past, these traits should mean that they can change with the needs of time.

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Needs for Change Intensified Competition

• Build a competitive organization with: fi professional management team fi clear strategic focus fi invest in growth drivers 䉴

䉴

Professionally Prepared Younger Generation Owners

Figure 13.3

• Leveraging unique capabilites: fi flexibility fi networking/alliance competence fi entrepreneurial drive

䉴 Sustained Success

In search of a Chinese management style: real heroes can stand the test of time

The question perhaps is not whether they can change, but what needs to be changed. Let me offer a few not too well-formulated thoughts. After all, I am not a behavioural scientist or economist but only a businessman. I would hope that to define the success factors of the overseas Chinese and to predict their future potential should be a topic of great interest to organizational researchers. First, we must admit that the overseas Chinese businessmen are no longer players in just the local economies; they face competition at a global level. They must build competitive organizations, and this means introducing professional management, having a clear strategy and investing in growth drivers. They must worry about such issues as the governance systems of their firms. They should understand the trade-off between owner control and shareholder control, and between owner management and management by professional managers. Neither has absolute advantages over the other, but understanding the disadvantages and advantages of each and of a creative mix of both could be an interesting possibility for Chinese firms where family will still be a key player for a generation or more to come. My biggest hope is that the descendents of the overseas Chinese pioneers do not lose the capabilities that served their parents or grandparents so well. These are a great adaptability to differ-

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ent circumstances, an immense ability to cultivate relationships that are mutually beneficial to the parties, and the burning drive to succeed.These traits, along with acquired professional management skills, could well prove the pessimism expressed above to be unfounded.

14

Doing Business in China: Staying Ahead of Your Competitors Lily Chiang

INTRODUCTION Localization is one of the key factors for a company’s survival and competitiveness in the Chinese market. Companies also need to localize if they want to capture greater local market share. By localization, I mean using local managers to run the business in the local setting, rather than expatriate managers from the parent company. When China first opened up, a lot of companies established businesses there to take advantage of low labour costs, low overheads and other incentives. As an example of how cheap expenses were, in 1985 the wage for a technician was 30 renminbi a month1: cheap enough for a company to hire a couple of technicians just to sweep the floor! Today though, things have changed. It now costs about 2100 renminbi a month for a tea lady,2 who is obviously not a skilled worker. If you project this cost inflation, then in five years’ time labour costs will be higher in China than in Hong Kong. Of course, I am referring to the cost of workers in the urban areas, not in the remote inland areas such as Xinjiang or Mongolia. One must understand that in these rural districts workers are relatively less skilled, so there is no basis for comparison. These figures illustrate why it is no longer profitable for companies to venture into China just for low costs. Instead, localization must now be used to expand market share and profits. If a company does not localize, it cannot identify itself with the culture and customs of the local people. And if you are unable to communicate with and understand the needs of the local people, you cannot sell your products to them. Localization also helps companies to operate more smoothly and efficiently. If you do not localize in engineering, you do not really know how to customize your products. 337

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For instance, if an accident should occur on the shop floor and a worker dies as a result, you would have up to six government departments knocking on your door. I doubt if a foreign manager would know how to handle this situation. Take another scenario. Say a customs official comes to you at year-end and says, ‘Buy me a Coke, it’s hot.’ If you do not understand the local ways, you might really buy him a bottle of Coca-Cola, when in fact he is asking for a couple of 100-dollar notes. If you do not give him what he wants, he might ask to check your account books. It wastes your time, and you probably would not have minded giving him the money in the first place. It takes a local to understand, as these things are not mentioned explicitly. Worst of all, customs vary from place to place, to such an extent that a person in Guangdong would say such things differently from someone in Shandong. It is important for companies to know how to get things accomplished through local channels with assistance from political parties and the government. This concept is close to a popular term, guanxi, in China. Guanxi refers to personal connections which help get things accomplished in a fast and easy way. With a good network of local Chinese, you can take the short cut to success. More importantly, foreigners would not even know which way to go as they could not understand the complex set-up of the PRC government, which involves numerous bureaus and committees.

CHEN HSONG’S EXPERIENCE IN CHINA Our company entered China in 1984, and we were one of the first wave of companies to do so after Deng Xiaopeng instituted the opendoor policy in 1978. We ventured into the southern part of China, for the simple reason that we believed a lot of Hong Kong firms would enter China to take advantage of cheap labour and land costs. These companies would, in turn, develop related industries nearby and thus generate interest from the local people. However, our basic intention in investing in China was to capture local market share. We were probably the first company in Guangdong province allowed to export less than 20 per cent of the goods we manufactured in China. We were also the first to own more than 50 per cent of a JV enterprise. Many companies that entered China brought their management manpower from Hong Kong. That is the fastest way to get things

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started, as workers only need to be trained to do the assembly and quality checking jobs. But in our case, a true JV, materials were purchased locally and local personnel were hired.We only brought in four people, one manager and three technical staff members. The three technical people were there for six months, mainly to provide training, but the manager is still there, overseeing things. Recruiting Workers Right from the beginning, hiring good people was a challenge we faced. People are the greatest asset of any company; without good staff, you really cannot run a company smoothly. The following will give you an idea of the initial difficulties: when we started our factory in Taiwan, it took us less than six months to ramp up production to 30 to 40 machines a month. In China, to produce 10 machines a month took us eighteen months. There are two main methods that we employ to recruit staff: one is word of mouth or recommendation (someone telling us that this person is good); another way is to look for people who are aggressive and seem capable when you attend events or exhibitions. Using a headhunter in China is not impossible, but the practice is more popular among international companies. It is not as suitable for a company like ours because what we want is someone who has strong local connections; in other words, we are looking for a local Chinese person. If our factory was in Shunde, then we would hire someone from Shunde or close by. Likewise, when hiring a marketing manager for Shanghai, we could send someone from Shunde to Shanghai to help start up an office for the first three to five months, but in the long run it would not work out. That person would not know the local bureaucracy or the local customs and culture. In China, they are very well organized when it comes to recruitment of university graduates. All the résumés of the graduates are prepared by the central authority, and your company’s personnel team just needs to select from the list and conduct interviews accordingly. One thing which we learned from our experience in China is that you should hire more people than you need. You hire five, even though you may only need three, in order to choose the best three. Another thing is that it is difficult to judge a person’s past experience just by looking at his or her résumé. This is because most of the job applicants had previously worked for SOEs. There is no way to tell someone’s capability from the salary they were paid or their years

