The evolution of family business in China: An institutional perspective Article  in  International Journal of Management Practice • January 2014 DOI: 10

Subject:ManagementPrice:0 Bought3

Share With

The evolution of family business in China: An institutional perspective

Article  in  International Journal of Management Practice • January 2014

DOI: 10.1504/IJMP.2014.061472

                 

CITATIONS          READS

5              3,103

3 authors, including:

 

Some of the authors of this publication are also working on these related projects:

Entrepreneurial intention project View project

Entrepreneurship in conflict zones View project

All content following this page was uploaded by Yong Wang on 09 July 2018.

The user has requested enhancement of the downloaded file.

 

                 

 

 

Int. J. Management Practice, Vol. 7, No. 2, 2014

                 

 

The evolution of family business in China: an institutional perspective

 

Yong Wang*

Department of Finance, Accounting, Systems, and Economics,

Wolverhampton Business School,

University of Wolverhampton, 

Wolverhampton, WV1 1AD, UK

Email: yong.wang@wlv.ac.uk *Corresponding author

Rong Pei

Department of Business Administration,

School of Management and Economics,

Beijing Institute of Technology,

Beijing 100081, China Email: peirong@bit.edu.cn

Yanhong Liu

International Office, 

Beijing Institute of Technology,

Beijing 100081, China

Email: liuyanhong@bit.edu.cn

Abstract: This paper investigates the emerging family business sector in China. Specifically, the objectives of the paper are threefold: (a) to explore how family businesses are catalysed by structural changes in the socioeconomic environment; (b) to examine policy initiatives sketched by the government in supporting family firms; and (c) to analyse the impact of extant policies on family business development. An explorative methodology is adopted where secondary data pertaining to family business emergence and development are employed. The paper claims that notwithstanding the economic reform in the past three decades has galvanised gigantic momentum from the private sector, new tailored policy initiatives are required to uphold the entrepreneurial impetus. With the service of prudently contemplated policies, the entrepreneurial venturing may lead to more success.

Keywords: family business; private economy; institution; policy.

Reference to this paper should be made as follows: Wang, Y., Pei, R. and  Liu, Y. (2014) ‘The evolution of family business in China: an institutional perspective’, Int. J. Management Practice, Vol. 7, No. 2, pp.89–107.

 

 

Copyright © 2014 Inderscience Enterprises Ltd.

 

 

 

Biographical notes: Yong Wang is Reader in Family Business & Entrepreneurship at Wolverhampton Business School. His research interests include family business, small business management, entrepreneurship, strategy, and business performance. His publications were appeared in the Journal of Strategic Information System, International Journal of Entrepreneurial Behaviour and Research, Journal of Small Business and Enterprise Development, Journal of Entrepreneurship, Journal of Enterprising Culture, International Journal of Management Practice, International Journal of Management Concepts and Philosophy, International Journal of Management Cases, as well as others. He serves the International Family Enterprise Research Academy (IFERA) as a board member. He is also a member of the Editorial Advisory Board of the Journal of Family Business Management and International Journal of Management Concepts and Philosophy.

Rong Pei is a Professor of Marketing at School of Management and Economics, Beijing Institute of Technology in China. Her PhD thesis on ‘Social network and its impact: an investigation of Chinese female academics’ social network’ won the best dissertation award from Renmin University, China. She has published articles in core journals and books on family business, entrepreneurship and management communication.

Yanhong Liu is an Associate Researcher at International Office of Beijing Institute of Technology and a Post-Doctoral Researcher at Flinders Business School, Australia (sponsored by Australian Endeavour Research Fellowship). Her research interests include family business internationalisation, business performance, and internationalisation-orientation of high education institutions. Her publications have appeared in Chinese journals, such as Journal of Beijing Institute of Technology (Social Sciences Edition), Modernisation of Management and Journal of Chinese Marketing.

This paper is a revised and expanded version of a paper entitled ‘The development of family business in the Chinese economy and government policy’ presented at the ‘9th IFERA International Family Enterprise Research Academy Conference’, Limassol, Cyprus, 24–27 June 2009.

 

 

1              Introduction

Family businesses are reckoned as one of the economic engines in the post-industrial growth era, as they are credited for nurturing entrepreneurial talent across generations, a sense of loyalty to business success, long-term strategic commitment and corporate independence (Wang and Poutziouris, 2010). In both developing and developed economies, they have been playing important roles and making considerable contributions to societies. For instance, in the USA, family businesses are estimated to represent 90–98% of all businesses, offering jobs to over 50% of the work force and creating 40–60% of the GDP (Shanker and Astrachan, 1996). In India, 16 family controlled corporations make up 65% of all private sector assets (Kenyon-Rouvinez and Ward, 2005). China, compared with other economies, is not unique where dynamics of family businesses are conspicuous, though as a sector family controlled firms have only been recognised recently. Lv (2007) reported that in China family businesses currently  represent over 90% of the total Non-Public-Owned Enterprises and the contribution of these firms to the GDP is about 60%. In a similar vein, China Industry and Commerce Association (2007) claimed that the majority of private firms are indeed under the family’s governance, despite that the family ownership is denied by some ownermanagers. According to MarketWatch (2013), by the end of January 2013, there were altogether 40.6-million private firms in China and these firms provided about 80-million jobs in the market. If we take into account that a considerable number of Chinese entrepreneurs register their businesses as collective-owned enterprises with a ‘red-hat’ on due to the ideological concern, the real size of the family business economy is more appealing.

In the past three decades, family business research has gathered increasing momentum, nevertheless there is overall a paucity of studies in the Chinese context. The scarcity of research is mainly due to two reasons: (a) only until recently did academics and governmental agencies commence to regard family businesses as distinctive entities; (b) the difficulty in defining family businesses makes research hard to execute (Shanker and Astrachan, 1996). In China, incongruent with the gigantic size of the family business economy, research on family business is only at its infancy stage. Academics, practitioners and policymakers are unclear about how family businesses are initiated, developed and sustained, what policy initiatives and infrastructure can facilitate them to survive and grow, and what resources need to be invested to instigate their development. Continuous effort is therefore needed to develop insights into how these firms survive and thrive in the increasingly competitive market. 

