Our Knowledge of Management in China
What have academics learned -- and failed to learn -- about business and management in China? Marshall Meyer, a management professor at Wharton, answered this question in his keynote address delivered in Shanghai at the launch of China Knowledge@Wharton. The text appears below:
At the inauguration of the Chinese K@W it’s fitting to review what we know and don’t know about management in China as well as the steps we’re taking to build a management research community in China. Though we know a lot about management in China, much more is unknown. Indeed, the allure of what we don’t know motivates scholars to do research in China. In China there is the possibility, though not the certainty, of discoveries going substantially beyond routine research results. There is also the possibility of creating a new research community joining scholars in the West and China although, as James G. March, perhaps the leading social scientist in the US, has pointed out, cross-border research communities tend to be fragile and dependent on “arbitrary physical proximity, isolation and irrelevant social facilitation.”
My journey in China began in Beijing in late spring of 1999 when I accepted a short-term teaching assignment at Tsinghua University. Since I taught only one day a week, I had time to explore Beijing. I began with the banks because I was working as a consultant and researcher with Citibank at the time. I recall a conversation in the offices of an international financial institution, not Citibank. The bankers explained patiently that the Chinese economy was on the verge of collapse. Their viewpoint was buttressed by many charts and graphs, all pointing downward. I had only one question: “Have you looked out the window?”
I have been looking at China since, mainly through direct observation and conversation rather than through the lens of government and bankers’ statistics. Almost all of this work involves Chinese colleagues—from Peking University, CEIBS, South China University of Technology, The Chinese University of Hong Kong, and Hong Kong University of Science and Technology. Some of these colleagues have become friends. A few weeks ago, my wife and I joined one of them, Professor Lan Hailin, Dean of the Business School at South China University of Technology, and his family to celebrate the Chinese New Year. I have found that there is no substitute for being in China and making friends over the lunch or dinner table.
I have learned a lot about China from my interaction with Chinese colleagues. One of the most important lessons is that relationships in China are qualitatively different from the West. Put simply, people watch and watch out for their friends. A year and a half ago I flew to Wuhan via Beijing. My mobile phone rang in Beijing Capital Airport: “Marshall, I heard you are in Beijing.” “Jim, I’m between planes on my way to Wuhan. But how did you know I’m in China?” “Someone recognized you on the plane and called me.”
Another lesson is that scholars and scholarship remain deeply respected in the Chinese business community. Chinese managers have been remarkably open with me, far more open than their US counterparts. The openness is for good reason. As often as not, toward the end of a day or two of interviews (and in one instance four days), the CEO has turned to me and said, “You have one more meeting with my top management team. However, this time we will ask the questions and you will answer them.” Seeking answers to the tough questions about the management and strategy of the firm is the highest complement a CEO can pay a professor.
What We Know
The accomplishments of the Chinese business community are well known. Some of these accomplishments include the creation of a legal framework for business in an extraordinarily short period of time, the creation of some globally competitive firms with many others on the cusp of global competitiveness, and the initiation of a program of outward foreign investment, about three percent of GDP to date with much more committed. Less well understood is how the Chinese business practice has been shaped, perhaps permanently, by China’s history and its path of enterprise reform, which is the focus of my research. The research has shown the following:
The enterprise reform process in China, unlike other countries, was decentralized and experimental. Many reforms were initiated locally rather than centrally; those reforms initiated by the central government were implemented experimentally before they were adopted nationwide or discarded. Experimental and decentralized reform has fostered entrepreneurship in the context of state ownership, something Western theories could never have anticipated. Look, for example, at the Shanghai Baosteel Group, which has been superbly managed.
- The enterprise reform process has been marked by compromise rather than abrupt change. One result of compromise is the complex governance and management structures of Chinese firms. Most Chinese firms have both a board of directors representing the interests of owners, including state owners, and a supervisory board representing the interests of other constituencies including workers. Most of the Chinese firms I have seen so far consist of a parent group corporation and several tiers of legally independent subsidiaries whose boards make many routine business decisions. Some subsidiaries may be listed companies whereas most are not; rarely is the parent group corporation listed. Moreover, there may be groups within groups. For example, a controlling interest in the Shanghai Pharmaceutical Group, which itself has more than 200 subsidiaries, some listed but most not, is now held by the China Worldbest Group. Western theories argue that governance and management structures are designed with transactional efficiency in mind. Clearly, there are other considerations in China, where management and governance practices appear to be more path-dependent and hence more varied than in the West.