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of experience. The only thing we can do is to put the employee on a 12-month probationary period. Retaining Workers Our attrition rate is low: we have about a 2.4 per cent turnover per year. For management-level staff, the rate is even lower. We would say we have no problem with job-hopping and we attribute this entirely to the fact that we are thoroughly localized. International companies normally hire management people who are fluent in English; otherwise, communications would be virtually impossible. In our company, we do not need English-speaking managers, just someone who can bring in business, so we are already talking about two different types of employees. Money and housing are still the main factors which attract and retain employees. Housing, especially, is important. In China, employers do not usually give their employees money and expect the employees to take care of their own housing; therefore you need to provide housing for your staff, especially for those workers from another province. For instance, someone from Beijing would never consider relocating to Guangdong no matter how much you paid him if you did not include housing. And if the employee is married with children, you also need to help his family settle in by hunting for a job for the spouse and locating a school for the children. It is all a part of the package and costs that your company must bear. The remuneration package should also carry an incentive scheme since most local workers will previously have worked for SOEs, which are rife with poor work norms. The underlying reason for this incentive scheme is to change the workers’ attitude that hard work is not rewarded with higher monetary returns. Corporate Culture Corporate culture is a very important factor for building employee loyalty towards a company. We believe corporate culture is more than just having mottoes such as ‘good quality’, ‘good work’, and so forth. The important thing is to guarantee that the core message gets through to the staff and becomes their daily responsibility, their job duty, and something they can claim ownership of.

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I would describe our management style as top-down and middlemanagement-up, not so much bottom-level-up. The workers can express themselves, and we listen to quite a lot of them. I am not sure that consensus-style management would work in a Chinese company, especially for the smaller companies. Perhaps it might be more suitable for global conglomerates. I believe Chinese workers prefer simple orders. They may not necessarily obey or agree, but at least they do not have to be responsible for a decision. In a way, I think most companies operating in China are not successful because they adopt the wrong culture. They do not understand China. In our case, except during the first year when we needed to transfer technology, we allowed our Chinese factory to operate autonomously. Things would slow down if they needed to consult the Hong Kong head office for everything. We still monitor them closely, though. Every six months they have to update us on their budget report, and they are also expected to turn in a monthly report. We also send an internal auditor at least once every three months. Corporate culture is also an important factor in motivating workers and increasing productivity. You have to make the workers feel that they are working together with the company. Instead of an employer– employee relationship, I ask them to treat their boss, colleagues and subordinates as customers. The problem with bureaucracy in a company is that a lot of people usually say: ‘It is not my responsibility, it is yours.’ But if the staff can all say: ‘If I help my colleague a little bit more, it will make my life easier and it will make his/her life easier’, then the company can thrive and grow. So we try to train our staff to think this way. It is also important that staff feel that they play an essential role in the company. That is why I always encourage my employees to come to me not only with problems, but also to suggest some solutions. If their solution sounds feasible, then fine. I may suggest something else and explain why my suggestion may be better, but if they believe their solution is better, then I let them have their way. When they implement their solution and eventually find my solution is indeed the better one, then in the future they will consult me more and respect me more. And if it turns out that their solution was the better answer, then I appreciate their contribution. This approach is better than merely asking workers to implement managers’ ideas with no discussion. It makes the employees feel as if they are your partners.

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Training We train our staff not only in the technical aspects of their work, but also in ethics, team spirit and other key aspects. We often give them opportunities to advance themselves so that they feel they are part of the company. This could include overseas training, attending exhibitions, and other means. The important thing to be emphasized here is that training is a continuous process. Other social activities, such as company dinners, physical training camps, barbecues and so on, are also helpful in inculcating the feeling of being part of a team. It is also important to give out rewards, which could include a monetary reward, a plaque, or even an announcement to colleagues. These rewards do not have to be expensive, but it does offer a way of recognizing the employee’s efforts and makes them feel appreciated. Other Factors We have found it necessary to retain at least one non-mainland Chinese person in our Chinese company to help us impose new regulations with which the locals may not agree. It is strange, but the workers will not listen to a mainland Chinese person even if that person has studied abroad for many years. They will listen to a foreigner, however, and sometimes we need to have a foreigner to assure them that the new regulations are consistent with international standards. As for corruption, we let our Chinese partners handle this aspect. I would be lying if I said this was something we could avoid. It is something that you have to accept if you want to do business in China. For example, if you do not give sweeteners to the electricity department, it could easily take you three months to get electricity, and then your factory will not produce anything. The department staff will say they are not holding you up, and that three months is normal. But if you buy them a nice dinner, then things will turn out to be much faster. Another major difficulty which most companies in China face is the continuously changing government policies. This pattern of change makes it difficult to plan, but it soon becomes part of a company culture, so we incorporate a certain amount of flexibility into our planning. But if it is something which is really out of your control, then you need to talk to the relevant department officials in an attempt to get a period of grace. We have also had to face competition from companies that are supported by the central government. China has a certain level of

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protectionism, so when your company does well in a certain industry, the central government might try to support another company to compete with you. The local government will support you because you belong to the locality, but elsewhere, in another province, the central government might support another company because they think they have lost face. When a foreign investor comes in and does extremely well in an industry, the central government may give low-interest loans and other benefits to help another company compete against yours.

CONCLUSION Despite all the difficulties and challenges I have outlined above, I am convinced that China still has great potential. Compare the population of one province in China to the populations of Asia’s four tigers, Singapore, Hong Kong, Taiwan and South Korea. Sichuan alone has a population exceeding 100 million, while the four countries combined only have a total population of about 44 million. If the productivity of Sichuan workers could reach the level of the four countries, the world would be flooded with the goods they produced. Companies venturing into China today need to understand the culture and not merely treat China as a low-cost manufacturing base. In the next century, China looks set to become the only nation that can compete with the USA in terms of consumer demand and market share potential. In the next two decades, the Chinese government will need to tackle several issues, including increasing worker productivity. With the onechild policy, children in China today are more spoiled. This could create problems when these children join the workforce. They also need to change the social welfare mentality of their workers. Workers became used to being taken care of while they were working for SOEs. The government will also need to look at retraining its workers to enable them to handle new technologies in the multimedia information technology environment.