The purposes of this paper are primarily to understand family business development in the Chinese economy contexts and to explore whether the supporting mechanisms established by the government are conducive to the growth of this sector. The paper commences with a brief introduction of the family business definition. Based on the institutional viewpoint, a review of family business evolutionary history and of the transition of the government’s perspective is executed. Secondary data from the national surveys on private enterprises are presented, aiming to investigate the principal concerns of private firms in the economy and highlight government policy initiatives. This explorative paper concludes that the family business economy is an essential component of the ‘socialist market economy’, and that the needs of family firms should be addressed more effectively for their better survival and development. Implications derived from the findings are elaborated.

2              Definition of family business

Substantial effort has been made in the literature to articulate conceptual and operational definitions of family firms (Sharma, 2004). Handler (1989) summarised four dimensions used by researchers in defining a family firm: (a) degree of ownership and management by family members, (b) interdependent sub-systems, (c) generational transfer, and  (d) multiple conditions (a combination of the three former dimensions). Nevertheless, hitherto no consensus on definition has been reached (Sharma et al., 1996; Sharma, 2004).

 

 

Family firms, simply defined, are owner-managed enterprises with family members exercising considerable financial and/or managerial control (Ward and Aronoff, 1990). In the West, a large proportion of privately owned businesses perceive themselves as ‘family businesses’ (Poutziouris and Chittenden, 1996), because in these firms the owner family influences the business to a great extent and in return the firm provides the primary source of income to the family unit. In China, enterprises are mainly categorised into three types: (a) state-owned (SOEs), (b) collective-owned (COEs), and (c) private and individual-owned enterprises (IOEs). The fourth ‘other’ category emerges since 1979, comprising joint-ventures, foreign invested firms, and other enterprises with mixed ownerships. Family businesses fall primarily into the third category and, in some cases, the fourth category (Poutziouris et al., 2002). In 1979, the State Council officially acknowledged the contribution from the private sector as a supplement to the economy (Dana, 1999a). Later, at the 13th Congress of the Chinese Communist Party (CPC) and 1987 National People’s Congress, private enterprises were formally defined and then modified in 1998 as: ‘profit making economic organisations (whose) assets are owned privately’. According to China Private Economy Research Institution (2011), it is estimated that if a loosely outlined definition such as Ward and Aronoff’s (1990) is used in China on average 85.4% of private firms are family controlled. The two types of the firms mutually overlap to a large extent.

3              Theoretical framework

Empirical evidence from transitional economies shows that the external environment, especially the state, plays a dominant role in shaping the nature of entrepreneurship during transition (Smallbone and Welter, 2010; Peng, 2003; Polishchuk, 1997). The availability of an environment conducive to entrepreneurship depends on the ‘formal’ and ‘informal’ enabling and constraining forces, or so-called institutions (Smallbone and Welter, 2010). North (1990) believed that institutions are ‘rules of the game’ which clarify what activities, behaviour and practices are acceptable. These rules include ‘formal institutions’ that are politics and economy-related policies enacted by coercive mechanisms, and ‘informal institutions’ that are codes of conduct, values and norms mainly enforced by normative mechanisms (Welter and Smallbone, 2011). North (1994) argued that it is the interaction between business organisations and their surrounding institutions that moulds the evolution of an economy. 

Busenitz et al. (2000) claimed that institutional profiles influence development of entrepreneurship in different nations. Inspired by Kostova’s (1997) study, Busenitz et al. constructed an instrument to measure a country’s institutional profile, which consists of three institutional dimensions: the ‘regulatory’, ‘cognitive’ and ‘normative’ dimensions. The ‘regulatory’ dimension outlines how laws, regulations and government policies in an environment provide support to new businesses and facilitate entrepreneurs to acquire resources. The ‘cognitive’ dimension portrays knowledge and skills possessed by people about creating and operating a new business, whilst the ‘normative’ dimension reflects the degree to which the people in an environment admire entrepreneurial activity and value innovative thinking (Busenitz et al., 2000). In fact, the works of Busenitz et al.

(2000), North (1990), and Smallbone and Welter (2010) share a good extent of  commonalities. The ‘regulatory’ institutions (Busenitz et al., 2000) are similar to the ‘formal’ institutions (North, 1990; Smallbone and Welter, 2010), whilst the ‘cognitive’ and ‘normative’ institutions are close to the ‘informal’ institutions.

In this paper, the institutional perspective has been adopted as the theoretical framework. This is firstly because the institutional theory excels in interpreting social phenomenon as it focuses on the integrated impact of external political, economic and social environments. Secondly, the perspective stresses social conformity (Zucker, 1981). Indeed institutions offer guidelines on what social norms and values are acceptable and what activities, behaviour and practices are appropriate. Meyer and Rowan (1977) stated that “institutionalisation involves the processes by which social processes, obligations, or actualities come to take on a rule like status in social thought and action” (p.341).

4              Institutional changes and evolution of the family business economy

China is one of the few countries on the globe with over 3000 years’ traceable history (Anderson et al., 2003; Tam and Redding, 1993). Parallel to this long-lasting civilisation, China sees its family business origin back to over 2000 years ago in the Qin Dynasty (221BC–206BC) (Lv, 2007). In ancient time, two agglomerates of family firms, Hui and Jin, were distinctive (Lv, 2007). The Hui agglomerates of family firms, so called because of their originated area Anhui Province, situated in Southeast of China, were influential in the territories along Yangtze and Yellow rivers since Tang Dynasty (619AD–907AD). They even prolonged their commercial radius to countries such as Japan, Portugal and nations in Southeast Asia. The Jin agglomerate of family businesses emerged to be a competitive economic force in the Ming Dynasty (1368AD–1644AD) in central China where the current Shanxi Province is. Jin businessmen excelled, by possessing affluent mineral resources. This, in conjunction with the advanced management skills and the broad covering networks, enabled Jin businesses to do well in manufacturing and exert their influences nationwide and sometimes even in the overseas markets.

4.1 Initial emergence of family businesses (1949–1984)

After the foundation of new China in 1949, in its first 30 years of history, entrepreneurship was a political taboo (Kshetri, 2007). The family business economy was fundamentally prohibited by the ‘regulatory institution’. This was primarily due to the socialist ideology upheld by the country, although historically Chinese were renowned for business operations and the private economy was prosperous and globally influential under several dynasties’ imperial governance. From 1950s to 1970s, China followed Soviet Union and adopted a centrally planned administrative mechanism. The economy was dominated by public-owned enterprises (i.e. SOEs and COEs), the operation mechanism of which was generally stiff, lacking flexibility (China Internet Information Centre, 2003). 

