Explaining China’s emerging economic order

From fiefs to clans and network capitalism: explaining China’s emerging economic order

Max Boisot

China has sustained a rapid rate of economic growth since the inauguration of its economic reform in 1979, with only short-lived interruptions. This success contrasts favorably with most other developing countries (Economist, 1995b) and prompts enquiry into the kind of economic organization that is facilitating such an impressive performance. China’s growth has been stimulated by two main developments. The first is a shift in industrial ownership and property rights, with the state playing a diminishing role. The second is the increasing part played by market transactions, including a growing integration with the world economy. These developments would appear prima facie to be moving China’s economic system toward market capitalism. China has distinctive political, institutional, and cultural characteristics, however, and it is recognized that such factors can give rise to different modes of economic organization (Hamilton and Biggart, 1988; Whitley, 1994). Two broad questions therefore arise. The first is what kind of economic order is emerging in China, an answer to which is complicated by the country’s size and heterogeneity and by the uneven spread of its economic reform (Tu, 1993; Ungar and Chan, 1995). The second is how far China’s emerging economic order can be analyzed in conventional Western terms. The ability of Western neoclassical economic theory to account for the nature and success of other Asian business systems has already been put in doubt (e.g., Biggart and Hamilton, 1992).

These broad questions subsume a number of more specific issues that this paper addresses. The first concerns the type of business system now operating in China. If, as Nee (1992) suggested, there is a newer system of marketized transactions in addition to state-dominated nonmarket firms, does this merit special attention as the Chinese economic system of the future (cf. Qian and Xu, 1993)? Second, do the arrangements through which the marketized sector operates conform to the Western model? Third, and notwithstanding protestations by the Chinese leadership to the contrary, is the economic order that is emerging in China from the dismantling of the socialist system a capitalist one – as understood by Western observers and as judged by the criteria of ownership and property rights – or does it require its own specific designation? Fourth, if a distinctive economic system is emerging in China, what part does government play in its operation and does this require an elaboration of our conventional theories about the role of the state in economic life? Answers to these questions would be of considerable moment for Western academics and business people. A good understanding of Chinese economic organization would bear on Western discussions of modernization, many of which assume that this requires the building of market, property rights, and other institutional systems of essentially the same kind that supported earlier instances of industrialization. Such answers would also carry useful implications for foreign investors and business people. Better knowledge of the Chinese business system would help foreign companies enter the system and point to where power and decision making are located within it.

In this paper, we argue that China is treading a path toward modernization that differs from Western experience and that the essence of this can be analyzed in institutional terms. We then tentatively identify the distinctive characteristics of China’s emerging economic order, by reference to China’s business system and markets, capitalism, and government within that system. The paper as a whole should be read as a prolegomenon to the research that its subject richly deserves, its purpose at this stage being to elaborate relevant questions rather than to offer adequate answers.

In theoretical terms, the paper extends the markets and hierarchies debate initiated by Williamson (1975) in a new direction. As it evolved, the markets and hierarchies formulation established a unidimensional continuum, with market coordination at one end and hierarchical coordination at the other. Clan or federal forms of governance (Ouchi, 1980; Butler, 1983) and relational contracting (Williamson, 1985) could then be located at notional points along this continuum – not quite markets but not quite hierarchies either. Boisot (1986) questioned the ability of a unidimensional markets and hierarchies continuum to capture adequately the transactional options available in different cultural and institutional settings. Using a conceptual framework that he labeled the culture space or “C-space,” which relates the diffusion of transactionally relevant knowledge within a given population to how far it has been codified, he showed that the clan forms of governance, together with a form of governance that he labeled “fiefs,” could not be convincingly depicted as mere staging posts between markets and hierarchies. We use the C-space framework here to illustrate the special and challenging characteristics of China’s modernization.

USE OF THE C-SPACE TO CONTRAST EUROPEAN AND CHINESE MODERNIZATION

The Chinese authorities have always explicitly conceptualized their economic reform as a program of modernization or, to be more precise, the “Four Modernizations” of agriculture, industry, science and technology, and defense. What has happened under the reform does not, however, appear to accord with the European experience of modernization. Prior to developing a market order, Europe went through an absolutist phase in which emergent nation states created strong centralizing bureaucracies that codified a rational-legal approach to government administration (Elias, 1939; Anderson, 1974). Only with the advent of a liberal ideology in the eighteenth and nineteenth centuries did decentralization to a market order gradually take place (Kumar, 1978).

Analysis of the contrast between China and Europe is facilitated by reference to the C-space (Boisot, 1986, 1987), a conceptual framework that relates the extent to which transactionally relevant information can be diffused, and hence shared, within a target population to how far it has been codified. Codification, the selection and compression of data into stable structures (Shannon, 1948), is a matter of degree: If Zen masters trade in the kind of tacit knowledge that is hard to codify and that can only be imparted slowly and face to face to a limited number of disciples, bond traders, by contrast, deal in well-codified prices that can be diffused worldwide in seconds by electronic means. As shown in Figure 1, the codification and diffusion of information create a transactional environment that conditions the institutional possibilities to be found in different regions of the C-space and endows them with some quite specific features, which are listed in Figure 2.

An institutional order can be thought of as the center of gravity of a scatter of transactions in the C-space and a change of institutional order as a shift in the center of gravity. In practice – and certainly in pluralist regimes – the scatter is likely to be quite wide. An institutional order in this analysis – such as the “markets” category in Figure 2 – is therefore an ideal type that is useful for pointing up analytical distinctions. It is not intended to depict the implausible situation in which all transactions are confined exclusively to one of the four categories. In reality, all the institutional forms depicted in Figure 1 are likely to find a niche within a given institutional order, even if one of these forms predominates. Thus it is acknowledged that market transacting in the West can involve elements of personal trust (cf. Zucker, 1986; Portes, 1994) and that Western bureaucracies rely to a degree on informal processes and on-going personal relationships (e.g., Blau, 1955; Dalton, 1959). The argument, rather, is that the Western market system is characterized by impersonal economic relationships, large-numbers transacting, relatively decentralized self-regulating economic units, a plurality of goals, and the other constituents of the ideal type. Much Western analysis has accepted this characterization, and the question we shall be addressing is whether it can be applied to China and, if not, what kind of alternative characterization would be appropriate for that country.

In the C-space, the European experience of modernization entailed, first, a shift in the transactional center of gravity from an institutional order based on feudal fiefs to one based on bureaucracies and, second, from there a decentralization toward markets. The move required both an ability and a willingness to codify. The very act of selection entailed by codification, however, leads to the suppression, or even the rejection, of data not selected and, hence, to the sacrifice of contextual data. Transactional coverage – the ability to subsume a large number of particular cases under a general coding scheme – is achieved at the expense of transactional nuance and richness. The depersonalization associated with codified transactions merely reflects the difficulty of maintaining a dense network of interpersonal obligations as small-numbers transacting gives way to large-numbers transacting. What Williamson (1975) termed “atmosphere” is lost as exchange loses its “embeddedness” (Granovetter, 1985). The move toward greater codification thus corresponds to what Hall (1976) termed a shift from high context to low context or to what Habermas (1970) called a shift from “lifeworld” to “system.” It stimulates and facilitates but does not guarantee decentralization and the development of large-scale markets. Indeed, the centralized bureaucratic state typically restricted the evolution of markets by operating monopolies under its own direct control. In such a state, prevailing belief systems and institutional norms favor the hoarding rather than the sharing of information. Applied to problems of modernization, the C-space indicates how a greater propensity to codify transactions can usher in a bureaucratic order like that aspired to by the sixteenth-century European absolutist states. Whether and to what extent codified transactions are subsequently decentralized is a function of how effectively power holders can or wish to resist the forces of diffusion set in motion by the very act of codification itself.