Notes 1. 2.

Each renminbi is worth about US$0.12. A tea lady brings tea to guests visiting an office.

15

Strategic Management: Critical Issues in the Hong Kong Business Environment William Overholt1

I am a research manager for a bank in Hong Kong. I do not manage big factories, as Dr Lily Chiang (Chapter 14) does. Instead, I manage professionals who write about the economy and the political environment that impact on firms in this region. I have lived in Hong Kong for 13 years, and I care a lot about China. I have even been accused of being a China advocate. I have great faith that China will continue to grow and prosper. Despite my enthusiasm for China, operating there is certainly a challenge for most multinational managers. All have had sleepless nights. There are so many issues that even an entire book would not be able to cover them all. Therefore, I will pick four areas that strike me as everyday challenges for managers in Hong Kong, China and Asia. I will focus in turn on one issue related to human resources, one related to managerial style, one related to business ethics, and one related to strategic management. HUMAN RESOURCES: IMBALANCE BETWEEN THE DEMAND AND SUPPLY OF PROFESSIONAL AND MANAGERIAL SKILLS Let me start with the human resources issue. In China, Hong Kong and Asia, we are in an environment characterized by high opportunities and low skills. We have growth and many exciting opportunities. Because skill levels are generally low, it is a seller’s market for employees who have the right skills. This creates some unique challenges for companies. There is a huge demand for talent, but there is also a severe scarcity of middle-level and senior-level management skills. In short, there is almost a complete absence of world-class man344

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agement talent. When I worked in New York, I had too many people to choose from – sometimes 50 qualified people applied for just one analyst’s job. In Hong Kong, I spend six months looking for the one person who can do the job. What does this lead to? At the lowest level, it leads to job-hopping, which creates all sorts of problems both for the individual and the company. It means you have no continuity of personnel. It means that if you invest in training you waste your money, unless you find some way to tie people down. This is not a problem unique to Asia. We face the problem of providing public goods in the USA too, but it is a uniquely difficult problem in this environment. From the point of view of the individual employee, I would characterize the situation as sacrificing career for immediate income. People do not acquire the basic skills they need to move up. As they take jobs for which they are not qualified, they become insecure. Because they are insecure, they hire people who are non-threatening to work for them. The end result is a culture of mediocrity. That is less of a problem in a small organization, particularly a small entrepreneurial business organization, where you are being pushed every day to do the best that you can do and to acquire the skills necessary to keep the organization afloat. If not, your organization will disappear and so will your job. In a big company, particularly a multinational company, however, the culture of mediocrity is a huge problem; not an unsolvable problem, but one that is real and that can affect the pace of progress in this part of the world. If you want to make a contribution that could help almost every company in Asia, this is a topic for further studies.

MANAGERIAL STYLE: CLASH BETWEEN TRADITIONAL CULTURE AND MODERN MANAGEMENT PRINCIPLES The second issue that I would like to discuss is managerial style. This is one of the most severe problems in Hong Kong. How do you transform an organization with a traditional, hierarchical, authoritarian managerial style to a modern service-oriented culture where empowerment is the only way you are going to stay alive? This is not an unfamiliar problem, but it is an extreme one in Hong Kong, where people are used to a very traditional management style. In Hong Kong today, depending on how you do the accounting, 84 or 92 per cent of GDP derives from services. This means that managing human resources will be the key to success in Hong Kong.

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Critical Issues in Hong Kong

However, management is very hierarchical. You do it the boss’s way and do not do anything different. With the strong family orientation, the whole social structure of China reinforces that idea that hierarchy is the way an organization ought to be run. But Western service organizations do not work that way: they work by empowerment and initiative. I manage a research group. I would like to tell you one story to illustrate the problem I am trying to convey. Ten years ago, I hired the first stock analyst from the PRC. She was a woman from Beijing who struck me as having exceptional talent. Everybody thought I was crazy to hire a Communist stock analyst. It is not so unusual now, but nobody did it then. I told her right from the beginning, ‘If you don’t produce an idea each time that’s different from what all the stock analysts at Jardine Fleming and Smith Newcourt and so on can do, I’m not going to publish it. You have got to add value. Otherwise you’re wasting my time and my money.’ She did add value. Everything she came up with had a different angle. She was extraordinary. I tried to manage the entire research group that way, by giving them lots of freedom but also holding them accountable for end results. The time came when I thought I had the group going on its own. I decided to promote myself to regional strategist and turn over the management of the group to a Hong Kong guy with a PhD from an excellent university in the USA. As soon as I did, I noticed he was clocking the times people came in and the times they left. In those days, real estate prices were lower and we had offices. I would be in my office, but even with the door closed, I could hear him and my stock analyst from Beijing yelling at each other. He would tell her that it was not her job to publish new ideas: her job was to come up with new ideas. She was to give them to him and he would decide whether to publish them.We almost blew up the department. It turned out to be an almost impossible challenge to institutionalize a style of management by empowerment in this cultural environment. I could do it myself within my little span of control, but as soon as I tried to make it a broader thing I had great difficulty making it work. It is not impossible, but it is very difficult. So it was a PRC person who was marvellously successful in the empowered culture and a Hong Kong person with a degree from an American university who could not adapt. Of course, a lot of Americans fit the authoritarian model too. Careful selection may help, especially at the top, and you also need to have some kind of cultural education and behaviour change mechanism. You need to

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make it very explicit and reinforce it, especially at the middle and lower levels. What is the research challenge here? I believe it is to define, measure and identify a management style that blends the Eastern/ Chinese traditional cultural values of respect for authority or hierarchy with the modern view that empowerment is the key to future success.