During the period, the family business economy was illegal and no ‘regulatory’ institutions supported entrepreneurship. The absence of legal frameworks (i.e. ‘regulatory’ institutions), i.e. the ‘institutional void’ (Polishchuk, 1997), stifled entrepreneurship and fostered ‘rent-seeking’ and ‘non-compliant or deviant behaviour’ (Smallbone and Welter,  2010). Dana (1999a) identified that the private economy only operated under the cottagetype activities, ranging from individualistic and familial ventures to other ‘specialised household’ businesses. The latter were often family operated businesses in carpentry, construction, embroidery and fish farming, which sometimes extended beyond immediate family and workers (Dana, 1999b). Whilst there was an absence of ‘regulatory’ institutions conducive to family enterprises, the ‘normative’ institutions did not regard entrepreneurship positively either. Only those individuals, e.g. ex-criminals, who could not find a job in SOEs and COEs switched to family firms (Kshetri, 2007). Statistics show that after the Cultural Revolution (1966–1976) the total number of employees in individually run enterprises was only about 150,000, a very small fraction of the employable population (Ping, 1997). With respect to the ‘cognitive’ institutions, researchers indicated that Chinese around that period of time did not show any attributes essential for entrepreneurship, such as critical thinking (Friedman, 2005) or selfdetermination (Anderson et al., 2003). Further, China had a culture which valued  conformity, harmony, and standard rules and procedures (Mourdoukoutas, 2004). Under this circumstance, risk-taking activities, primarily relying on individualism, were likely to be shunned. 

The 11th Plenum of the Chinese Communist Party (CCP) in December 1978 was a milestone, demarcating the revitalisation of the private economy (He, 2009). Indeed, this Plenum not only terminated the political campaigns, but also directed the nation’s momentum towards the economic development trajectory. In 1979, the first wave of reform advocated by Deng Xiaoping was initiated, the principal purpose of which was to modernise the economy through a ‘gradualist’ path (Buck et al., 2000). China further conceptualised its ‘regulatory’ institutions on the basis of four principles: (a) adherence to the socialist approach, (b) adherence to the people’s democratic dictatorship,  (c) adherence to the leadership of the Communist Party of China, and (d) adherence to the Marxist-Leninism and Maoism thought (Dana, 1999a). This is why the transformation of China from a centralist-planned to a new market-based economy is labelled as ‘a reform with Chinese characteristics’.

The early 1980s witnessed radical changes in the macro-economic environment. After an almost vacuum period of 30 years, family enterprises re-emerged. This was partly because the ‘regulatory’ institutions recognised the potential contribution of the private economy and deliberately altered policies. In 1981, the State Council issued the first regulation for private businesses, which specified who were allowed to set up private businesses and the nature of such businesses (Chow et al., 2012). In 1982, according to Lv (2007), the total number of registered private firms increased 44.2% from 1981 and the number of employees employed by these firms boosted up 40.6%. In 1984, the State Council further clarified its stance by stating that “the State would control the macro economy, while individuals could control the micro economy under the law of the market”. 

4.2 Further development of family businesses (1984–1992)

‘Regulatory’ institutions, once upon a time stifling entrepreneurship, shifted since the initiation of the reform. In October 1984, the 12th National Congress of CPC approved the Resolution on Reforming the Economic System and encouraged all economic sectors, 

 

 

i.e. SOEs, COEs and IOEs, to cooperate with each other (China Internet Information Centre, 2003). The year of 1984 also witnessed that China opened its 14 coastal cities to foreign investments. The central government followed a ‘trickle-down’ approach and hand-picked coastal areas to boost economic growth (Lin, 2002). 

In 1986, the approved Enterprise Law (Trial) showed that enterprises in insolvency may apply for bankruptcy and in 1987 the National Congress of CPC approved that the property rights of small SOEs may be transferred to individuals. This is the first ‘regulatory’ institution endorsed by the central government that allows the public property rights to be transferred to private hands. Malik (1997) commented that when the government permitted, the “traditional entrepreneurial spirit sprang up in almost every corner of China” (p.185). The promotion of the private economy later even instigated the official endorsement of private enterprises in the 13th Congress of the CPC and National People’s Congress in 1987. In 1989, the development of the private sector slowed down because of the political turmoil and social unrest, but the sector rejuvenated afterwards (Chow et al., 2012). In 1991, the contribution from the non-public-owned industry to the total industrial turnover was 43.8%, a net increase of 12.9 percentage points compared to 30.9% in 1984 (National Bureau of Statistics of China, 1999).

Although the private economy progressed considerably and started to be supported by the ‘regulatory’ institutions, family firms encountered barriers from the inertial ‘normative’ institutions. Atherton and Fairbanks (2006) cited Lau et al. (1999), indicating that “…private entrepreneurs fear the loss of their private property in case of political backlash. They thus hesitate to invest too much in their businesses under the threat of the ‘fat pig policy’, a situation in which the state waits until businesses have become sizeable and then takes them over”(p.335). Even today many family enterprises remain reluctant to acknowledge the family ownership because of the concern over the negative identity of family business. 

Owing to the insufficient institutional support, many family enterprises encountered strategic barriers. They were short of operational finance and were obsessed by ‘bad debts’. Many companies were contented by copying each other business strategies and engaged to low quality production. In Leqing, Zhejiang Province, for instance, thousands of small family businesses founded in the 1980s manufactured similar or identical lowvoltage electrical apparatus. The reported criminal cases, such as Jinjiang Illegal Medication case, further exacerbated the private sector (Lv, 2007). Rumours were spread out, instigating scepticism over the legitimacy of private firms.

