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    The China Business Model: Originality and Limits
    The China Business Model: Originality and Limits
    The China Business Model: Originality and Limits
    Ebook532 pages5 hours

    The China Business Model: Originality and Limits

    By Elisabeth Paulet and Chris Rowley

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    About this ebook

    The China Business Model: Originality and Limits emphasizes transformation of the Chinese Business Model over the last decades. The impact of the financial crisis on China helps the reader understand its evolution towards capitalism. Topics covered include CSR, leadership, and management in China, how do these organizations impact the performance of companies, the financing policy of Chinese firms and its evolution till the slowdown, finance and business in China, and how could the banking sector and/or the financial markets help the development of Chinese companies?

    • Helps the reader understand the impact of the financial crisis on China and its evolution towards capitalism
    • Contains coverage of CSR, leadership, and management in China
    • Answers the question "how can financial markets help the development of Chinese companies?"
    LanguageEnglish
    PublisherElsevier Science
    Release dateJan 17, 2017
    ISBN9780081007570
    The China Business Model: Originality and Limits
    Author

    Elisabeth Paulet

    Elisabeth Paulet is Professor of Finance at ICN Business School in Nancy, France. She completed her PhD at the European University Institute of Florence and has held the Jean Monnet Chair in European Banking. Her main interests are in banking structures and financial policy of firms on historical and contemporary level. She has published several articles and books in this field.

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      The China Business Model - Elisabeth Paulet

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      Chapter 1

      Introduction

      The China Business Model in Context—Setting the Scene

      Elisabeth Paulet¹ and Chris Rowley²,³,⁴,⁵,    ¹ICN Business School, CEREFIGE, Pole Lorrain de Gestion, Nancy, France,    ²Professor Emeritus, Cass Business School, City, University of London, London, United Kingdom,    ³Professorial Fellow, Institute of Hallyu Convergence Research, Korea University, Seoul, Korea,    ⁴Adjunct Professor, Griffith Business School and Griffith Asia Institute, Griffith University, Brisbane, QLD, Australia,    ⁵Visiting Fellow, Institute of Asia and Pacific Studies, Nottingham University, Nottingham, United Kingdom

      1.1 Introduction

      Since the 1980s, China has moved from a closed, centrally planned system to a more market-oriented one. Several reforms led to this situation in domains such as agriculture, fiscal decentralization, state-owned enterprises (SOE) autonomy (Li, 2011), growth of the private sector and small- and medium-sized enterprises (SMEs), creation of a diversified banking system, development of stock markets and opening up to trade and foreign direct investment (FDI). The commensurate shifts in management, marketing, accounting, as well as mergers and acquisitions, SOEs and SMEs have been noted (see Rowley & Cooke, 2010), as have those regarding labor and management, human resource management (HRM), business relations and trust, corporate social responsibility (CSR) (Dyllick and Hockerts, 2002), and bank–corporate relationships (Warner & Rowley, 2011) and financial services, impression management, institutional isomorphic pressure on internationalization, international HRM, competitive strategy choices, and innovative performance of start-ups (Warner & Rowley, 2014).

      The reforms and changes were undertaken gradually in order to make the transition toward a form of market capitalism. This development can also be placed in the context of different types of capitalism (see Rowley & Oh, 2016a, 2016b; Rowley & Yukongdi, 2016) and business relations. Indeed, it is commonly noted that Chinese firms are characterized by the inclination to incorporate personal relationships in decision making among which personal control, guanxi (Warner & Rowley, 2011, 2014, 2016) and interpersonal trust or xhinyong are the most well-known.

      In terms of business organization, China has renewed its support for SOEs in sectors it considers important to economic security—explicitly looking to foster globally competitive national champions. There were reforms of SOEs from late-1990s onwards, with the worst closed or privatized and their employment halving from 70 million in 1997 to 37 million by 2005 (Wildau, 2016). This, however, ended with the government’s stimulus responding to the 2008 Global Financial Crisis through massive lending by government fiat to SOEs acting in the national interest. This consequently fueled the construction boom for factories, housing, and infrastructure, which in turn increased demand for output from SOEs. Now reform is in the air again, this time by mergers—with 6 SOEs having merged in 2015 and 1.8 million coal and steel jobs to be cut, although the government remains wary of job losses with the fear of social, unrest (Wildau, 2016).

      In terms of the finance area, after keeping its currency tightly linked to the US dollar for many years, in 2005 China revalued it by 2.1% against the US dollar. From then until late 2008 the cumulative appreciation of the renminbi against the US dollar was more than 20%, but the exchange rate remained virtually pegged to the dollar from the onset of the 2008 Global Financial Crisis until mid-2010. The government’s financial intervention produced economic growth, although the rate of increase has been declining. This calls into question the veracity of the once-vaunted China business model, requiring an examination of its underpinnings and elements. Chinese firms are characterized by specific characteristics in their business model.

      Our introductory chapter will present the current situation and subsequent changes, underlining the originality and limits of the China business model. The different compositional factors of business management and organization, culture, and finance and investment will be taken into account to help make the reader more aware of the ongoing transformations of the China business model.