BUSINESS ETHICS Let me now turn to a third area, business ethics. It only became clear to me what business ethics meant when I went to China and saw the situation. Here is a typical example: one would see a minister in charge of regulating the steel industry, but his ministry also owned steel companies.That is, the minister was regulating steel companies which competed with the ones the ministry owned. His wife and children all owned steel mills too. I started talking to people about this situation, and I realized that this is a business world that is organized around a different ideology about managing conflicts of interest. In contrast, at Bankers Trust, the Compliance Department manages conflict of interest issues. In Hong Kong alone, we spend US$2 million a year on four lawyers. It is such a complex area that it takes seven or eight years of experience after a law degree to be able to manage the rules. We have what we call Chinese walls and fire walls. For example, a banker has a deal but he cannot tell my analysts for that company about the deal. Or, if there is somebody in the government who is in charge of planning new highways, he is not supposed to tell his cousin, a real estate developer, where the new highway is going to go. But that is not the way things work in a traditional culture. I said traditional culture; I did not say China. That is the way things worked in the USA before the Great Depression. That is the way things worked in all traditional cultures. We learned some lessons from the Great Depression. It takes a great national crisis to bump people out of the traditional way of doing things. However, transferring this Western ideology regarding conflicts of interest (with its complex culture, set of regulations and underlying assumptions) to a place like China, Hong Kong or Taiwan, is a very difficult task. It affects not only businesses, but also lives. In an American company, top managers can be fired under corrupt practices laws and can go to jail, or local employees who behave the way

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they have behaved their whole lives may suddenly get fired for corruption. When I try to get our local offices to obey some rules about conflict in situations affecting my research, I become the enemy. They say, ‘You don’t understand the Chinese way of doing business.’ And it is thought of as ‘the Chinese way of doing business’. The conflict is not understood as traditional versus modern, but that is what it is. One of the things we are seeing in the regional crisis today is that when you do not have these kinds of rules, whole business empires and whole countries can collapse for lack of them. This is probably one of the more difficult areas for management researchers because managers are probably reluctant to reveal how they manage such conflicts of interest. Yet some companies do well while adhering to certain codes of ethics, while others insist that adapting to local culture and practice is the key to success. Perhaps an interesting question is why some companies decide to adapt to local culture on ethical practices and others adhere to their internal norms. Relating certain practices or standards to business success can potentially misguide managers to decisions that are not conducive to the economic development of the region in the long term.

STRATEGIC MANAGEMENT Let me close with one last area, strategic management. When you’re a self-contained company, you have to get the manufacturing process right. You have to get the right employees doing the right things. You have to get the money coming in and going out. It is complicated, but it is much simpler than dealing in a global environment. In a global environment, people are making bets. Businesses that think they are making semiconductors find themselves actually in the business of managing currencies, managing interest rate volatility, managing global commodity price risk; indeed, managing all sorts of things. Bankers Trust is an institution operating in 150 countries, and we are taking huge bets on all these things. We have had to evolve a technology for coping with that. We spend $600 million a year to know what businesses we are in and control what businesses we are getting into. If you are taking a position in the Deutschmark or the yen, you are in the foreign exchange business. If you are assuming a loan, you are in the interest rate volatility business. One of the things we tell our

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customers around the region is that, if you are depending on US dollars, you are in the foreign exchange business. And who are your competitors? George Soros and Goldman Sachs. Who is going to win? There is a whole technology now being used in financial institutions for allocating capital against the risks that you are taking. Any risk can be hedged. A businessperson today can choose what business he or she wants to be in! I will be in the interest rate volatility business to this extent, in the foreign exchange business to this extent, and in the business of making semiconductors to that extent. Thousands of companies around Asia have just discovered that they had allocated 50 per cent of their capital to the textile business, and 150 per cent of their capital to the foreign exchange business, another 150 per cent of their capital to the interest rate management business, and so on. Acquiring the basic skills to know what businesses you are in and how much of your capital you are committing to different businesses is not rocket science. It can be taught as well as treasury management skills. If companies are going to survive in the modern world, managers must learn to develop risk management skills. Alongside the chief financial officer, somebody should know what businesses the company is getting into and be able to ask the CEO, ‘Do you really want to commit 150 per cent of your capital to the foreign exchange management business and compete with George Soros? Is that what you want to do?’ This notion was very theoretical a year ago, but it is obviously not today. It involves restructuring the way top executives think about the businesses they are in, in a global world. It is going to be a critical competitive advantage for every industry, especially in this region, to have either a risk management department or a chief risk manager alongside the CEO. What are the implications for organization and management research? Possible topics could range from organizational structure and design to how managers process information about the environment and manage decisions about them. You could research these questions: do companies that have a risk management function do better than those that don’t? What variations exist in the way executives in the same industry define the core business of their firms? What are the causes and consequences of these variations? Are competitive strategies that work in the Western world applicable or effective in the Chinese context? Or are there indigenous business strategies that have yet to be discovered or developed?

350


CONCLUSION There are hundreds of topics to be researched; I’ve just taken a flashlight and poked around in four places. However, let me stop here and see if this discussion has provoked any thoughts.

Note 1.

William Overholt was Managing Director of Bankers Trust when this paper was delivered at the Research Conference of Management and Organizations in China, held at HKUST in January 1998.

Index Academy of Management Journal 10, 11 Academy of Management Review 11 adaptability see flexibility adaptation: in negotiation 213 Adler, N.J. 213, 272 Administrative Science Quarterly 11 agreeableness: and influence 287, 288, 294, 295, 296, 299 agreements: tentativeness 214, 215 agriculture: vs industry 34, 71–2 Aharoni, Y. 161 Akira, S. 252 Allison, G.T. 161 American Journal of Sociology 10, 11 American Sociological Review 10, 11 Ang, S. 236 appointments, personnel: in JVs 52, 133–7, 145, 146–7, 150 ‘Asavabahu’ 255 Asia: financial crisis 20, 37, 332 asset deflation/inflation: in East Asia 327, 332 assimilation: of overseas Chinese 255, 261–2 Assumption School 254 auditing: in JVs 145, 149, 150, 151 authoritarianism: in PL 94, 112–13 cultural roots 99–104, 108 research findings 109, 110, 111 and social change 113–16, 118 and subordinates’ response 97–9, 119, 120

bao see reciprocity ‘bargaining, regime of’ 70 Bass, B.M. 118 Beamish, P.W. 137, 151 Becker, T.E. 273 Beijing: state investments 78 Bellah, R.N. 100 benevolence: in PL 89, 94, 112–13, 117, 118 cultural roots 104–6, 108 research findings 109, 110, 111 and subordinates’ response 97, 98, 119, 120 Bian, Y. 236, 240 ‘Big Five’ see Five Factor Inventory Billings, R.S. 273 birds’ nests: tax collection 252 Bishop, James W. 3, 269–82 Björkman, I. 57–8 Black, F. 162 ‘Black Face God’ 286, 290, 294, 298 Blum, M.W. 185 board meetings: in JVs 135, 145, 148–9, 151, 153 Boisot, M. 48 Bond, Michael H. 4, 115, 283–302 Boyacigiller, N.A. 272 breakdown: in cultural accommodation 54–5 bribery 203, 338, 342 Brown, Brad 3, 245–68 budgeting: in JVs see capital Burns, J.M. 118 business start-ups: and guanxi 256–7 Butler, John E. 3, 245–68