4.3 Thriving development of family businesses (1992–Present)

The globalisation pressure in the 1990s imposed China to align its economy with the international market, but to achieve legitimacy from international institutions, such as WTO, a respect at the national level to entrepreneurship and private ownership was essential (Kshetri, 2007). In 1992, Deng Xiaoping re-expressed his eulogising viewpoint on private economy and stated that ‘being rich is glorious’ (Nair, 1996). The ethos was that a richer economy could not only justify the legitimacy of the regime, but help construct a positive image of the nation (Kshetri, 2007). The year 1992 was deemed as a critical turning point when the central government’s role started to shift from interference to fostering and promotion of the private economy (Chow et al., 2012). The 14th  National Congress of CPC in 1993 re-stated the institutional stance that “the State was to create conditions for all sectors of the economy to participate in the market competition on an equal position, and enterprises from all sectors would be treated equally”. The 15th National Congress in 1997 further confirmed that private enterprises were an important component of the socialist market economy, not merely a complement to the economy (Chow et al., 2012; He, 2009).

In January 2003, the SME (Small and Medium-sized Enterprises) Promotion Law came into effect which outlined a framework that the central and local governments could use in supporting small private firms (Atherton and Fairbanks, 2006). It stipulated that the government should actively support SMEs in finance (Chapter 2); facilitate small business creation (Chapter 3); provoke technological innovation (Chapter 4); ease market exploration and entry (Chapter 5); and liaise with supporting agencies, financial institutions, and academic institutes to improve services proffered to small firms (Chapter 6). In 2005, the State Council issued Regulations on Expediting Development of NonPublic-Owned Enterprises (also known as ‘36 clauses’ because of the number of clauses in the legal document), explicitly stating that the government should promote and guide the development of the non-public sector (Cao, 2007). In particular, the government should allow non-public-owned enterprises’ entry to previously prohibited industries such as banking, utility service, telecommunication, railway service, and civil aviation; enhance financial support to non-public economy; enrich social services targeting at nonpublic economy; and improve quality of inspection to the non-public sector. 

Whilst outlining the evolution of the ‘regulatory’ institutions, it is worthwhile to highlight the predicaments in this evolutionary process. The transition in China is characterised by the unparalleled development of its legal infrastructure and economic system, where legal infrastructure lags behind the growth of the economy (Zhang and Ma, 2009). Despite the fact that the government bodies had enacted many laws and regulations since the end of 1970s, some of these laws were inappropriately enforced and this was due to (a) deficiency of the public’s trust on legal systems, (b) shortage of law enforcement mechanisms, (c) lack of independent inspection systems, and (d) frequent alterations of the laws (Luo, 2006; Zhang and Ma, 2009).

Parallel to the radical shift in ‘regulatory’ institutions, ‘normative’ institutions underwent fundamental changes. The attitude towards private economy in the society turned to be more positive (Han and Baumgarte, 2000). For instance, in the 1980s entrepreneurs often were called ‘getihu’, i.e. self-employed peddlers, whereas in the new millennium, owner-managers were addressed as ‘laoban’ or ‘laozong’, i.e. bosses. This appellation evolution conveys the perception change. Indeed entrepreneurship is increasingly favoured by people, especially the young generations. The recent survey in China shows that 70% of the respondents reckoned entrepreneurial venturing as a good career (Kshetri, 2007).

Although in the past Chinese were mediocre in critical thinking (Friedman, 2005) or self-determination (Anderson et al., 2003), a shift in the ‘cognition institutions’, parallel to entrepreneurial development, is ongoing. For instance, recently innovation and risk taking are promoted by the central and local governments, whilst many family firms are playing a leading role in the process. They actively interact with each other, contributing to knowledge creation and sharing expertise through networking. 

 

 

China Industry and Commerce Association (2007) reported the following findings, which portray a picture of changes during 1993–2006:

1              Private enterprises have developed considerably since 1993 and created a noteworthy economy. During 1993–2006, the total number of private enterprises increased from 0.1 million to 29.7 million and they contributed 41.3% of the total employment in the urban area in 2006.

2              Private economy transformed from a manufacturing-populated to a more diversified sector. In 1993, 65.3% of private firms were manufacturers, whilst in 2006 the figure dropped to 43.5%. In 2006, 21.9% of private enterprises were retailers and wholesalers and many of them engaged in the real estate, utility and information technology industries. 

3              Many private firms in 2006 agglomerated in southern China or coastal areas, whereas in the west or central parts of the nation, the density of private firms was lower. In addition, private firms were more likely to dwell in the metropolitan area because of the availability and complicity of infrastructures.

During the swift development period, elite family businesses start to emerge. They float on the stock market and acquire finance from the public. According to the Forbes China magazine, by the end of 2011 a total of 460 family businesses are listed on the Shanghai  and Shenzhen stock exchange markets, representing 20.2% of all listed companies. More interestingly, 370 of these 460 PLCs are newly floated within a five-year span, indicating the increasing confidence in the family business identity. 

5              Research methodology

The fact that research on contemporary family business economy in China is premature implies that investigation of this sector is difficult. Two further caveats need to be accounted for in the pursuit of any empirical research in the field: (a) the limited availability of up-to-date statistics on the fast developing family business sector and (b) the unavailability of any formal databases incorporating registered businesses. 

Table 1 Features of surveys conducted during 1993–2006

Survey  Year       Ending Point for the Survey         No. of Questionnaires Distributed            No. of Valid Responses Received             Response Rate (%)

1993       31/12/1992         1700       1440       84.0 

1995       31/12/1995         3025       2564       84.4 

1997       31/12/1997         NA          1171       Na

2000       31/12/1999         3600       3073       85.4 

2002       31/12/2001         3635       3258       89.6 

2004       31/08/2004         3670       3012       82.1 

2006       31/12/2005         2360       2301       97.5 

Source: He (2009)

 

The authors adopted an explorative methodology where extensive use of secondary data pertaining to industrial developments in China was made. China Industry and Commerce Association administered seven nationwide surveys on private enterprises in 1993, 1995, 1997, 2000, 2002, 2004 and 2006 (see Table 1 for details of the surveys) and the secondary data were available from their book published in Chinese (relevant data were selected, translated and analysed). Despite the fact that the research instruments employed in these surveys varied throughout years, the data do outline a picture of the private sector. 