A bureaucratic order, however, could only stabilize on the basis of a rational-legal approach to the problems of statecraft and institution building. In Western countries, it was the development of systems of universalistically applied laws that provided the framework within which a market system could develop. Thus it is argued that the evolution of property rights was a necessary condition for sustained economic growth in the Western world (North and Thomas, 1973; Economist, 1994b). Using the codification/diffusion framework as an analytical tool, Boisot and Child (1988) argued that China would have been inhibited in decentralizing from bureaucracies to markets, had it wanted to, because it had not actually built up a stable codified bureaucratic order from which to decentralize. A preference for interpersonal accommodation – an orientation to particular individuals and relationships rather than to impersonal rules – coupled with the irrationalities of the post-1949 command economy, was always undermining the country’s attempt to develop into bureaucracies and pulling China toward its traditional mode of social organization (Gernet, 1982). The process is self-reinforcing in that the absence of a rational-legal institutional framework fails to engender confidence in a wider system of bureaucratic or market transacting outside networks based on personal power, commitment, and trust. Boisot and Child labelled this tendency the “iron law of fiefs.”

In the countries of Central Eastern Europe, especially Czechoslovakia, Hungary, the Baltic States, and (to a lesser extent) Poland, rational-legal state bureaucracies predated the advent of Marxism-Leninism. When Marxism-Leninism was imposed upon these countries, with its erosion of legality and economic rationality, it still had to contend with the countervailing effects of the institutional order that had been in place. This undoubtedly helps to account for their rapid transformation toward Western institutions since 1989. In China, however, the bureaucracy that the communists inherited in 1949 was “patrimonial” (Weber, 1964) and feudal in its operations. It was in the hands of an unspecialized class of literati that, although dirigiste, interventionist, and particularistic in its orientation, was more concerned with the formality of bureaucratic codes than with their rational-legal content or effects. Its survival owed much to the fact that the simple and cellular preindustrial society it had presided over was comparatively undemanding of coordination and rationality (Balazs, 1968). The modernizing Chinese assumed that Marxism-Leninism would show the way to the attainment of a codified rational-legal order. Stalin’s forced collectivization of the Soviet Union in the 1930s and the latter’s subsequent ability to confront an armed Germany’s industrial might in the Second World War had suggested that, with the right policies, socialism in one country was indeed a live option. Without the countervailance of a legal-rational bureaucracy, however, Marxism-Leninism in China operated through the fieflike traditional mode of social organization. This was reinforced by a Chinese cultural and cognitive bias against abstraction (Bond and Hwang, 1986).

Abstraction is a prerequisite for the creation of robust codifications and the construction of a rational-legal order. If codification seeks to economize on data processing by assigning the data of experience to categories, abstraction seeks to economize on the number of categories used in the act of codifying (Boisot, 1995). It involves a move away from treating each specific exchange concretely sui generis and toward the use of general principles that apply predictably and systematically to every case. The central role of law in modern societies illustrates the importance of abstraction to the notion of modernization. The modernization hypothesis assumes that there is a shift from particularism to universalism and from substantive to procedural rationality. Thus the ability to move toward higher levels of codification, and to stay there, requires a greater disposition for abstract thought than Chinese culture has shown up until now. Remove abstraction from efforts at codification and one obtains little more than ritual and mock bureaucracies (Gouldner, 1954), low in institutional stability. Sooner or later under these conditions, transacting gravitates back toward the lower regions of the C-space. Japan held a similar disposition toward concrete particularisms when it started modernizing in the last third of the nineteenth century, but this disposition was attenuated rather than reinforced by the development model that it borrowed at the time. In contrast to the Marxist-Leninist model adopted by China after 1949, the Western liberal model that guided Japan’s efforts was conducive to the emergence – at least to some extent – of rational-legal economic order (Sansom, 1931).

What appears to be happening in many parts of China’s economic sphere is that the system continues to reproduce a model of organization specific to the relations between the governmental authorities and the enterprises within their hegemony. The authorities concerned are industrial ministries, provincial governments, and (more often) local governments. Interorganizational relations between governmental bodies and the enterprises within their purview, relations that in other industrial economies would be conducted at arm’s length through markets, are managed through personal interactions. The impersonal abstract order associated with a decentralization to markets has yet to replace the much more concrete personalized order that delegation within a patrimonial system can allow. The institutional model currently in use thus fails the test of abstraction implicitly posed by the modernization thesis. Instead, people “make out” through interpersonal accommodation and negotiation that is specific to each relationship and to each situation and, in so doing, they continue to sustain the iron law of fiefs.

The Chinese authorities themselves experience this law without being able to articulate it or incorporate it in their policies. They implicitly adopt the unidimensional perspective of the markets and hierarchies approach – albeit at a macroeconomic level – when they explain the economic reforms they have undertaken since 1978, in institutional terms, as a restructuring of the system from bureaucratic to market governance. According to the Chinese, the shift away from bureaucracy has taken two forms. The first form is a delegation of administrative power within the state bureaucracy from the central government to provincial and city governments. For example, responsibility for large state-owned enterprises was transferred from central to provincial governments, while for medium-sized state-owned enterprises it was transferred from provincial to city or county governments. Powers to enter into foreign trade relations and to approve the establishment of smaller joint ventures have also been delegated. The second form is a decentralization of economic power from the state bureaucracy to firms: state-owned enterprises, collective enterprises, and private businesses. State-owned firms have been given a measure of managerial discretion over what they produce, over securing inputs, over marketing outputs, and over organizational and personnel policies (Child, 1994). Moreover, there has been a considerable expansion in the share of industrial output accounted for by non-state firms, which are not formally so dependent on higher governmental authorities (Qian and Xu, 1993).

Although economic reform measures were enacted at an ever accelerating pace throughout the 1980s and the early 1990s, decentralization measures have encountered problems on the ground. The state has lacked both the appropriate economic and institutional concepts and the “low-context” (Hall, 1976) culture that would allow such measures to usher in a workable market order. The situation has not appreciably changed in the 1990s. The institutions that characterize a rational-legal system – an effective central bank, macroeconomic levers, enforceable and consistent laws – remain absent, all official rhetoric to the contrary notwithstanding. The freeing up of the financial system, for example, has led to the emergence of a sizeable secondary credit sector in which lending takes place through direct relationships between firms and other bodies at very high interest rates; this sector is beyond the control of the monetary and regulatory authorities (CEA, 1993). China’s growth has been barely controllable, with a continuing tendency to overheat, and the only tools available to central policy makers for bringing the economy under control remain the microeconomic ones designed for a command economy in which firms come under direct administrative authority (Economist, 1995a). To function at all they require direct interpersonal encounters between state actors and myriad economic agents in highly particularistic circumstances. Under the economic reform, governmental encounters with economic agents have shifted significantly to the local level and the center has lost much control over the provinces and municipalities. This is evidenced by the share of tax revenue accruing to the central government, which, according to the World Bank, amounted to 34 percent of gross domestic product (GDP) at the beginning of the reform process 15 years ago and shrank to 19 percent by 1994 (Economist, 1994a).

If, according to Western experience, modernization requires institutional changes moving transactions first toward bureaucracies and then toward markets, China cannot be said to be modernizing effectively. Yet if China is not modernizing effectively, how does one account for its spectacular performance on the criterion of growth – an average of 9 percent per annum in the 1980s and in double figures since 1992?