Bangkok Metropolitan Bank Bankers Trust 347, 348 banking: reforms 37 Banthin, J. 160

Cambodia, Chinese in 251 Campbell, N.C.G. 160 Cannice, Mark 3, 157–84 capacity utilization, low 37–8

253

351

352

Index

capital budgeting: in JVs 136, 145, 151 Cavusgil, S.T. 158 CC (contingent control): vs GP (gentle persuasion) 284 and influencer’s personality/ tactics 287, 291, 292, 294, 295, 296–7, 298–9 and target’s behaviour/status 285, 286, 293, 294, 297–8 CFBs, overseas: and PL 85–93, 94, 103–4, 117 chaebol conglomerates 40–1 Chamornmarn, Wai 3, 245–68 Chamroen Krukrit 253 Chan, A. 90, 93 Chan, D.K-S. 272 Chan, Ronnie 4, 20, 325–36 Chen, C.C. 272 Chen, M. 212 Chen, W.S. 119 Chen, Xiangming 3, 269–82 Chen, Z.M. 136 Cheng, Bor-Shiuan 2, 20, 84–127, 233 Chen Hsong (company) 338–43 Chi, P.K.K. 160 Chi, P.S.K. 160 chia-jen 227, 229–30, 231–2, 330–2 Chiang, Lily 4, 337–43 Child, John 2, 33–62, 271 China Quarterly 10, 11 ‘Chinese capitalism’ 88, 94 Chinese Personality Assessment Inventory (CPAI): facets 287–8, 294, 295, 296, 299 Chu, T.S. 99–100 Citroen: and Dongfeng 50 collectively-owned enterprises 38 collectivism in decision-making 205, 206, 207, 208 vs individualism 199, 271–2, 277 collegiality 249 communication see under context Communist Party and economy 65–70 15th Congress (1997) 33–4, 42 ideology: influence 199, 200, 270

competition increasing 37–8, 49, 332 between jurisdictions 73–4 complexity: of China 49–51, 67–8 compradors: in Thailand 254 concession trading 212 conflict diffusion 90 conflicts of interest 347–8 ‘Confucian Dynamism’ 198 Confucianism 94, 116, 191, 197, 270, 329 and benevolent leadership 104–5, 108 and family/patriarchalism 99–101, 102–3, 194 and guanxi 228–9 and moral leadership 106–7, 108 conglomerates 39–44 conscientiousness: and influence 287, 288, 294, 295, 296 consideration see benevolence context and communication 195, 212; in negotiation 186, 187, 188– 90, 200–4, 210 and decision-making 161, 169–70 contingency theory: and foreign operations 163, 164, 166 adapted framework 170, 172 in Hong Kong banking 319–20 contingent control see CC corruption 203, 338, 342, 347–8 Costa, P.T. 288 CPAI see Chinese Personality Assessment Inventory CPM scale 95, 96 ‘creative investment’ 36 cultural leadership model 118 Cultural Revolution 113–14, 199 culture Chinese traits 191–200 and negotiation: research neglect 185, 187, 188 and organizations 54–6, 305 Daniels, John D. 3, 157–84 Davidson, W.H. 167 decentralization, fiscal 68–75

Index decision-making collective: in negotiation 205, 206, 207, 208 context, high/low 161, 169–70 development aims: of China 34–6 ‘developmental states’, local 77 Deverge, M. 212 Deyo, F.C. 88 dialogue ideal 90–1 Ding, D.Z. 137 dominant logic: and decisions 161 domination: in cultural accommodation 54, 55–6 Dongfeng: and Citroen 50 Dong Fureng 42 Duncan, R.B. 162 Earley, P.C. 96, 272 East/Southeast Asia, Chinese in 245, 325–36 and guanxi/networks 45, 246, 251–64 Economic Reform era 199, 200, 208 Economist, The 38 economy, Chinese 36–9 and Asian crisis 37, 332 and negotiation 201, 202–3 reforms 37, 63–80 Eisenhardt, K.M. 163 EJVs see JVs employment relations see HRM enterprise reform 35, 39–49, 64 entrepreneurship 44–6 and environment 325–36 and guanxi/networks 45, 245–64 of officials 76 entry mode decisions: for foreign operations 158–63, 175–6 study 163–82 equity joint ventures see JVs ethics, business 347–8 expectation structuring 210 extroversion: and influence 287, 288, 294, 295, 296, 299 face/etiquette 195–6 and influence 287, 288, 290, 294, 295, 296, 299

353

Falbe, C.M. 283 family as cult: ‘familyism’ 194 and patriarchalism 99–104, 194 ties (chia-jen) 227, 229–30, 231–2, 330–2 family businesses, Chinese see CFBs Farh, Jiing-Lih 2, 3, 20, 84–127, 225–44, 248, 278 Faulkner, D. 154 favours see renqing FDI see foreign direct investment FFI see Five Factor Inventory 15-Year Perspective Plan 33 filial piety 101, 107, 114, 197 financial managers: in JVs 135, 146, 147 fiscal reform: effects 68–75 Five Factor Inventory (FFI) 287–8, 294–6, 299 5-Year Plan, 9th (1996–2000) 33 Fleishman, E.A.: LBDQ 95 flexibility/inflexibility of Chinese 328–9, 334, 335–6 and influence 287, 288, 294, 295, 296 foreign direct investment (FDI) 36, 37, 38, 47 foreign firms in China 35–6, 38–9, 49–56, 57–8, 270–1 see also JVs; entry mode decisions; influence; investment; negotiation Forgas, J.P. 285, 296 Founder Group 43–4 Francis, J.N.P. 213 GDP: of China 36 GE 304, 307 Gell-Mann, M. 49 general managers: in JVs 134, 149–50, 151, 153 and majority shareholding 134, 145, 146, 147, 152 gentle persuasion see under CC GFS (‘Global Financial Services’) 304, 306, 313–18, 319, 320–1