6              Policy initiatives and current status of family firms

A precondition of the success of enterprise development policies is the harmonisation of the macro-economic framework with initiatives directed at restoring the internal and external balances; addressing the scarcity of finance and fragmentation of capital markets; tackling labour market deficiencies; and finally creating a stimulus business environment supported by dynamic fiscal and legislative (red tape-free) policies. Since 1979 a diversity of policies and regulations (i.e. ‘regulatory institutions’) has been issued (see Appendix 1), aiming to accelerate the economic development pace, promote the private economy, and balance the private with the public sector. Specifically, the SME Promotion Law enacted in January 2003 offers comprehensive guidelines in supporting small private firms (Atherton and Fairbanks, 2006). The law clarifies that the government has a role in supporting, stimulating and enabling small business development, as the SMEs are an essential component in the socialist economy. In 2005, the State Council further issued regulations on expediting development of non-public-owned enterprises, explicitly stating that the government should ease/permit the market entry for private enterprises to some previously prohibited arenas, enhance support to private firms in finance and taxation, and assist private companies in normalising their employment relations. In the following the current situations of private firms are analysed. 

6.1 Family enterprises financing and policy initiatives

Firms across different development stages need operational finance to sustain and enhance their performance. Owing to the capital market imperfections, family businesses often encounter difficulties in obtaining financial resources. They lack financial records, asset security and equity base to command external finance support. In the past under the centralised governance regime, financial institutions only offered services to state-owned enterprises, whilst the demand from the private sector was ignored. Recently, the Chinese banking system started to reform and family firms as a result started to appear on the supporting agenda of the financial institutions.

The SME Promotion Law approved in 2003 stressed the importance of financial support to SMEs (majority of these firms are family controlled). In particular, three facets of the law are distinctive: (a) the law urges banks to construct and/or ameliorate the credit assessing system to open accesses for firms to institutional support; (b) the law encourages local governments, agencies and public organisations to offer loan guarantees to small firms; and (c) the law specifies the government should set up small business  development fund, subsidised by the central government, donations and funds from other sources. This fund is supposed to support: (a) technological innovation, (b) small firms’ specialisation, (c) training and business consultation, (d) internationalisation and  (e) switching to environment-friendly and low-carbon products or services.

Although many initiatives have been developed and implemented, the scenario of private firm financing is not rosy (see Table 2). In 2006, 49.3% of the surveyed firms claimed that they experienced difficulties in securing bank loans due to strict requirement for collateral. This percentage stands out from the set of the data, indicating a strong suspicion state-owned financial institutions have against the security of loans lent to private companies. In addition, 24.4% of the firms were not satisfied because of the complicated application process and 17.5% argued that the expenses to anchor bank loans were beyond their expectations. Interestingly, compared with the results in 2004, the new survey shows that entrepreneurs in 2006 were more satisfied with the loan application process, but less contented with the costs associated. 

Table 2 Difficulties experienced by private firms in securing bank loans

                2004 (%)               2006 (%)

Complicated application process               33.8        24.4 

Strict collateral requirement       46.5        49.3 

Strict requirement of disclosing business information     1.3          2.0 

Strict credit assessing system     2.8          4.5 

Expensive cost associated with loans      12.7        17.5 

Others                  2.8          2.4 

Source:  China Industry and Commerce Association (2007)

In China, there is a shortage of credit assessing services available to private firms. Private companies as a consequence hardly have any opportunities to secure funding from stateowned financial institutions. Even when the credit assessing facilities are available, private firms are often unable to make good use of them. They are incompetent in accounting, unwilling to provide information of their financial status, or unaware of commercial banks’ lending conditions. Under this circumstance, private firms have to rely on their own limited internal capital, such as personal equity and family loan (Berger and Udell, 1998; Romano et al., 2000), or resort to individuals or illegal private institutions. For instance, the survey of 2002 indicates the majority of the start-up capital in private companies was from the entrepreneurs’ personal savings (69%), and friends and family member’s contribution (18%) (He, 2009). China’s institutional financial systems have not reached the status to flexibly facilitate private businesses to attract equity finance (i.e. formal and informal venture capitals) or secure debt finance (i.e. bank loan and overdraft). Banks only play a minor role in supporting private firms and as a result, the black market money-lending business is frequently reported in China (He, 2009). There is a long way for private business financing to reach a satisfactory state and in this process, the central government need to do work more closely with local governments, supporting agencies, and financial institutions to ensure that the supporting  initiatives are not only available on the paperwork, but also are substantiated and transformed into practices. Only by doing so, the financial barriers experienced by private firms can be eradicated.

6.2 HR practices and policy initiatives

China has a population of 1.3 billion, with nearly 0.7 billion inhabitants in rural areas (China Internet Information Centre, 2003). Before the economic reform the employment aspirations of the population were primarily geared towards SOEs or COEs, which offered both financial and non-financial benefits such as house, healthcare and childcare. During the 1980s and the 1990s, because of the substantial inbound flow of foreign direct investment, people moved to joint-ventures or foreign-invested companies in pursuit of superior remuneration packages. Entering into the new millennium, family enterprises became a new oasis. These firms often have flexible and humanistic working environment, negotiable and attractive remunerations, as well as short lines of communication. 

Family businesses in China often face a short supply of managerially and technically sophisticated labour and this phenomenon has been recognised by the government. Policies such as New Competition Law in 1993 and Labour Contract Law in 1986 were drawn up to address the issue. The SME Promotion Law approved in 2003 and Regulations on Expediting Development of Non-Public-Owned Enterprises issued in 2005 further state that it is within the government’s remit that they offer support to private firms in recruiting and training managers and employees. In particular, the law and the regulations specify that the government should offer training on business administration, business-related legislations and regulations, and business ethics to institutionalise management behaviour. 

Table 3 Employee structure in private firms in 2006

Types of Employees       Average Number in Each Private Firm     Percentage

Unemployed before the current job       10           18.8 

Farmers before the current job                 20           37.6 

Managers before the current job             6              11.3 

Technicians before the current job          5              9.4 

Others 12           22.6 

Total number of employees        53           100.0 

Source: China Industry and Commerce Association (2007)

Table 3 shows that in 2006, 37.6% of employees working in the private firms were previously unskilled farmers, who had little knowledge of modern industries. Before joining the firm 18.8% of employees were unemployed. Putting the two groups together, the majority of the labour forces were unskilled or low skilled and have difficulties in engaging in advanced business processes. Interestingly, the survey also shows that 11.3% of employees were managers before joining the firm and 9.4% of staff were technicians. This result improves, compared with the figures in 1993 when the percentages of managers and technicians were only 6.6% and 4.1%, respectively. Two facts might have  contributed to this improvement: (a) private firms became more attractive to managerial or technological professionals, who were apt to lock their careers with state-owned enterprises in the past; (b) the proportion of managerial and technical specialists in the population was escalating. Mudambi et al. (2008) and Zhang and Ma (2009) observed  that business education in China commenced sporadically in the 1980s and only becomes popular in recent time. As a whole, it lags behind Western countries and many other industrialised economies countries in the region. A shortage of well-trained and experienced professional managers is therefore unavoidable.