One answer would be that modernization does not reduce to growth. As Schumpeter once quipped (1978: 64, note 1), “Add successively as many mail coaches as you please, you will never get a railway thereby.” Rather, just as total factor productivity identifies those elements of growth that cannot be attributed to any single factor but are rather the product of how the factors are organized at both macro and micro levels (cf. Porter, 1990), we might consider that modernization speaks about how growth is organized, about its quality, and about the institutional choices that drive the process. This means the question can now be reformulated: How can China be achieving such rapid rates of growth while retaining an institutional order so heavily invested in the lower, uncodified regions of Figure 1?

Two explanations suggest themselves. The first is that with a per capita income of $US300 or so in 1980 (in 1980 dollars), the country started its reforms from a very low base (World Bank, 1985). Most of its growth is the result of bringing into play factors that had hitherto been underutilized, rather than of any effort to reorganize them. According to this explanation, reorganization has a part to play, but it hardly drives the process. Many countries that undergo economic take-off indeed start from a low base, and in the case of China this must certainly count as part of the explanation for its spectacular growth rate in the 1980s. For the 1990s, however, the explanation begins to lose some of its force. The World Bank’s “World Development Report” has recently taken to estimating GDP per head for various countries on a purchasing-power parity basis to take into account international differences in prices. Using such calculations, China’s GDP per head was $US1680 in 1991 and possibly $US2,000 in 1994, figures that place it among middle-income countries. From such a perspective, the low base vanishes, as do the arguments that it was used to support. At this income level, many economies have already acquired the rudiments of a rational-legal bureaucracy as well as those of efficient market institutions – hence their claim to be modernizing.

A second explanation is that the iron law of fiefs only applies to the state sector, victim of the continuing irrationalities of the planned economy. It is argued that transactions in the non-state sector are becoming codified, as they should, according to the conventional argument (Fischer, 1993). The significance of the non-state sector in China today is undeniable; it now accounts for around 50 percent of industrial output (Qian and Xu, 1993), while the state sector has been “hollowing” itself out through subcontracting to non-state firms and/or through forming joint ventures both with non-state firms and foreign partners. Yet the non-state sector is, by and large, made up of small, undercapitalized collective or family businesses. They operate discreetly, sometimes clandestinely, and where they do so most successfully it is because they are beyond the reach of the state central bureaucracy. They do not, however, escape the exactions of local bureaucracies with which they must reach some accommodation if they are to survive (Nee, 1992). Here the relationship remains essentially feudal, with the local bureaucracy offering protection in return for loyalty from the private and collective enterprises that come under its jurisdiction.

The infrastructure available at the local level does not necessarily energize such enterprises; it can also impede them. The phenomenal growth of official corruption in recent years bears eloquent testimony to this problem. The implementation of company and contractual law enacted by the central government is very much at the discretion of local authorities and often comes down to a matter of individual application. These considerations indicate that the non-state sector in China is not pushing toward the codified areas of our framework. Rather, it is having once more to fend off, or at least manage, the personalized impositions of ostensibly formal governmental organization as it had to in late-imperial times (Mann, 1987). Bruun’s (1993: chap. 5) ethnographical account of private household businesses in contemporary Chengdu richly illustrates this phenomenon.

We are thus left with a country representing over a fifth of the world’s population that is achieving an unprecedented level of economic performance through a relatively uncodified system of ownership and transacting. Whatever efforts at codification have taken place – and there have been some – have tended to be in response to external rather than internal demands and to be concentrated in areas that affect inward foreign direct investment (Potter, 1995; Carver, 1996). In effect, China’s rapid growth and development over the last 15 years challenges our concepts of modernization initially as an institutionalization toward greater codification (cf. Durkheim, 1933; Tonnies, 1955; Habermas, 1970) followed by a decentralization toward a market order. We either have to imagine a country as being capable of growing at 13 percent per annum without modernizing – theoretically conceivable at least – or we have to reconceptualize the process of modernization itself to take account of the way it is being achieved in China.

Casual empiricism refutes the first option – a visit to any of China’s cities or to the villages of its coastal regions overwhelmingly confirms that something we can call modernization is taking place. We are then left with the need to rethink the concept of modernization itself and to extend it beyond its Western conception. This opens up the possibility that China is not even trying to move further up the transactional framework toward a more codified rational-legal order as a precursor to a less troublesome decentralization – that it is not attempting to build a Western type of economic order. If China’s rapid development is being pursued through its own model of economic and social organization, can more be said about the distinctive features of this model? We attempt this, in terms of China’s business system and markets, capitalism, and government within that system.

SOME FEATURES OF CHINA’S EMERGING ECONOMIC ORDER

What Kind of Business System?

China has always had a significant amount of small-scale commercial and industrial activity outside the centrally planned command economy, but since 1979 the industrial system has become considerably more diversified (Hussain, 1990, 1992). An outstanding feature of China’s economic reform has been the steady and substantial growth in the share of the non-state sector in the national total (Qian and Xu, 1993). Today, there is a free market for most consumer goods, while the market remains supplementary to planning only in the production and supply of some industrial goods and materials, especially those considered to be of strategic significance. Moreover, several different forms of industrial property rights have now emerged alongside a diversification in the forms of enterprise ownership and of relationships with the organs of government, including different types of contracts for the management of state-owned enterprises. We therefore need to use a framework for analysis within which the spread of markets and changing structure of property rights in China can be taken into account.

One available framework is that developed by Whitley (1991, 1992, 1994) for comparing business systems. He argued that business systems vary internationally in terms of three main sets of characteristics: (1) the nature of firms as economic actors, especially their autonomy, (2) the way relations between firms are structured to form markets, and (3) the logic that governs managerial systems of coordination and control within the firms. He applied his analysis of these three constituents to “market economies” in which “control over economic resources is decentralized to private owners” (1994: 155). While reference to the three constituents can potentially identify differences between Chinese economic sectors, the way he posited a necessary conjunction of market transactions and capitalist ownership appears to be less appropriate.

Nee (1992) has identified three categories of Chinese enterprise according to the predominant mode through which their transactions are coordinated and the rights over industrial property they embody. He called the three types the “non-marketized firm,” the “marketized firm,” and the “private firm.” Table 1 builds on Nee’s classification but also adds certain refinements.

[TABULAR DATA FOR TABLE 1 OMITTED]

Non-marketized firms, which are also state-owned enterprises, form part of a now greatly diminished centralized structure of economic transactions in which state agencies control the circulation of goods and services through their redistributive mechanisms; to a large extent they also redistribute income between the firms. They predominate in heavy industries such as petroleum, chemicals, power, iron, and steel. Those goods for which the state still sets fixed plan prices come within this category. Within this sector, personalized relations between senior enterprise managers and higher state officials remain of considerable consequence, especially for the allocation of major investment funds (Lu and Child, 1996).

The marketized firm, according to Nee, falls outside the bounds of central planning, though it may rely to some extent on local government to secure access to resources allocated through the plan. He regards the collectively owned enterprise as the stereotypical marketized firm, and the economic contribution of collective enterprises has grown considerably under the reform. It is necessary, however, to make some distinctions that Nee has overlooked, within both the state-owned and collective categories. First, many state enterprises now engage fully in market transactions and report to local government authorities (see Child, 1994, for examples). They are therefore distinguished in Table 1 as “marketized state enterprises.” Second, collectively owned enterprise is a very broad category. It includes quite large urban manufacturing enterprises that may in reality have a rather similar relationship with local government to that of a marketized state enterprise and are to that extent state-dependent. Thus the assumed conjunction between market relations and capitalist (or at least non-state) ownership, made by both Nee and Whitley and drawn from the Western model, does not necessarily apply to China.