354

Index

GHB (‘Gung Ho Bank’) 304, 308–13 compared with GFS 306, 315–16, 317, 318–21 giant enterprises 39–44 Gibson, J.J. 286 gifts see renqing Glaister, K.W. 132 ‘Global Financial Services’ see GFS globalization and strategic management 348–9 vs localization 303–21 gong-si-fen-ming 95 government officials 75–9 GP (gentle persuasion) see under CC Graham, J.L. 213 Granovetter, M.S. 240 Gray, B. 53, 133, 158, 160, 165 Greater China: defined 9 Greece, ancient: patriarchalism 100 gross domestic product 36 guanxi 21, 93, 225–33, 248–50, 305, 338 cultural roots 228–32, 248–9 and networks 239–40, 250, 256–9 and overseas Chinese 246, 248, 249, 250, 251–64; Taiwan: studies 228, 233–4, 235–8, 278 and reciprocity 105, 194–5, 249–50 research: to date 228, 233–8, 278; needs 238–42, 263–4 ‘Gung Ho Bank’ see GHB Habib, M.H. 186 Hamilton, G.G. 100, 103, 249 Handan Iron and Steel 40, 45–6 Han dynasty 102, 107 ‘hardware’: of negotiation 187, 188 harmony, social 191, 192, 193 and influence 287, 288, 294, 295, 296, 299 headship, paternalistic 90–1 high-technology ventures, US 157–76 Hill, C.W. 161 Ho, E.K.F. 288 Hofstede, G.H. 115, 271–2, 277

holism: in negotiation 190, 209, 210, 215 Holzmann, K. 134 Hong Kong economic trends/policies 327, 328, 332 management issues 254–5, 344–50; local/global firms 304, 308–21 social change 113, 114 horizontal enterprise groups 35 HRM (human resource management) 344–5 in MNCs/JVs 53–4, 135 and negotiation 201, 204 Huchet, J.F. 44 Human Relations 11 Hungary 65, 67, 79 Hwang, P. 161 ideology: and negotiation 201, 202 imperial China 101–3, 107, 248–9 individualism: vs collectivism 199, 271–2, 277 Indonesia 251, 254, 255, 261–2, 328 Industrial and Labor Relations Review 11 industry: vs agriculture 34, 71–2 inflexibility see flexibility influence tactics 283–4, 296–7, 299–300 and influencer’s personality 286–8, 294–6, 298–9 research methods 288–92 and status 284–5, 292–3, 297–8 and target’s behaviour 285–6, 293, 294, 298 Influence Tactics Profile (ITP) 284 information technology industry 43–4 in-groups/out-groups 93 institutional/macro studies 12–14, 15–16 integration: of overseas Chinese 255, 261–2 integrity see moral leadership internationalization 46–9 see also foreign firms; globalization; JVs; MNCs

Index investment 36–7, 46–7, 78–9 foreign (inward) 35–6, 37, 38, 46, 47, 49–53, 79 Israel: patriarchalism 100 ITP 284 Jacobs, J.B. 226 ‘Japan/Korea’ model: of internationalization 48, 49 Jews: family relationships 100 Jiang Zemin 42 joint stock companies 42 joint ventures see JVs journal articles 10–14 Journal of Applied Psychology 10, 11 Journal of Cross-cultural Psychology 10, 11 Journal of International Business Studies 10, 11 Journal of Management Studies 11 JVs and contingency theory 164, 172 control 131–7; and equity stakes 133, 137–8, 144–51, 152–4; and performance 137, 138–9, 151–2, 158, 160 example: Chen Hsong 338–43 implementing regulations (1983) 134, 135, 136, 148 partners: ‘unreliability’ 50 research 18–19, 20–1, 139–52 and technology transfer 148, 164, 166, 167, 172 vs WOFEs/WOSs 20–1, 51–2, 164, 166–7, 172 Kadar, Janos 65 Kao, C. 160 Kazuo, O. 212–13 Khrushchev, Nikita 68 Killing, P.J. 133 Kim, W.C. 161 King, A.Y. 113, 226, 241 kinship 194, 249 see also family Kipnis, D. 284–5, 297 Koenig, C. 154 Kogut, B. 162 Koh, P.H. 132, 133, 134, 135, 137, 147, 148, 151

355

Koreans: in USA 247 Kornai, Janos 64–5, 69, 71–2 labour relations see HRM Lardy, N. 79 Leader Behaviour Description Questionnaire (LBDQ) 95 leadership 84 cultural 118 and decision-making: in negotiation 205, 206, 207 didactic 86 in East/West 84–5, 90, 117–19 in Taiwan: studies 86–8, 91–3, 95, 112 transformational 118, 119 see also PL; moral leadership; subordinates Legalism 101–2, 107 Legend Group 43–4 legislation: and negotiation 201, 203 Leung, T. 233 Lewicki, T. 185 Lewin, D. 185 Li, J.T. 2, 9–32 liaison offices 158, 164, 172 Liang, U Chu 253 Li Ji (Book of Rites) 104 Li Ming 45 Lin, N. 240 Lin, S.C. 96 literature review 10–14 Liu Han Zhang 45 li-wei 91–2, 93, 94 localization 333, 337–8 vs globalization 303–21 location controlling: in negotiation 211 of foreign-owned operations 53 Lu, Y.B. 57–8, 133, 134 Luo, Y. 200, 241 Ma, C. 160 McCrae, R.R. 288 McFetridge, D.G. 167 macroenvironmental factors: in negotiation 200–4 macro/institutional studies 12–14, 15–16