Not only is the shortage of expertise an issue in private companies, but the formality of employment relations in these firms also causes attention. Table 4 shows a disappointing scenario – only 67.7% of the firms with investment less than five-million yuans formally signed employment contracts with their employees in 2006. In largersized firms, the situation was marginally better. Overall, evidence reveals an alarming rate that about 20–35% of private firms did not fulfil their legally obligatory responsibility. In an emerging economy, the transition process is often characterised by insufficient market-economy institutions, e.g. incomprehensive legal infrastructure, opaque regulations, and obscure government decision-making process (Hoskisson et al., 2000). Zhang and Ma (2009) and Luo (2006) argued that such institutional environment creates room for opportunistic behaviour.

Table 4 Formality of employment relations in private firms in 2006

Classification of Private Enterprise Based  on the Investment      Formal Employment Contract Signed (%)

Capital invested less than 5 million Yuans              67.7 

Capital invested between 5 and 10 million Yuans               74.2 

Capital invested between 10 and 50 million Yuans             76.0 

Capital invested more than 50 million Yuans        81.0 

Source: China Industry and Commerce Association (2007)

Note:    The exchange rate as at this paper is being written is 1US Dollar equals to 6.23 Chinese Yuan.

6.3 Private firms’ perspectives on institutions

The Regulations issued in 2005 received nationwide attention. The key feature that makes the Regulations distinguishing is that the policy for the first time allowed private firms to enter into industries such as banking, utility service, telecommunication, railway service, and civil aviation, while these sectors were state-controlled in the past. In the 7th National Survey Conducted in 2006, China Industry and Commerce Association particularly explored the private firms’ perspective on the Regulations (see Table 5). The results indicate that most of private firms acknowledged that the Regulations have made a change to the society. In particular, the surveyed firms affirmed that entry to special sectors was becoming easier, that the credit assessing system in banking was progressing, that legal rights of private firms were more effectively safeguarded, that the governments offered more useful guidance, and that the innovation was better subsidised.

 

 

Table 5 Perspectives on institutions after the regulations on expediting development of Non-

Public Owned Enterprises Issued in 2005

                Deteriorated (%)              Neutral  (%)        Improved (%)    Significantly improved (%)

Entry to special industries            0.5          12.9        62.9        23.7 

Financial support from the government                1.3          31.1        55.6        11.9 

Credit assessing system in banks              0.6          21.6        60.8        17.0 

Legislation safeguard from the government        0.8          18.4        63.1        17.7 

Strategic guidance from the government              0.7          22.1        64.6        12.7 

Audit from the government        2.5          22.9        58.8        15.7 

Support to innovation    0.3          20.0        62.9        16.8 

Source: China Industry and Commerce Association (2007)

7              Discussion and recommendation

The Chinese economy has experienced a significant upturn after the dramatic economic paralysis in 1950s and 1960s. Restructuring state-owned enterprises and revitalising the multi-ownership economy have paved the way for the development of the private sector. Further structural reforms including reconfiguring financial supporting system and redesigning human resource training programmes seem legitimate if economic growth and stability are to be sustained. To further construct a macro- and micro-economic platform conducive to entrepreneurialisation, a set of initiatives are recommended as mention in the next section.

7.1 Family firm development banking

It is imperative that Chinese banks normalise their financial supporting practice. The supporting packages are to focus on developing high value-added products/services, innovating or absorbing high technologies, and upgrading business structures. In particular, four recommendations may be considered: 

Loan guarantee scheme: Banks need to orchestrate a loan guarantee scheme to echo the call from the regulations (‘36 clauses’). Family firms often lack track records or assets to be used as collateral and those operating in peripheries have little knowledge about development agencies and enterprise’s support mechanism. Under this circumstance, banks need to collaborate with local governments or supporting agencies to offer guarantees. 

Restructuring loans: Banks need to improve their services to entrepreneurially inspired family enterprises and if possible, the loan agreement could provide an extended period of 2–3 years for start-ups and a long-term overall repayment period. In fact, the  recent financial turmoil in Wenzhou in August 2011 is an alert, indicating the inefficiency of financial support to the private economy. 

Venture capital branch: The venture capital market in China is at an embryonic stage. Banks may launch a venture capital branch to back up family firms through equity finance. Seed capital, start-up capital, as well as expansion finance may be options for growth-oriented family firms. In this process, the professional management of equity investment portfolios, relying on more prospective criteria such as growth potential, innovation competence, and adoption of flexible specialisation, may contribute to the partial replacement of collateral conditions.

Factoring scheme: Cash flow is crucial to business growth and late payments often erode a firm’s growth dynamics. The establishment of the factoring scheme, aiming to ease the cash flow, may enrich firms’ accesses to working capital and free managerial time spent on bad debts chasing.

7.2 Integrated labour service programme

An integrated labour service programme is to be considered by central or local governments. The programme may have at least threefold objectives: (a) to address labour supply gaps through orchestrating training services; (b) to modernise the industrial relations and remuneration scheme to encourage labour mobility; and (c) to promote continuous education and vocational training through cooperation with tertiary educational institutes.

In addition, an entrepreneurship and human resource development scheme can be designed to meet the aspirations of family entrepreneurs. In fact, any skill or labour management initiative must account for the aspirations of entrepreneurs (Poutziouris et al., 2002). The initiative should address the owner-managers’ desire for professionalisation, meanwhile safeguard the interests of the family. In this context, the suggested scheme not only lay emphasis on nurturing entrepreneurs’ strategic management capability, but also assist owner-mangers in understanding the power of the family business economy as  well as the array of socio-economic and political factors that are shaping the entrepreneurialisation process in China.