- The complex governance and management practices of Chinese firms may have limited their ability to grow beyond provincial boundaries and consolidate domestic markets, possibly facilitating the entry of foreign firms into China. Consider beer. Five years ago it was expected that two brewers, Tsingtao and Yenching, would consolidate the Chinese beer industry. Today, Budweiser owns Wuhan Beer outright and has a controlling interest in Harbin Beer as well as a substantial stake in Tsingtao. A few Chinese firms have been able to integrate their operations throughout China despite the complexities of the parent-subsidiary system. One such firm is China International Marine Containers, Corp., which now controls 90 per cent of the shipping container market domestically and 60 per cent of the market globally. I have studied CIMC closely and published a paper on the company, and K@W has reported this research.
- The challenges of consolidating domestic markets may have accelerated the internationalization of Chinese firms. Lenovo’s acquisition of the IBM Personal Systems Division occurs at a time when it is fighting Dell for domestic market share. TCL’s acquisition of Thompson (and the RCA brand, once an American icon as IBM is today) is partly in response to the cutthroat domestic television market. The Shanghai Automobile Group has completed the acquisition of the Korean carmaker Ssangyong Motor Co. and is negotiating the acquisition of the last British auto manufacturer, Rover, at a time when Chinese automobile sales are flat and Volkswagen’s market share in China is slipping. Western theories of internationalization generally argue that consolidation of domestic markets precedes internationalization, but China’s program of internationalization may upend these theories.
What We Don’t Know
Still poorly understood, in my judgment, is the process of privatization in China. The statistics are staggering. From 1991 to 2003, self-employment and employment in urban private enterprises grew rapdily, from 7.6 million to 49.2 million. From 1991 to 2003, employment in state-owned and urban collective enterprises plummeted from 142.9 to 75.7 million. The number of private enterprises with revenues above RMB 5 million is growing at the rate of 40 to 50 per cent per year—it was 22,128 in 2000, 36,218 in 2001, 49,176 in 2002, and 67,607 in 2003. The output of the private sector is growing even faster. Most private enterprises are short-lived, however. The typical lifespan is two to four years, and survival rates are quite low compared to the US. The rapid growth of the private sector is due partly but not entirely to displacement of state-owned and collectively-owned enterprises by more efficient private enterprises. It is also due to reconstitution of state-owned and collective enterprises as private firms once they incur loses and become burdensome to government. Looking around Shunde during the Chinese New Year, I had the impression that the government has converted many declining TVEs into private enterprises and simply handed them to their managers.
Also poorly understood are persistent regional differences in ownership and management. In Beijing and the northeastern provinces of Hebei, Liaoning, Jilin, and Heilongjiang, 27 per cent the industrial enterprises (excluding SOEs with revenues below 5 million RMB) remain state-owned. In Shanghai, by contrast, state ownership is about 14 per cent, and state ownership is about 7 per cent in Jiangsu and Guangdong and 3 per cent in Zhejiang. There are also persistent differences in the relations between government and firms, even state-owned firms. In Beijing, for example, unplanned meetings with government officials consume half the time of SOE senior managers. In Guangdong, firms have more autonomy. SOEs are on profit responsibility contracts, and their managers avoid meetings with the government so long as they deliver results. A Guangdong government official often accompanies me to interviews with firms in Guangzhou and Shenzhen. I originally thought he was facilitating my work but it turns out that I have been facilitating his. In Shenzhen, the CEOs of the largest listed firms have announced a Listed Companies Association. The Association will “establish self-disciplined management regulation . . . strive for and safeguard the members’ rights and benefits . . . and coordinate all kinds of working relationships.” Western management theories assume best practices diffuse and attenuate regional differences quickly. In China, differences persist because there is very little agreement on best practice. Our management theories have not yet accommodated this fact but will have to.
Building a Research Community
The first steps toward building a community joining Western and Chinese management scholars are underway. The International Association for Chinese Management Research has been formed; IACMR’s inaugural meeting in Beijing last summer drew 900 delegates. I have helped create a new academic new journal focusing on Chinese management issues; the title is Management and Organization Review and the publisher is Blackwell. As important as it is to have a community of scholars interested in Chinese management issues, it is also important to nurture a Chinese approach to management research. If young Chinese scholars are forced to follow Western conventions and publish mainly in Western journals, then their research will mirror Western research and fail to focus on the distinctive features of Chinese management—decentralized and experimental reform, entrepreneurship in the context of state ownership, complicated and often opaque governance and management structures, internationalization despite fragmentation of domestic markets, and persistent regional differences—that may ultimately force us to revise received theories.
My journey in China has been the most fascinating of my career. I’m deeply grateful to my Chinese colleagues and the many Chinese managers who have spent so much of their time with me. I look forward to CK@W as a forum where the research of Wharton faculty and their Chinese colleagues can be disseminated throughout Greater China. And, needless to say, I look forward to learning much more about China over the coming years.