The category of collectively owned enterprise also includes small collectives running facilities such as restaurants that are largely free from regulation. Many collective enterprises, especially the smaller ones located in townships and villages (the so-called township-village enterprises, or TVEs), operate entirely in the market and with considerable freedom from government control. Their markets are not efficient neoclassical markets of the kind depicted in Figure 1, however, since they remain for the most part small, local, and hierarchically ordered. They retain formal links with local authorities and may enjoy some preferences over access to resources such as working capital. Otherwise they come close to Nee’s third, private-firm category. Foreign-funded firms also enjoy a private status, albeit usually with state-owned partners, and operate in the market. These distinctions point to the presence of three main sectors within China’s economic order: (1) a non-marketized state-owned sector, (2) a marketized non-private sector, and (3) a (marketized) private sector. The application of Whitley’s (1994) criterion characteristics helps to make these distinctions more specific and in so doing demonstrates the plurality of China’s present economic order.

The first sector, comprising non-marketized state-owned enterprises, remains at least as much an administrative as a business system. Despite the formal decentralization of decision making to their managements under the responsibility system (Chen, 1995), state enterprises in this category continue to depend on vertical ties to higher-level agencies that transfer to them materials and capital resources according to central plans. They can only produce for the market once they have satisfied the requirements of the plan, and in many cases the prices of both inputs and outputs under the plan are fixed administratively. Their performance is judged more in the light of plan fulfillment than of hard budget criteria. One-third of state enterprises are overtly loss-making, while another third have so-called hidden (unpaid) debts; these firms rely on subsidies to keep them afloat. This undermines the decentralization of responsibility to enterprises as economic actors since it is not clear under a non-market system who should bear the responsibility for losses, and under soft budget constraints it is effectively government that does so.

By contrast, the marketized non-private sector in China can be said to be a business system because it constitutes a mode of organizing market transactions, even though this organization relies a great deal on local government intervention. Comprising larger collective firms and many state enterprises responsible to local authorities, this sector bears some resemblance to Whitley’s state-dependent type of business system. Firms in this sector do not enjoy the same degree of formal autonomy as do private firms, although their effective freedom of economic action is usually greater because of the support they enjoy from local institutional intermediaries such as banks. The growth and profitability of marketized non-private firms have a larger and more direct impact on the income of local government than do those of either private firms or non-marketized state firms (Nee, 1992: 11). This encourages local authorities to assist the former by providing them with valuable networks and assistance in gaining access to capital, raw materials, and labor.

In this way, local agencies of the state fill many of the roles that in other business systems are played by private inter-median institutions. The isolation of firms in this sector from supporting institutions, at least those within the local economy, is therefore relatively low. The localized nature of state-dependency for firms in this sector supports the development of their personal interorganizational connections, which are of greater importance than appears to be the norm for this type of business system, as described by Whitley (Child, 1994). These connections are often arranged by local officials, and they may be a continuation of arrangements previously made under the planning system, as Solinger (1989) has illustrated through her study of relational contracting in Wuhan. The localized and informal decentralization of economic power to the marketized non-private sector in China would place it in the clan rather than the market region of Figure 1 – in effect, a decentralization in the lower region of the C-space.

The characteristics of the Chinese marketized private sector have several similarities to those of Whitley’s “centrifugal” business system, which he illustrates by the example of the non-mainland Chinese family business. Within this system, economic power is decentralized to firms, only to a limited extent, however, partly because there is a lack of stable institutional procedures (especially laws) governing economic relations. Nor can firms in this sector expect much support from intermediaries like the Chinese banks which, having hitherto remained as government agencies, continue to offer loans as much on the basis of political as economic criteria, favoring state and larger collectively owned firms.(1) These firms operate under hard budget constraints and have to be self-reliant; as a result, they remain small and undercapitalized. Many private firms in China attempt to compensate for these disadvantages by seeking close ties with local government, but they cannot take support from that quarter for granted. They often have to pay a “management fee” to the local authority for assistance in securing access to resources and political protection, or they have to register as collective enterprises to obtain greater support (Kraus, 1991; Nee, 1992). This mode of compensation parallels a characteristic of the centrifugal business system posited by Whitley, namely, that in the absence of stable institutional procedures and well-developed private intermediaries, the managers of firms have to use personal connections. A difference is that the key personal connections in China lie with local government officials rather than with other firms.

While there are some similarities between the private sector in China and Whitley’s centrifugal type of business system, they nevertheless diverge in two main respects. The first is that private companies in China are normally still small-scale organizations, unlike some centrifugal firms. Thus the diversity of their operations is limited, and they achieve a relatively high level of internal integration under the close personal control of their owners. The second is that, because the ownership of property in China does not furnish unambiguous legal property rights, such rights continue to depend importantly on the sanction of local governments and their officials. Even the private sector in China thus continues to be shaped partly by governmental institutions.

The Nature of Market Arrangements

The development of marketized sectors within the Chinese economy indicates that a growing proportion of economic transactions has become subject to market forces. Byrd’s (1991a) analysis indicates that this is the case even with the distribution of industrial goods by state-owned enterprises, in which central allocation previously played an important role. The special characteristic of market transactions in China lies, however, not so much in their spread but in their mode of organization.

Many business transactions in China appear to be settled through negotiation within a system of networked relations based on interpersonal reciprocal obligations (guanxi), with local government being a major player as resource provider, facilitator, and tax collector (see Pye, 1995). These transactional arrangements, “weak” in Western terms (Granovetter, 1985), appear to have considerable latent strengths. Thus the institutionalized use of negotiation between enterprises and local authorities appears to introduce flexibility into regional property rights and to allow for the reconstitution of transactions to meet new opportunities and changing circumstances. Solinger (1989) indicated how, in Wuhan, the withdrawal of the planning system based on quotas and local government-directed input and output transactions gave rise to relational contracting in which many of the former business relationships were maintained. She pointed to the advantages these long-established relationships could provide in an economic environment in which uncertainties persisted about the honoring of trading agreements, the assurance of quality in goods exchanged, the provision of working capital, and so forth. These transactions were founded on longstanding economic relationships between key individuals within the organizations concerned. The assurances that underpinned the transactions derived from mutual trust.

The description offered by Solinger appears to be broadly consistent with Nee’s (1992)analysis of local quasi-market networks in which local government agencies play a facilitating role and benefit from the tax revenues that derive from the stimulation that dynamic networks provide to local economic growth. The development of both internal and external subcontracting, particularly by larger enterprises, serves to extend such networks. External subcontracting encourages the growth of close personal relations between managers and technical staff of the collaborating firms, particularly when technical quality specifications and delivery schedules need to be tightly controlled (Child, 1994: chap. 7).

It has also become quite common for Chinese enterprises to form alliances and mergers to provide horizontal and vertical integration (Su, 1994). These alliances contribute to the development of quasi-market networks within China and appear to constitute a growing trend. In cases known firsthand to the writers, the initial moves in establishing these alliances were made by the enterprise director approaching persons from his home town in other units who were acquainted with him personally. Later on, endorsement from the relevant government ministry became necessary to ensure the support of local government departments and encourage coordination between them. Once in operation, integration between the constituent units of these alliances appears to depend heavily on close personal relations among senior managers and, to some extent, the interlocking of roles between the units.