7.3 Family business information banks

Family firms have limited access to market information partly due to high transaction costs, and partly because of their isolated artisan management style and narrowly constructed networks. The information gap indeed hampers the ‘economic infrastructure’, essential to family business development. A network connecting information centres across the country may improve communication and interactions between ownermanagers. Through the network an interactive platform, e.g. family business forums, can be constructed, where discourses between firms from different backgrounds are encouraged. This will enable information exchange and satisfy the needs of growthoriented firms. 

8              Conclusion

Guided by the principal policy of ‘reform, open door and activation’, China through its 30-year’s continuous effort has created a dynamic and competitive private economy. Deemed as an essential component in the ‘socialist market economy’, the private sector is becoming crucial to the entire country. With the ongoing reform, privatisation and expedited globalisation, new waves of family firms are approaching to the shore of the Chinese economy. They will reshape the socio-economic structure and reconfigure the future China landscape.

Motivated by the fact that there is a paucity of family business research executed in China and the belief that continuous effort may result in advanced understanding and improved knowledge, this study examines how family businesses are initiated and developed in China after the foundation, what policy initiatives and infrastructure are available, how regulatory institutions influence family firms, and what policy agenda can be drafted to further support family business development. The research, on the basis of secondary data, sheds light on the special family business sector and highlights a number of directions that the government may influence. Future studies could be implemented both with government and businesses. From the government angle, case studies targeting at local governments may be conducted to understand the processes of policy generation and the practices of policy implementing. From the business stance, surveys focusing on family controlled firms may be implemented to appreciate business expectations, the barriers these firms are facing, and the effectiveness of the extant policies addressing the barriers. Indeed, owing to the fact that China has a colossal body of family businesses and the study of this economy is distance away from maturity, more work is warranted before one can hope to develop domain-specific theories pertaining to this idiosyncratic economy.

References

Anderson, A.R., Li, J.H., Harrison, R.T. and Robson, P.J.A. (2003) ‘The increasing role of small business in the Chinese economy’, Journal of Small Business Management, Vol. 41, No. 3, pp.310–316.

Atherton, A. and Fairbanks, A. (2006) ‘Stimulating private sector development in China: the emergence of enterprise development centers in Liaoning and Sichuan provinces’, Asia Pacific Business Review, Vol. 12, No. 3, pp.333–354.

Berger, A.N. and Udell, G.F. (1998) ‘The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle’, Journal of Banking and Finance, Vol. 22, pp.613–673.

Buck, T., Filatotchev, I., Nolan, P. and Wright, M. (2000) ‘Different paths to economic reform in Russia and China: causes and consequences’, Journal of World Business, Vol. 35, No. 2, pp.379–400.

Busenitz, L.W., Gomez, C. and Spencer, J.W. (2000) ‘Country institutional profiles: unlocking entrepreneurial phenomena’, Academy of Management Journal, Vol. 43, No. 5, pp.994–1003.

Cao, S.Y. (2007) ‘Development of the private economy and optimisation of legal environment’, Chinese Law and Government, Vol. 40, No. 6, pp.72–85.

China Industry and Commerce Association (2007) The Large-Scale Survey on Private Enterprises in China During 1993–2006, China Industry and Commerce Associated Press.

 

China Internet Information Centre (2003) Market-Oriented Reforms of China’s Enterprises in Retrospect. Available online at: www.china.org.cn/english/2003chinamarket/79520.htm

China Private Economy Research Institution (2011) Chinese Family Business Report, China CITIC Publishing Group, Beijing.

Chow, C.K.W., Fung, M.K.Y., Lam, K.C.K. and Sami, H. (2012) ‘Investment opportunity set, political connection and business policies of private enterprises in China’, Review of Quantitative Finance Accounting, Vol. 38, pp.367–389. 

Dana, L.P. (1999a) ‘Small business as a supplement in the People’s Republic of China’, Journal of Small Business Management, Vol. 37, pp.76–80.

Dana, L.P. (1999b) Entrepreneurship in Pacific Asia: Past, Present & Future, World Scientific, London.

Friedman, T.L. (2005) ‘From gunpowder to the next big bang’, New York Times, 4th November.

Han, V.X. and Baumgarte, R. (2000) ‘Economic reform, private sector development, and the business environment in Vietnam’, Comparative Economic Studies, Vol. 42, No. 3, pp.1–30.

Handler, W.C. (1989) ‘Methodological issues and considerations in studying family businesses’, Family Business Review, Vol. 2, No. 3, pp.257–276.

He, X.H. (2009) ‘The development of entrepreneurship and private enterprise in the People’s Republic of China and its relevance to transitional economies’, Journal of Developmental Entrepreneurship, Vol. 14, No. 1, pp.39–58.

Hoskisson, R.E., Eden, L., Lau, C.M. and Wright, M. (2000) ‘Strategy in emerging economies’, Academy of Management Journal, Vol. 43, pp.249–267.

Kenyon-Rouvinez, D. and Ward, J.L. (2005) Family Business Key Issues, Palgrave Macmillan, Basingstoke, Hampshire. 

Kostova, T. (1997) ‘Country institutional profiles: concept and measurement’, Academy of Management Best Paper Proceedings, pp.180–189.

Kshetri, N. (2007) ‘Institutional changes affecting entrepreneurship in China’, Journal of Developmental Entrepreneurship, Vol. 12, No. 4, pp.415–432. 

Lau, C., Ngo, H. and Chow, C. (1999) ‘Private businesses in China: emergent environment and managerial behaviour’, in Kelly, L. and Luo, Y. (Eds): China 2000: Emerging Business Issues, Sage Publications, Thousand Oaks, CA.

Lin, Y.M. (2002) ‘Economic institutional change in post-Mao China’, The Chinese Economy,  Vol. 35, No. 3, pp.26–51. 

Luo, Y.D. (2006) ‘Opportunism in inter-firm exchanges in emerging markets’, Management and Organization Review, Vol. 2, No. 1, pp.121–147.

Lv, H.X. (2007) An Investigation of Innovation of Chinese Family Business’s Governance Mechanism, Zhejiang University Press, Hangzhou, Zhejiang. 

Malik, P. (1997) Chinese Entrepreneurs in the Economic Development of China, Praegar, Westport, CT. 