      1.2 Setting the Scene

      Since 2012, China’s gross domestic product (GDP) growth has been slowing down: 10.5% in 2010, 9.3% in 2011 and decreased to 7% by mid-2015 (see Fig. 1.1). After the 2008 Global Financial Crisis, the government reinforced its efforts to reduce reliance on trade and investment (The Times, January 20, 2014; Wildau & Weinland, 2016). Unexpectedly reduced global demand for Chinese goods has recently reduced output and increased unemployment—reaching 4.1% of the active population by 2016. Concerns about the debts owed by local governments that have borrowed heavily is contributing to a deterioration in the situation, The Financial Times issue What China Wants (2016) notes that local governments ran up debts of 10.7 trillion yuan (US$1.6 trillion) over the decade 2000–10— equal to about one-quarter of China’s annual economic output. The ending of the migration miracle (Clover, 2015; Waldmeir, 2015) as the fuel for the Chinese economic miracle—the vast rural labor force—dries up and the demographic time bomb of a growing aging population and shrinking workforce ticks ever louder (see Fig. 1.2), in the context of limited social security provisions.

      Figure 1.1 Annual growth rate in China. www.tradingeconomics.com | National Bureau of Statistics of China.

      Figure 1.2 Population age distribution. CIA Factbook.

      These economic developments and social conditions have affected the well-being of the population and social progress in the country (see Fig. 1.3). In 2013, 13.6% of the population was below the poverty line. This situation is partly explained by a distortion of distribution between capital and labor. According to the Gini Index, China had a distribution of family income ranking of 47.4 (2013) due to wage disparities between workers belonging to private and public companies, or people leading their activities in rural zones or industrial cities. Reduced social benefits have contributed to increasing inequalities among workers throughout the country (World Bank Indicators, 2014).

      Figure 1.3 Factors explaining well-being of Chinese population.

      Despite these negative developments, China exhibits some potential to move in the right direction; China and Australia recently sealed a landmark Free Trade Agreement, significantly expanding ties between the world’s second largest economy and one of Washington’s closest allies in Asia. As reported by the Australian department of Foreign Affairs and Trade, the deal will open up Chinese markets to Australian farm exporters and the service sector, while easing restrictions on Chinese investment into Australia. Despite China already being Australia’s top trading partner, these commercial agreements will reinforce its position. The two countries also agreed to work jointly to combat climate change by sharing technology aimed at improving coal use efficiency.

      Economic transition has produced a high degree of institutional uncertainty in China (Nee, 1992) and transaction costs remain high for firms to secure necessary inputs and legitimacy. As the uncertainty increases, firms more eagerly turn to guanxi networks to lower external dependence for key resources and to improve their validity. A guanxi network helps firms overcome the lack of resources to accommodate growth while alleviating substantial bureaucratic costs from internalizing operations, aiding smooth business transactions.

      As in many Western countries, Chinese firms are commonly SMEs (Cunningham & Rowley, 2010, 2011). The advantages associated with SMEs are those of entrepreneurial dynamism, internal flexibility and responsiveness to changing circumstances The SME Promotion Law in 2002 emphasized SMEs’ scientific and technological innovations and upgrading. In 2004 the constitution was amended to grant non-SOEs a legal status (Chen & Tjosvold, 2006; Zhu & Sanderson, 2009). Since most SMEs are non-state-owned, such a legislative move shows broad acknowledgment of the importance of the private sector, which in turn is more conducive to the further development of these firms.

      Credit allocation has been characterized by government intervention and has been biased toward SOEs (Cull, Xu, & Zhu, 2009; Li, Zhao, Tan, & Liu, 2008). The 2008 Global Financial Crisis tightened credit constraints for SMEs around the world, and particularly in emerging economies. Additionally, there are imperfections in capital markets which create a wedge between the cost of internal and external finance (debt and new share issues). The principal source of the wedge may be due to asymmetric information between firms and potential suppliers of external finance. Information problems can lead to adverse selection and moral hazard problems in markets for external finance. Moreover, the extensive use of debt finance is not appropriate for many firms, especially those whose projects have little collateral value because of asset specificity. As most Chinese firms are family enterprises (Lim & Gosling, 1983), these arguments are even more pertinent.

      FDI in China grew at its strongest pace in nearly 4 years in January 2012, surging 29.4% in 1 year and reaching US$13.9 billion with investors largely avoiding the troubled manufacturing sector and focusing more on services. The Chinese service sector accounted for 48.2% of China’s economic output in 2014, leading the traditional manufacturing sector by 5.6% (KPMG, 2015), including a growth of ecommerce, with annual sales reaching US$354 billion, 11/4% of total retail sales, in August 2014–15 (Clover, 2015). This growth, however, relies on super cheap delivery (just US$1.5–2 for overnight packages), creating swatches of kuaidi: exploitative, insecure, long hour, low paid, and poor status courier jobs.

      Capital market imperfections are very present in China. By law, the largest Chinese banks, predominantly state banks, were instructed not to lend to private firms until 1998. This instruction was embedded in the political notion that private firms do not rank high in terms of political status. This political pecking order in the allocation of credit, where private firms were disadvantaged, should have been alleviated since 1998. Evidence suggests, however, that credit constraints for private firms are still present and these may impede the growth of the economy (Huang, 2012). In fact, central and local governments define mandatory rules with different priorities and commercial banks have to obey. The various, large, specialized banks are not institutions with independent management and are responsible for their own loss and profit. As a consequence, these banks are not as concerned about the operational efficiency of credit.

      1.3 Aims and Structure

      The aim of this book is to examine the development and transformation of the Chinese business model. The impact of the financial crisis on countries and China will help the reader to understand its evolution toward a form of market capitalism. We develop three main parts as a framework: The business model of companies and how it affects the performance and the management of firms; business culture and its influence of financing policy of enterprises; finance and investment and how the financial sector could help the development of

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