Richardson (1972) came close to recognizing the phenomenon of relational transacting in his discussion of cooperative interfirm relationships, and Williamson (1985) has brought it into his perspective. While these contributions diverge importantly from neoclassical market analysis, they still regard relational transacting as falling within the domain of codified transactions at an intermediate point between hierarchy and market. The Chinese system of networked transactions, however, is relatively uncodified, and it is based on trust and longstanding personal connections. It does not therefore fit with Western analyses, nor is there reason to suppose that the Chinese system is merely in transition to a Western model; quite the contrary. For instance, the rapid spread in China today of modern technology for personal communications (such as mobile phones) is actually reinforcing the system by removing some of the constraints on the diffusion of personalized transacting previously imposed by low levels of codification. It facilitates the extension of economic fiefs into clan-type networks that achieve a measure of market coverage through relatively uncodified, personal means.

Do the “new” networking arrangements in China derive their distinct character from drawing on pre-1949 modes of economic transacting and the institutional supports for these? The issue here is whether we are now seeing in Chinese economic organization the reemergence of traditional social structures and behavior patterns or, rather, the establishment of new forms (cf. Siu, 1989). There is some reason to expect a degree of continuity with pre-communist society, because it is recognized that social institutions and traditions are deeply embedded and extremely persistent (Granovetter, 1985; Powell and DiMaggio, 1991). The imperial era was characterized in many parts of China by both a highly organized market system and well-established practices for the conduct of business (Faure, 1994). Thus Wong and Perdue (1992: 143-144) commented on the “mounting evidence of active, integrated markets” in Qing China, while Rawski and Li (1992) noted the active intervention of the Qing government in the grain market to stabilize prices and avert catastrophes. Skinner (1964-65) has analyzed the hierarchical ordering of market structures in pre-communist China and the extent to which this subsumed a conjunction of administrative and market units, especially at prefectural level and above. Cohen (1993: 156) remarked that “China was notable for the cultural, social, political, and economic interpenetration of city and countryside” during the later imperial era, which provided the organizational infrastructure for business and trade. Although the markets referred to were unlikely to be efficient in the neoclassical sense of the term and hence would not be assigned to the market region of the C-space, the previously established institutional system appears prima facie to provide precedents for the market-oriented, administratively supported system of networked transacting that has developed recently in China’s non-state-dependent sector.

A New Form of Capitalism?(2)

There is a major debate in Western economics about the relevance of property rights to economic performance. Economic reform in the different socialist countries since the 1970s has intensified this debate, on which the Chinese case should offer an important comment. Arguably the seminal text in the modern debate is that of North and Thomas (1973: 157), who maintained that the key factor explaining the “rise of the Western world” was the evolution of “a set of property rights that provided the incentives necessary for sustained growth;” they attributed economic failure, including that of “much of Latin America, Asia and Africa in our times,” to “inefficient property rights.” A large literature has emerged, arguing on both theoretical and practical grounds that, with certain exceptions, state ownership of industrial assets is incompatible with efficient operation. This argument has shaped the policy advice received by developing countries, often as a condition of further aid from the Bretton Woods organizations (Cook and Kirkpatrick, 1988). Most recently, it has informed the advice given to the reforming communist countries: “The hallmark of market capitalism is that private capital has wide autonomy to enter or leave industries by creating or closing enterprises and it has substantial control over the management of the enterprises it owns” (EBRD, 1993: 113).

China’s rapid growth, and that of a wide spectrum of East Asian countries, calls these broad judgments into question. The case of China prompts the realization that “property rights” can be a complex mixture that does not constitute a simple binary set of possibilities – “state” versus “private.” In China, a bundle of property rights is exercised by different bodies, and de factor property rights tend to emerge from continuing processes of negotiation between central, regional, community, and private interests. Moreover, the rights relate to such diverse matters as the appointment of senior enterprise managers, allocation of profits, investment funding, and formation of interfirm relationships. These rights, in the context of different categories of firms, are articulated through a variety of institutional structures, some of which are more strongly oriented toward the interests of the community than those of either the individual or the state. In this respect, again, the contrast between China’s economic development and that of the West is consistent with the view that different institutional frameworks are capable of generating economic development in different societies.

While the Chinese have explained the post-1978 economic reforms as a move from a bureaucratic to a market-led system of industrial coordination, they have been at pains not to present this as a move toward capitalism and private property rights. Chinese economists and political theorists have therefore been concerned to distinguish the two dimensions in Table 1. They have repeatedly claimed that a market economy does not equate with a capitalist one, just as a planned economy does not necessarily amount to a socialist one (Gong, 1992; Jiang, 1993; Wang, 1993). Markets and hierarchies, in this perspective, are just tools – mechanisms for coordinating transactions – that with suitable adjustments can each be placed equally effectively at the service of a socialist or a capitalist order.(3) Even a Western writer like Solinger (1993), who from a close vantage point suggested that China is developing a form of capitalism, nevertheless argued that this will not be based on Western institutions but will depend very much on adaptation by a state that continues to regulate property rights. Faure (1994: 57) commented: “I am not saying that China, by discarding Marxism, is necessarily becoming capitalist. It is not clear to me that such words as socialism or capitalism are applicable to this emerging society in any absolute sense.”

Whether these writers’ claims are correct or not, their disassociation of marketization from private ownership reflects a distinctive feature of China’s economic development that appears to be socially embedded. Up to 1949, industrial property rights in China were granted more or less under license from the state, and the continued approval of local officials was required (Jiang, 1992). Faure (1994) indicated how firms in the early stages of Chinese industrialization in late-imperial times usually depended on the patronage of senior government officials. Similarly, the property rights enjoyed by “state-owned” enterprises today are in practice negotiated with higher authorities, whether these concern specific resource commitments (Child and Lu, 1996) or the implementation of responsibility contracts in general (Chen, 1995). In the rapidly growing non-state sector, the ownership of collectives has not been clearly defined, and local government retains an important supportive and supervisory role in their operation (Nee, 1992).

While state enterprises in China are officially owned by “the whole people,” government being the de facto representative of their owners, the intention of the economic reformers has been to separate public administration from business management by decentralizing powers of enterprise decision making to the latter through the Contract Responsibility System (CRS) (Byrd, 1991b). As Chen (1995) has shown, the property rights enjoyed by the managers of state enterprises under the CRS are established through their negotiation with administering authorities rather than on the basis of codification, with the result that the rights of their official owners are becoming increasingly attenuated. The lively current discussion on the possibility of introducing stockholding systems to state enterprises points to a further impending re-definition of their ownership. The nature of such redefinition is uncertain, since it will depend on the determination of which groups are entitled to own stock and the percentage of enterprise assets that are allocated to stockholders. It is therefore quite difficult at this moment to comment on the prospects that the state sector will be privatized and whether, in this respect, there will be a move toward a capitalism of the Western variety. If there is, it is quite likely that the institutional basis on which ownership rights are defined will not accord to the highly formal and legalized Western pattern.

Whereas the reform of state enterprises has been from the top down, township-village enterprises (TVEs) have emerged and proliferated from the bottom up. The consequence is that their ownership status is very ill-defined. Weitzman and Xu (1993) argued that TVEs do not have any owners, in the spirit of Western property rights theory. Nominally, TVEs are collectively owned enterprises, with community members being the owners. These collective owners do not, however, have shares in a formal sense and are permitted to participate in the TVE on the basis of their residency, a right that is mandated by the community government. The community government is the de factor executive owner of the TVEs and is reported, normally, to control them. The TVE is therefore not a private capitalist firm in disguise, and there are legal restrictions to prevent it from converting into one. So, while TVEs are highly successful non-state enterprises, with a growth rate of total factor productivity about ten times that of state enterprises and accounting for about 38 percent of China’s industrial output by 1991, they do not represent a shift toward capitalism in the Western sense. TVEs and other Chinese enterprises today may behave like Western capitalist firms, and indulge in an increasingly entrepreneurial pursuit of market opportunities, but this does not necessarily mean that their constitution is of the Western capitalistic variety.