356

Index

majority shareholding: in JVs see under shareholding Malaysia 251, 254, 327, 328 and Chinese integration 255, 261 Management Science 11 managers: in JVs 134–5, 145, 146, 147, 149–50, 151 manipulation: in negotiation 212–13 Manning, Thomas 117 Mao Zedong 68 market economy: vs planned economy 34, 64–5, 79 market-seeking 167, 168–9 Meindl, J.R. 272 Meyer, Marshall W. 4, 21, 303–22 mianzi see face/etiquette micro/psychological studies 12, 13, 14, 15, 16 Ming dynasty 101, 248–9 minorities, overseas Chinese as 261–2 ‘Mr. Always Says OK’ 286, 290, 294, 298 Misumi, J. 95, 297 MNCs 38, 51, 53–4 and giant enterprises 39, 40, 41 research needs 18–19, 20–1 MNM theory 306–7, 320 Montri, Phraya Thongwanit 253 moral leadership 86, 94–6, 97, 112, 116, 118 cultural roots 106–8 and subordinates’ response 96–7, 98, 119, 120, 121 Morningside Productivity Center 333 Motorola 269 multinational corporations see MNCs multinational management (MNM) theory 306–7, 320 multiple interested parties: in negotiation 206, 207 Myanmar, Chinese in 251 Naughton, B. 75 nee bhun khun 249

negotiation, Sino-Western and context 185–6, 187, 188–90, 191–204, 210, 215–17 organizational framework 204–8 outcomes 201–2, 213–15 process/behaviour 208–13 research: review 186–8 Nelson, R.R. 161 networks/networking 41, 47–8 and entrepreneurship 45, 247–8 and guanxi 239–40, 250, 256–9 interpersonal: and influence 290 see also guanxi neuroticism: and influence 287, 288, 294, 295, 296, 298 Ne Win, General 251 Nolan, P. 45 officials, government 75–9 openness: and influence 287, 288, 295, 296, 299 options theory: and foreign operations 162–3, 169 Organisation Studies 10, 11 Organizational Behavior and Human Decision Processes 11 Organization Science 11 Osland, G.E. 137, 151, 158, 193 out-groups/in-groups 93 Overholt, William 4, 21, 344–50 overproduction: in China 37–8 overseas Chinese 245, 325–6 family businesses see CFBs and guanxi/networks 45, 246, 247, 248, 249, 250, 251–64 Pan, G. 160 Pan, Y. 160 pan-familism 103–4 Parkhe, A. 163 partnership model: of internationalization 48–9, 52 paternalistic headship 90–1 paternalistic leadership see PL patriarchalism 99–104, 194 Pearce, J.L. 226, 233, 241 Perceived Leader Integrity Scale (PLIS) 118–19 personalism: in PL 89, 92–3

Index personality: and influence tactics 286–8, 294–6, 298–9 personnel: in JVs see appointments personnel managers: in JVs 135 pessimism: and influence 287, 288, 294, 295, 296, 299 Peterson, M. 297 Phatak, A.V. 186 Philippines 251, 253, 254, 255, 261 Phra Apaiwanich 252 Pilkington–Shanghai Yaohua Glass JV 55 pillar industries 35, 42, 133 PL 85, 94–9, 119–22 cultural roots 99–108 elements see authoritarianism; benevolence; moral leadership in overseas CFBs 85–93, 94, 103–4, 117 research: evidence 108–11, 112–22 planned economy: vs market economy 34, 64–5, 79 planning: in negotiation 210–11 POIS 284 politics and negotiation 199, 200–2 and overseas Chinese 251–4 see also Communist Party Poole, M.S. 185 population: of China 67, 343 post-industrialism 34–5 power distances 115, 197, 271–2 privatization 80 productivity cultures 304–6 local vs global 303, 306–21 Profile of Organizational Influence Strategies (POIS) 284 psychological/micro studies 12–16 Putnam, L.L. 185 Pye, L.W. 88, 89, 210 Qin: dictatorship 102 Qing dynasty 101, 107 reciprocity (bao) 105–6 and guanxi 105, 194–5, 249–50 in negotiation 192, 196–7, 212 see also renqing

357

Redding, S.G. 86–9, 90, 91, 93, 94, 239, 325 redistribution: and reforms 68–75 Reform era 199, 200, 208 relationships 193–4, 329 in negotiation 205, 211–12, 214 see also family; guanxi ren 194 renqing 233, 249–50 and influence 287, 288, 290, 294, 295, 296, 299 research: needs 17–23, 57, 279–80 guanxi 238–42, 263–4 PL 112–22 resource allocation: in JVs 136, 145, 151 Richet, X. 44 risk-averseness 277–8 risk management 348–9 ritual 196 see also face role modelling 118 Roloff, M.E. 185 Romans: patriarchalism 100 Russia see Soviet Union Schaan, J.L. 132, 133, 136, 154 Schein, E.H. 118 Schermerhorn, J.R. 285 Schmidt, S.M. 285 Scholes, M. 162 science sector enterprises 43–4 Scott, K. Dow 3, 269–82 segregation: in cultural accommodation 54, 56 Selzer, L. 160 shareholding and ex-SOEs 42 in JVs 137–8, 152–4; equal 145, 149–51, 153; majority 133, 143, 144, 145, 146–9, 152, 153; minority 145, 151, 153 sheng-jen 227, 229, 230, 231, 232 Shenkar, O. 137 Shi, Xinping 3, 185–221 shi-en 91, 92, 93, 94 Shougang Group 40 shou-jen 227, 229, 230, 231, 232

358

Index

Silin, Robert 85, 86–8, 89, 90, 91, 93, 94 Simon, Herbert A. 103 Singapore 251, 255, 305, 328 internationalization model 48, 49 Smith, P.B. 297 social change 113–15, 199, 271 social harmony see harmony SOEs 333 reforms 38, 39, 40, 44, 51, 58 soft budget constraints 40, 69, 70 ‘software’: of negotiation 187–8 Song dynasty 101 Southeast Asia see East/Southeast Asia South Korea: industrial reform 40 Soviet Union 63, 67, 68, 79 starting businesses: and guanxi 256–7 state-owned enterprises see SOEs status: and influence tactics 284–5, 292–3, 297–8 Stone Group 43–4 Stopford, J.M. 133 Strategic Management Journal 11 subordinates and leaders: responses 87–8, 96–9, 118, 119–21 and patriarchs 103 and supervisors 276–7, 278; and guanxi 233–4, 235–8 Sui-Tang period 107 Sun, Haifa 4, 283–302 Sun Tzu 210 supervisors see subordinates synergy: in cultural accommodation 54, 55 Taiwan 38, 255, 328 social change 113, 114 studies: on guanxi 228, 233–4, 235–8, 278; on leadership 86–8, 91–3, 95, 112 Tan, Kong Yam 3, 52, 131–56 Tang dynasty 101, 107 tax farming 252 Tayeb, M. 297 teamwork: in USIEs 269–80