MarketWatch (2013) China has 40.6 Million Private Businesses. Available online at: http:// www.marketwatch.com/story/china-has-406-million-private-businesses-2013-02-10 (accessed on 10th February 2013). 

Meyer, J. and Rowan, B. (1977) ‘Institutionalised organisations: formal structure as myth and ceremony’, American Journal of Sociology, Vol. 83, pp.340–363. 

Mourdoukoutas, P. (2004) ‘China’s challenge’, Barron’s, Vol. 84, No. 7, p.37. 

Mudambi, R., Peng, M. and Weng, D. (2008) ‘Research rankings of Asia Pacific business schools: global versus local knowledge strategies’, Asia Pacific Journal of Management, Vol. 25,  No. 2, pp.171–188.

Nair, S.R. (1996) ‘Doing business in China: it is far from easy’, USA Today, Vol. 124, No. 2608, pp.27–29.

 

 

National Bureau of Statistics of China (1999) Chinese Statistical Yearbook, China Statistics Press. 

North, D.C. (1990) Institutions, Institutional Change and Economic Performance, University Press, Cambridge. 

North, D.C. (1994) ‘Economic performance through time’, American Economic Review, Vol. 84, No. 3, pp.359–368.

Peng, M. (2003) ‘Institutional transitions and strategic economies’, Academy of Management Review, Vol. 28, No. 2, pp.275–286.

Ping, H. (1997) ‘New private entrepreneurs in China: family relations and social connections’, in Rutten, M. and Upadhya, C. (Eds): Small Business Entrepreneurs in Asia & Europe, Sage Publications, London. 

Polishchuk, L. (1997) ‘Missed markets: Implications for economic behaviour and institutional change’, in Nelson, J.M., Tilly, C. and Walker, L. (Eds): Transforming Post-Communist Political Economies, Washington, DC, pp.80–101. 

Poutziouris, P. and Chittenden, F. (1996) Family Business or Business Families, Institute for Small Business Affairs Publication, Leeds. 

Poutziouris, P., Wang, Y. and Chan, S. (2002) ‘Chinese entrepreneurship: the development of small family firms in China’, Journal of Small Business and Enterprise Development, Vol. 9, No. 4, pp.383–399.

Romano, C.A., Tanewski, G.A. and Smyrnios, K.X. (2000) ‘Capital structure decision making: a model for family business’, Journal of Business Venturing, Vol. 16, pp.285–310.

Shanker, M.C. and Astrachan, J.H. (1996) ‘Myths and realities: family businesses’ contribution to the US economy – a framework for assessing family business statistics’, Family Business Review, Vol. 9, No. 2, pp.107–123. 

Sharma, P. (2004) ‘An overview of the field of family business studies: current status and directions for the future’, Family Business Review, Vol. 17, No. 1, pp.1–36. 

Sharma, P., Chrisman, J.J. and Chua, J.H. (1996) A Review and Annotated Bibliography of Family Business Studies, Kluwer Academic Publishers, Boston, MA. 

Smallbone, D. and Welter, F. (2010) ‘Entrepreneurship and government policy in former Soviet republics: Belarus and Estonia compared’, Environment and Planning C: Government and Policy, Vol. 28, No. 2, pp.195–220. 

Tam, S. and Redding S.G. (1993) ‘The impact of colonialism on the formation of an entrepreneurial society in Hong Kong’, in Birley S. and MacMillan (Eds): Entrepreneurship Research, Global Perspectives, Elsevier, North Holland, pp.158–176.

Wang, Y. and Poutziouris, P. (2010) ‘Entrepreneurial risk taking: empirical evidence from UK family firms’, International Journal of Entrepreneurial Behaviour and Research, Vol. 16,  No. 5, pp.370–388.

Ward, J.J. and Aronoff, C.E. (1990) ‘To sell or not sell’, Nations Business, Vol. 73. 

Welter, F. and Smallbone, D. (2011) ‘Institutional perspectives on entrepreneurial behaviour  in challenging environments’, Journal of Small Business Management, Vol. 49, No. 1, pp.107–125.

Zhang, J.J. and Ma, H. (2009) ‘Adoption of professional management in Chinese family business: a multilevel analysis of impetuses and impediments’, Asia Pacific Journal of Management,  Vol. 26, pp.119–139. 

Zucker, L.G. (1981) ‘Organisations as institutions’, in Bacharach S.B. (Ed.): Perspectives in Organisational Sociology: Theory and Research, JAI Press, Greenwich, CT. 

 

 

 

Appendix 1         Key economic policies promulgated by the Chinese government

Date      Policy

1979       Joint Ventures Law; Price Liberalisation of Farm Products 

1980       Fiscal Autonomy to Local Government; Creation of Special Economic Zones; Private Income Tax

1981       Individual-Owned Enterprises Encouraged in Urban Centres

1982       Price Liberalisation of Industrial Products; Patent and Trademark Laws

1983       Soes Taxed instead of Profit Sharing

1984       Fourteen Coastal Cities Opened up to Overseas Investment; Economic Responsibility System; Resolution on Reforming the Economic System 

1986       Labour contract law 

1988       SOE Contract Responsibility System; Regulations on Private Enterprises; Enterprises and Bankruptcy Laws 

1989       New Regulations on Merges; Joint-Stock Companies; Commercialisation of Banks

1990       Copyright law

1991       Delegation of Direct Foreign Trade Rights to SOEs; Pension and Housing Reform; Establishment of Shanghai and Shenzhen Stock Markets

1992       Patent and Trademark Laws; New Operating Mechanism and Autonomous Rights to SOEs

1993       Principles of ‘Socialist Market Economy’ Replacing ‘Socialist Commodity

Economy’; Decision on the Third Plenum on Establishing Modern Enterprise

System; Company Law; New Competition Law; New Accounting Standards

1994       Foreign Exchange Reform; Fiscal and Tax Reform; Implementation of Company Law

1995       New Commercial Banking Law; People’s Bank of China Law; Provisional Regulations Guiding Foreign Investment; Insurance Law

2003       Small and Medium-sized Enterprises Promotion Law 

2005       Regulations on Expediting Development of Non-Public Owned Enterprises 

Note:    Adapted from Anderson et al. (2003).

                 

                 

                 

                 

View publication stats