This failure to match the Western model generates ambiguity in the minds of some writers. Bolton (1995: 8), for example, questioned whether “TVEs can be expected to be a stable institutional arrangement which could form a long term alternative to private ownership of firms.” An alternative reaction would be to suggest that if TVEs have emerged from and retain their roots within a traditional system of community cooperation and transacting, then they are founded on a sound institutional bedrock. Further investigation into this question will require close attention to the property rights and transactional arrangements pertaining to TVEs and other collectives in particular communities. It is not clear, for instance, how much variance there is in such arrangements between different local areas. Overall, it seems appropriate to break away from the legally based Western notion of property rights that emanates from ownership and, instead, adopt a concept more appropriate to China that allows for the possibility that (1) such rights may be granted upon administrative sufferance and (2) that their terms can be subject to a continuing process of renegotiation. In that case, the significant research question is not so much who owns Chinese business assets as who controls and regulates them and through what social process, a question that Berle and Means (1932) asked of the large American corporation six decades ago.

Another feature of growing importance in the Chinese economy, in which government agencies are often active partners, is the development of various forms of hybrid firms (cf. Borys and Jemison, 1989; Su, 1994). These organize business activities across ownership forms and systems and include Sino-foreign joint ventures, Sino-Sino joint ventures, and partnerships between state, collective, and private ownership forms. Su concluded from his research in Xiamen that hybrid firms have provided an extremely important dynamic for economic growth and development at the micro level. They also contribute importantly to the formation of business networks that, among other things, stimulate innovation through information exchange and innovation. They are often formed and operate on a basis of personal trust rather than formal contract.

There is a juxtaposition in China of (1) an emergent form of what at best can be termed “quasi-capitalism,” incorporating important aspects of governmental patronage, and (2) marketization. This will, according to conventional Western thinking, inevitably generate certain fundamental tensions, and it remains to be seen how significant these are. One such tension stems from the temptation of government officials to introduce non-economically rational criteria into resource allocation by firms (cf. Child and Lu, 1996). Another derives from the increasingly local focus of industrial governance, which may in several ways inhibit the flow of investment funds to their nationally most beneficial uses, such as through pressures to retain surplus funds within the locality or the discouragement of outside investors because of the risks they perceive to stem from local interpretations of the law and the distortions introduced by local corruption. As Faure (1994: 87) stated, “The present danger in the development of a market in China lies in the very real possibility that with the devolution of state power, local authorities may take away what the state would concede. It is as yet unclear if the state can effectively curb the emergence of patronage networks built upon the personal influence of members of the officialdom.”

The Role of Government

It has been said that China is a nation searching for a country. Huge size and topographical barriers have contributed to an historical problematic in China concerning the relations between the state – the central overall authority that organizes and symbolizes a country – and the nation. The contrast between the Western and Chinese models of the state’s economic role are illuminated by the differences among the concepts of a “nation-state,” “the nation and the state,” and “the nation or the state.” The first concept assumes that there is a positive valence between government and society, with the state being the codification of the nation through the constitutional and legal system. This approximates the Western model. The “nation and the state” points to a situation in which the population accords legitimacy to the central authority while seeking to keep it at arm’s length. The saying that “Heaven is high and the Emperor is far” has traditionally met with approval in China, signifying that the state does not codify the nation that prefers to conduct its transactions according to customary uncodified norms. The third concept, “the state or the nation,” envisages a sharp distinction between government and people, in which the state may be oppressive and fail to secure popular legitimacy. It may be conjectured that in the former Soviet Union and in China by 1976, the situation was one of “the state or the nation” and that this contributed importantly to the failure of the planning system.

The post-1949 communist regime saw the most far-reaching attempts in China’s history to bring economic and social life under the central control of the state. The first was via the central planning system that was established in the 1950s but which never attained the detailed coverage of the Soviet system. The second was via the ideologically sustained mass mobilizations of the Great Leap Forward and the Cultural Revolution, which while ostensibly encouraging local initiatives were nevertheless centrally orchestrated. By the late 1970s, it was realized that both systems of central state control or initiative had failed to provide for sustained economic development: China had not been able to sustain a satisfactory position in the “bureaucracies” region of Figure 1 (economic regulation via a central planning bureaucracy), while the attempt to have the state exercise direct central initiative and control through traditional fieflike social formations proved disastrous.

Since 1979, there has been a steady decentralization of economic initiative to provincial, municipal, and even more local tiers of government, a shrinking of the state-owned component of the industrial economy, a consistent decline in the proportion of capital investment controlled directly by central government, a shrinking share of tax revenue accruing to central government, and an official aspiration to concentrate central government intervention on tuning the economy as a whole through fiscal and monetary instruments (Naughton, 1987; Economist, 1994a). Together with the encouragement of market transacting, this may at first sight appear to be a redefinition of the state’s economic role toward the Western model, which would be an erroneous interpretation. For it does not mean that government in China now takes a hands-off stance towards business. Rather, the system that is now emerging involves a sharper differentiation between the role of central and regional authorities, the latter comprising layers of government down from province, city, county, and township to village. Various bureaux and commissions operate at each level within this tiered system, each having its own goals for the economy. The resulting vertical and horizontal cleavages within the system give rise to multiple power centers with which enterprises have to deal, depending on their scale, legal status, and sector (Wank, 1995).

Government officials at the different levels and in the various units have been enjoined to support profitable economic developments, and their departments often take a stake in these. Economic decentralization has meant that only large state-owned enterprises, normally located in strategic industrial sectors, retain a direct responsibility to central ministries. For other enterprises, it has led to a closer interdependence between local governments and enterprises led by managers or enterpreneurs who are part of the same community. Local governments and associations may even sometimes ally with the enterprise managements under their purview to resist the encroachment of the central state over matters such as investment approval and taxation (Ungar and Chan, 1995). Wank (1995) noted that such local alliances can reduce the need for enterprises to look to the central authorities for resources and that these authorities are often critical of them. He concluded from an in-depth study of private and cooperative enterprises in Xiamen that “entrepreneurial connections with the bureaucracy create clientelist networks that are neither market relationships nor formal command-economy relationships. . . . They are patron-client relations between actors who control asymmetrical resources and forge alliances for mutual benefit. The alliances . . . are embedded in personal ties between entrepreneurs and officials who know and trust each other” (1995: 69-70).

The new system bears some similarities to that which evolved during the early stages of Chinese industrialization in late-imperial times. This was a system of state patronage in which officials took an active role in promoting and supervising private enterprises, especially the more significant ones. The rapid growth of the economy after 1895 brought about a decentralization and broadening of bureaucratic involvement in industry in collaboration with local networks of gentry families (Faure, 1994). During the period of Nationalist government, many so-called “national capitalist firms” were owned and controlled by politically dominant families (Coble, 1980). The Chinese tradition was therefore one of close alliance between government officials and communities in industrial governance.

The combination in contemporary China of decentralization from central authorities with the bottom-up dynamic provided by township and village enterprises leads to a perspective on the role that government can play in facilitating business networks at the local level that is quite different from Western experience. Tu (1993: xi) observed that the collusion of state and entrepreneur made for a peculiar economic strength:

The interdependence of economy and polity is such that the state plays a vitally important role at all levels in removing structural impediments to development and building necessary infrastructures for manufacturing industry, commerce, and trade. The mixed pattern is certainly not a socialist planned economy, nor is it a Western capitalist system. The so-called township village enterprise is a new animal, a species in economic development that has yet to be properly defined.