technology development 43 know-how: in JVs 136, 145, 147–8 transfer 148, 166–7, 168, 202; costs 161–2, 164, 172 Terpstra, V. 169 Thai-Hua group 253 Thailand, Chinese in 252–4, 261, 328 and guanxi/networks 247, 249, 251–2, 255 Thomas, K.W. 185 Thompson, A.G.F. 90–1 Thompson, L. 185 Three Bonds (sang-gong) 102–4 time orientation and influence 290 in negotiation 192, 198, 199, 211 Tomlinson, J.W.C. 133 transaction cost theory: and foreign operations 162, 166–7 transformational leadership 118, 119 Tretiak, L.D. 134 Triandis, H.C. 272 trust fostering: in negotiation 211–12 and guanxi 233–4 Tsui, Anne S. 2, 3, 9–32, 225–44, 248, 278 Tung, R.L. 186, 241 Tung Chung-Shu 102 unemployment: in China 37 USA 271, 328 high-tech ventures 157–76 teamwork research 272–3 USIEs (United States-invested enterprises): and teamwork 269, 273–9, 280 ‘Vajiravudh, King’ 255 van Wijk, G. 154 Vejjajiva, Kosit 254 veto rights: in JVs 136, 145, 150 Vietnam, Chinese in 251 Wagner, C.L. 202 Walder, Andrew G.

2, 63–83

Index Wall, J.A. 185 Wang, Pien 3, 52, 131–56 Wang, X.J. 133, 134 Wang Jianming 45 Wee, C.H. 132, 133, 134, 135, 137, 147, 148, 151 wei 115–16 Weiss, S.E. 185 Welch, Jack 304, 305 Wells, L.T. 133 West/East and leadership 84–5, 90, 117–19 management styles 53–6, 271, 326, 334–6, 345–8 and patriarchalism 100 on self 229 Westwood, Robert I. 3, 90–1, 93, 94–5, 97, 185–221 Wiggins, J.S. 297 Wilkinson, I. 285 Winter, S.G. 161 WOFEs (wholly-owned foreign enterprises) 36, 51–2 World Bank 34 WOSs (wholly-owned subsidiaries) 137, 160, 164, 166–7, 168, 172 Wu, D.Y.H. 105 Wu, H. 160

Wu (emperor) 102 wu lun 197, 228–9 Xia, Y.F. 133, 143, 278 xiao see filial piety Xiao Jing 101, 105 Xin, Katherine R. 3, 225–44 Yan, A. 53, 133, 158, 160, 165 Yan, Y. 52, 53 Yang, C.F. 114 Yang, K.S. 103, 229 Yang, L.S. 105 Yang, M.M.H. 226 Yeung, I.U. 241 Yeung, L.L. 233 Yieng Saehao 252 Yin, R.K. 163 Yu, C.M. 169 Yuchai Diesel 46 Yukl, G. 283 Zander, U. 162 Zhi, Yunye 3, 131–56 zhong-cheng 93 Zhou dynasty 102 Zhu, Rongji 34, 37, 52 Zhuang, S.J. 95, 96

359

Management and Organizations in the Chinese Context

Status in Management and Organizations

Operations Management in Context

Knowledge Management in Modern Organizations

Preventive Stress Management in Organizations

Misbehavior in Organizations: Theory, Research, and Management

Management In Scandinavia: Culture, Context And Change

Data Management: Databases and Organizations

The Management of Meaning in Organizations

Environmental Management in Organizations: The IEMA Handbook

Environmental Management in Organizations: The IEMA Handbook

Internationalising the University: The Chinese Context

Learning by Design: Building Sustainable Organizations (Management, Organizations and Business)

Ritual and Deference: Extending Chinese Philosophy in a Comparative Context

Strategic Knowledge Management in Multinational Organizations

Knowledge Management in Organizations: A Critical Introduction

Embedding Organizations: Societal Analysis of Actors, Organizations and Socio-economic Context (Advances in Organization Studies)

Gender, Identity and the Culture of Organizations (Studies in Management, Organizations Andsociety, 6)

Women Employment and Organizations: Challenges for Management

Sustainable disease management in a European context

Nonprofit Organizations: Theory, Management, Policy

Management and the Worker (Vol. V in series Early Sociology of Management and Organizations)

Building More Effective Organizations: HR Management and Performance in Practice

Making Time: Time and Management in Modern Organizations

Power and Interdependence in Organizations (Cambridge Companions to Management)

Complexity, Organizations and Change (Routledge Studies on Complexity in Management)

The Mind in Context

The Mind in Context

Organizations and Strategies in Astronomy

Strategic Positioning in Voluntary and Charitable Organizations (Routledge Studies in the Management of Voluntary and Non-Profit Organizations)

Management and Organizations in the Chinese Context

Status in Management and Organizations

Operations Management in Context

Knowledge Management in Modern Organizations

Preventive Stress Management in Organizations

Misbehavior in Organizations: Theory, Research, and Management

Management In Scandinavia: Culture, Context And Change

Data Management: Databases and Organizations

The Management of Meaning in Organizations

Environmental Management in Organizations: The IEMA Handbook

Environmental Management in Organizations: The IEMA Handbook

Internationalising the University: The Chinese Context

Learning by Design: Building Sustainable Organizations (Management, Organizations and Business)

Ritual and Deference: Extending Chinese Philosophy in a Comparative Context

Strategic Knowledge Management in Multinational Organizations

Knowledge Management in Organizations: A Critical Introduction

Embedding Organizations: Societal Analysis of Actors, Organizations and Socio-economic Context (Advances in Organization Studies)

Gender, Identity and the Culture of Organizations (Studies in Management, Organizations Andsociety, 6)

Women Employment and Organizations: Challenges for Management

Sustainable disease management in a European context

Nonprofit Organizations: Theory, Management, Policy

Management and the Worker (Vol. V in series Early Sociology of Management and Organizations)

Building More Effective Organizations: HR Management and Performance in Practice

Making Time: Time and Management in Modern Organizations

Power and Interdependence in Organizations (Cambridge Companions to Management)

Complexity, Organizations and Change (Routledge Studies on Complexity in Management)

The Mind in Context

The Mind in Context

Organizations and Strategies in Astronomy

Strategic Positioning in Voluntary and Charitable Organizations (Routledge Studies in the Management of Voluntary and Non-Profit Organizations)

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