Bruun (1993) argued that the state and the family (or community) – fundamental institutions in China – present a dichotomy that has historically been in mutual tension. We are suggesting, by contrast, that the significant feature of the emerging Chinese system lies in the ways government and community or family work together within a system of relatively uncodified relationships that derives legitimacy from embedded social practice rather than from formalized ownership and property rights. In some forms, government and family work constitute a fieflike relationship, as with some large enterprises that report directly to a ministry or with business ventures that have been started by the children of senior party members or by the People’s Liberation Army. In other forms, like many township or village collective enterprises, government and community organizations work together with firms in a more extensive clan-like network. In both instances, there is an evident contrast with the Western market capitalism model in which government codifies the rules and monitors adherence to them from outside the transactional arena. In China, government operates from within the transactional arena. The distinction between the inside and the outside remains itself uncodified and hence subject to arbitrary interpretation by power holders.

This is not to claim that the economic role of the state is unproblematic in China; far from it. A major problem is that the emerging “new” economy of non-state enterprises does not remove the continuing headache of state-owned firms, among which it was recently estimated that as many as 80 percent are loss-making (private communication from a senior Chinese economist in 1994). One of the most difficult problems facing the current reform of state enterprises away from the contract responsibility system toward a modern corporate system lies in determining who has the right to select their boards of directors. If this is the state as owner, then it is hard to see how any reform will be effected. If this is not the state, then who else has the right, since there are no other owners? Collective and private firms avoid this dilemma insofar as tangible social units constitute their de facto ownership, whereas the ownership of a state-owned enterprise is intangible.

The question also arises as to whether or not local government enjoys the legitimacy to run economic networks. There can be tensions between government controls and the aspirations of firms (Ungar and Chan, 1995). Within local communities, private businesses can feel exploited by local officials and to be the victims of growing corruption, as Bruun (1993) found in Chengdu. If local authorities do develop this legitimacy, will the emerging system be similar to Gellner’s (1981) notion of a segmented society, in which there is a collection of local systems in competition with each other but coordinated by government at the next level up? The notion of a segmented society posits a clear functional role for government within an economic system that is vertically as well as horizontally networked. The parallel with Skinner’s description of hierarchically ordered markets in pre-communist times is intriguing. The challenge of hierarchical ordering will always be particularly acute for China simply because of its huge size, topographical barriers, and tendency for inter-regional economic imbalance. It is important always to recall that in China government straddles several hierarchical levels, and the resolution of the relationship between these levels in economic governance is inherently problematic.

The Western concept of the state in the process of modernization has envisaged it as the legislator of rules for economic behavior and of procedures for resolving disputes under these rules. In the liberal interpretation, the state acts on behalf of the majority in society through the democratic process, and, in the Marxist interpretation, it acts on behalf of the dominant capitalist class (Gran, 1994). The state is not assumed to be the natural body either to own or directly to manage industrial organizations. Studies of East-Asian societies other than China have already called for the amendment of this theory about the role of government in modernization (Hamilton and Biggart, 1988; Whitley, 1992). The state has, for example, played a far more directive role in the industrialization of countries such as Japan and South Korea. China adds an interesting dimension, with its tiered system of governmental involvement creating an interdependence of economy and polity down to the bedrock of local communities. As Tu (1993) observed, this mixed pattern is neither a socialist planned economy, nor a Western capitalist system. It requires an elaboration, if not amendment, of conventional theories about the role of the state in economic life, including further development of those that do adopt a comparative institutions perspective.

CONCLUSION

It has been argued that even a superficial examination of the emerging Chinese economic system calls for a reappraisal of the universal validity of conventional Western assumptions about modernization. That analysis has largely confined itself to the codified reaches of the codification-diffusion framework presented earlier. Application of the framework suggests that we can derive a conceptual language from Western economic and social analysis that is useful for elucidating the Chinese case but that Western assumptions about the variables identified by the concepts will not apply, either in terms of the configurations of variables (at one point in time) or movement along the variables over time. The Chinese system, in particular its underlying logic and its gestalt, will be different. This difference, as it emerges from our discussion, is summarized by Figure 3 and can be simply stated: The Western path to modernization, involving first an increase in codification toward rational-legal administrative systems (i.e., bureaucracies) and then a decentralization toward a market order, created the institutions of modern “market capitalism.” Such a path, at least when codification has been achieved, is consistent with the unidimensional markets and hierarchies perspective. The Chinese path to modernization since 1949, by contrast, involved first an abortive move up the codification scale (state planning), punctuated by wild oscillations toward mass mobilization, and then, after a reversion into fiefs, a subsequent decentralization, coupling with traditional systems in the lower reaches of the C-space. In the absence of effective codification, and given traditional Chinese social organization, such decentralization leads not to markets but to clans and permits the more local and personalized institutional order, which, following other observers of Asian economic institutions (Biggart and Hamilton, 1992; Gerlach and Lincoln, 1992; Berg, 1994), we shall label “network capitalism.”

Three main sectors have been distinguished within China’s emerging economic order. These are the non-marketized state-owned sector, the marketized non-private sector, and the marketized private sector. They vary in the extent to which their constituent enterprises engage in market transactions and enjoy autonomy from the state in the exercise of property rights. They share, however, a high level of engagement in transactional networks based on relational contracting and interfirm alliances that involve governmental agencies in approving, supporting, and sometimes initiating roles. China’s emerging economic order is constituted by a combination of communal property rights and transactions in which contingent risks are managed in these networks informally on the basis of accepted social practice rather than by reliance on formal laws of contract. The security of property rights, which, according to the Western tradition is guaranteed by the rule of law in democratic societies, in China derives primarily from a relatively uncodified process of legitimization within the community as a socioeconomic network. The security of Chinese rights to employ economic assets in the fulfillment of transactional obligations is supported by the intervention of officials at the various levels of government to safeguard what is a politically and socially acceptable use of those rights. In terms of our analytical framework, China appears to show how a clan-based system of transactions can function successfully based on a communal definition of property rights, rather than these being defined externally and from above through a legal system that identifies property rights based on individual ownership. China thus demonstrates that a modernizing economic order is able to operate in the less codified domain of the C-space.

Despite this limited reliance on codification, there is an increase in the diffusion of economic transactions within China’s economy. A shift from fieflike to clan-based transactions within China’s economic order is evidenced by several developments. The first is the growing share of economic activity accounted for by non-state-owned enterprises. State-owned enterprises are more beholden than other Chinese firms to specific governmental authorities in which custody of their ownership is vested, such as ministries and economic commissions. The structure of control over state-owned enterprises, and in some cases their input-output transactional networks, tends to be narrower in scope and to retain more fieflike characteristics. Control over non-state enterprises is less specific, and their patterns of resource dependency lead them into a wider network of external organizations from which they transact factor inputs and dispose of their outputs. Second, an increasing number of enterprises are widening the scope of their transactions, and securing greater economic independence from higher governmental bodies, through the formation of joint ventures with foreign firms investing in China. These linkages with foreign firms extend their networks beyond the scope of localized fiefs. Third, more Chinese enterprises are forming alliances between themselves, chiefly to provide horizontal integration and to enlarge the scope of their transactions within the Chinese economy as a whole.

Networked relationships have for a long time played a significant role in Western economic life, a fact that became obscured by the hegemony of the atomistic market model of classical and neoclassical economics (Berg, 1994; Powell and Smith-Doerr, 1994). There has also been a rapid growth of various forms of economic networking in recent years, such that it has been described as the characteristic organizational form of the “new competition” (Nohria and Eccles, 1992). It is therefore not the presence of networking that is distinctive about China’s emerging economic order but, rather, the depth and nature of its social embeddedness. Regarding the former, we have cited evidence of continuities between contemporary and historic networking, with agents of the state playing an integral role in both. Redding (1990: 95) has noted how living “in a collectivist and group-dominated society” is a cultural tradition for the Chinese. The roots of networking as an institutionalized practice are ancient and extensively developed in China. The fundamental contrasts in the institutional constitution of property rights and transactional safeguards between Western (especially Anglo-Saxon) societies and China also imply that the nature of the social processes sustaining networking in China are also quite different from those in Western countries.

Biggart and Hamilton (1992) noted that economists have long had difficulty applying the Western neoclassical model of markets and firms to Asia, with its developed interfirm networks (Goto, 1982; Aoki, 1984, 1990). They point out that a model of Asian capitalism is long overdue. The analysis of the Chinese economic reforms in the C-space contributes both to the institutional interpretation of Asian capitalism and offers an indication of where China stands with respect to it. The analysis yields two related propositions:

Proposition 1: The markets and hierarchies perspective, when applied to the modernization process, assumes that policy options are located along a single dimension with the state (bureaucracies) at one extremity and autonomous firms (markets) at the other. This perspective assumes, therefore, that decentralization involves a transition from bureaucracies to markets. A C-space analysis indicates that it is also possible to decentralize at a lower level of codification than is implied by the markets and hierarchies perspective. In that case, the move will be from fiefs to clans.

Proposition 2: China offers an instance of such a decentralization and, in so doing, it is moving not toward a market order, as it claims, but toward a form of economic organization that can be labeled network capitalism and that to a large degree appears to be characteristic of East Asian societies.

Taken together, these two propositions extend the institutional options available for the modernization process beyond those offered in the markets and hierarchies framework. They do so in a way that challenges both the widely held assumption that capitalism is a unitary market-oriented phenomenon (cf. Braudel, 1979) and the popular belief that institutional and economic development invariably lead to a convergence with a unitary capitalist order.

Applied to the Chinese case, a further and more detailed investigation of these propositions would benefit from a focus on selected local economies and their linkages to the wider national and international economy. A local focus is justified by the emergence of the non-state sector, to which many state enterprises are becoming increasingly tied through sub-contracting and alliances (Su, 1994). It is the sector from which much of the bottom-up momentum of the reform has derived and within which new business networks are emerging with local government support. Questions of ownership, financing, trading, and regulation need to be investigated as components of a wider regional commercial system, and with regard to its historical antecedents, and this comprehensive perspective can only be practically accomplished on a local basis. Some localities should furnish records relevant to a reconstruction of the pre-1949 economic system, and it should be possible to question those influential in establishing the new system as to their design templates and the normative framework that informed them (cf. Jiang, 1992).

Western capitalism in its mature form has directed its codifying efforts toward increasing efficiency and managing risk. It has striven toward order and predictability through both the codification of law outside enterprises and the codification (formalization) of management structures and systems within them. This is a path that an increasing number of Western writers are now urging corporations to abandon in favor of modes of organizing that are more consistent with the concept of networking, such as subcontracting and temporary alliances (e.g., Kanter, 1983; Hastings, 1993; Miles and Snow, 1994). Peters (1992) has called this the “necessary disorganization for the nineties.” While this emerging thinking might be more accurately described as the search for the self-learning and self-reconstituting organization, the significant point is that networking is increasingly being seen as a necessary way of achieving this end.

The Chinese system of network capitalism works through the implicit and fluid dynamic of relationships. On the one hand, this is a process that consumes much time and energy. On the other hand, it is suited to handling complexity and uncertainty. Networks offer greater capacities for generating and transmitting new information, and when they are sustained by trust-based relationships they offer a cushion against the possibility of failure that is a concomitant of uncertainty. We have argued that, in this last respect, the networks of the emergent Chinese capitalism are qualitatively different from those within the Western market system, for the latter continue to be based on legal contract and ownership rights rather than on long-term trust relationships. If Peters (1992) is correct in seeing Western capitalism as exhibiting conditions of increasing impermanence and fickleness, with businesses joining in more and more temporary alliances, then it clearly is not developing toward the long-term clan-like relationships of Chinese network capitalism. Rather, Western networking is likely to be characterized by short-term expediency that will increase rather than cope with uncertainty and in which there may well be an increasing resort to litigation to deal with disputes arising from broken business marriages. These differences between the emerging Chinese and Western economic orders point clearly to the influence of the institutional systems in which they are respectively embedded.

For those transacting directly with the Chinese system, useful practical insights would arise from investigating the issues addressed in this paper. Light should be thrown on entry points into Chinese economic networks, and this would have direct implications for European companies’ market entry and marketing policies with respect to China. It would be useful to compare foreign companies that have achieved differing levels of success in their China market policies. One might expect to find differences between overseas Chinese and Western companies. Westerners may well believe that their best policy is to enact their Chinese business environment via formal dealings with the state, whereas Chinese investors may well enact their environment via the invisible, “weak” network. Research in progress at Cambridge University on Sino-foreign joint ventures confirms that overseas Chinese investors are more likely to establish business relationships through friendship ties or other informal contacts than are Western investors. Further investigation into local economic systems would also help to throw light on the question of where the key decision makers are located within what appear to be quite fluid and dynamic systems. This is of obvious potential importance to foreign firms seeking to secure a commitment to actions that will further their business operations. This returns us to the main point of the analysis presented in this paper. The social rules of business in China are not those to which Westerners have become accustomed or which conform to their stereotype of “socialist” economy. What they find when engaging with China is a system that in its transformation is giving rise to a distinctive institutional form – network capitalism.

1 Similar considerations tend to govern the allocation of materials in short supply. The situation regarding finance will probably change as, for example, foreign banks are permitted to play a more active role in the Chinese economy.

2 This section has been informed by comments from our colleague Peter Nolan.

3 Experience with privatization in Western economies, however, suggests that whether a firm has public or private ownership does influence its behavior toward the market, particularly whether it pursues the goal of profit seeking to the exclusion of other goals.

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Max Boisot [coauthor, “From Fiefs to Clans and Network Capitalism: Explaining China’s Emerging Economic Order”] is a professor of strategic management at ESADE in Barcelona and a senior associate at the Judge Institute of Management Studies, University of Cambridge, UK. His mailing address is Avda. Miguel Utrillo, Q.14, Vallpineda, 08870 Sitges (Barcelona), Spain (e-mail: ). His current research interests include the role of information in analyzing and managing complex systems, both technological systems within firms and social systems. He recently published Information Space: A Framework for Learning in Organizations, Institutions and Culture (Routledge, 1995). He received his Ph.D. from the University of London for research on technological diffusion.

John Child [coauthor, “From Fiefs to Clans and Network Capitalism: Explaining China’s Emerging Economic Order”] is the Guinness Professor of Management Studies at the Judge Institute of Management Studies, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK, where he is also director of the Centre for International Business and Management (CIBAM). His e-mail address is . His current research interests include management in China, the impact of foreign acquisitions on domestic management practice, and organizational learning. He was editor-in-chief of Organization Studies from 1992 to 1996 and is now chair of that journal’s advisory board. He has published 15 books and 100 journal papers. He published Management in China During the Age of Reform (Cambridge University Press, 1994), and his new book (with David Faulkner), Cooperative Strategy, will be published by Oxford University Press in 1997.

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