Book proposal and book review

251 The China Business Model. Copyright © 2017 C. Rowley and E. Paulet. Published by Elsevier Ltd. All rights reserved.

http://dx.doi.org/10.1016/B978-0-08-100750-1.00011-5DOI:

CHAPTER 11

Conclusion: Implications and What Can We Learn? Chris Rowley1,2,3,4 and Elisabeth Paulet5 1Professor Emeritus, Cass Business School, City, University of London, London, United Kingdom 2Professorial Fellow, Institute of Hallyu Convergence Research, Korea University, Seoul, Korea 3Adjunct Professor, Griffith Business School and Griffith Asia Institute, Griffith University, Brisbane, QLD, Australia 4Visiting Fellow, Institute of Asia and Pacific Studies, Nottingham University, Nottingham, United Kingdom 5ICN Business School, CEREFIGE, Pole Lorrain de Gestion, Nancy, France

11.1 INTRODUCTION

China has suffered from an economic model that is too dependent on exports and low-priced and commodified products. This economic pol- icy, of course, led to rapid development in production volumes but since it was based on an over-abundance of inputs (labor and capital), this also went hand in hand with some wastage—relatively low yields, high pollu- tion costs and the inefficiencies of a model based on an ability to produce at speed, to the detriment of natural resources, security or maintenance. All of which is coming under increased questioning and is more commonly reported in the Western media (inter alia, Wildau & Weinland, 2016).

The varied contributions in our book have underlined the foundations on which China has based its business development and expansion. The Chinese Cultural Revolution of the 1960s shook the faith of families and enterprises who had originally seen socialism as an alternative model for economic growth, and one that promised economic expansion, equality and social justice. The new institutional and economic situation saw the growth of Chinese business and an economy that relied on policies that supported an export- and investment-driven model of development. This model proved to be effective, even as the 2008 Global Financial Crisis hit. Beginning in 2009, China was able to rapidly jumpstart a slowing econ- omy with a massive state-led stimulus schedule that relied heavily on state banks extending credit for real estate and infrastructure projects and encouraged gross domestic product (GDP) growth.

The China business model has now come under increasing strain as the economy slows annually (Wildau, 2015; Wildau, 2016; Wildau & Weinland, 2016). One result is the swathes of unfinished and unoccupied

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buildings—even whole cities—as well as job lay-offs. The slowdown will also require further reexamination of the model. This will involve many aspects (see Rowley & Cooke, 2010; Warner & Rowley, 2011, 2014), including those we focused on in our book. Aspects such as the change and rebalancing between sets of actors and factors: exports and imports, manufacturing and services, and state-owned enterprises (SOEs), mul- tinational companies (MNCs) and small- and medium-sized enterprises (SMEs), but also culture, guanxi, corporate social responsibility (CSR), and finance.

11.2 OVERVIEW OF CONTENT CONCLUSIONS

We present an overview of the conclusions of each of the trio of parts and each of the nine chapters in our book. Part I provided the reader with some basic concepts necessary to help better understand the Chinese busi- ness model. Chapter 2, Guanxi Culture, discussed guanxi and Chinese man- agement. It concluded that guanxi was based on mutual interests including utilitarian and emotional aspects. Applied to the business environment it helps induce collaborative behaviors among companies implying mutual trust, information sharing, resource acquirement, cost saving, negotiation, etc. This could lead to improved performance in terms of finance, marketing, and supply chains as well. For Western people wanting to invest in China, or intend to do business with Chinese partners, guanxi practice with key personnel is an inevitable process. Chapter 3, Interpreting China’s Model for Business: Roles of Corruption, Favoritism, Reliability, and Responsibility, covered the conditions of China’s transition from a communist-style com- mand economy to a market economy. It concluded that Chinese manage- ment remained vertically structured, with the domination of SOEs. It also detailed the dimensions that influenced the business model: corruption, favoritism (with emphasis on guanxi), reliability (meaning loyalty to the regime), and responsibility: separated into CSR and philanthropy. In the same line of argument, Chapter  4, The Evolution of Corporate Social Responsibility and Corporate Sustainability Practices in China, compared the differing process of CSR development with Europe and the United States, taking into account history, economics, and the development of cor- porations. It concluded that the reporting of CSR practices in China was an important issue for the authorities and that CSR to promote competitive business environments, social cohesion, and fostering collective responsibility for the betterment of society through business practices, was also critical.

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Part II of our book concentrated on the business practices of Chinese firms. Chapter 5, The Equity Gap Amongst Technology-Based Small Firms: Challenges for Government-Backed Venture Capital in China, covered pri- vate and public venture capital for technology-based SMEs. It concluded that there was a need to improve competitiveness through enhanced tech- nological and commercial knowledge to overcome the funding gap for start- ups, high risk and high growth technology SMEs, especially at the early stage of venture development. Crowd funding was used to narrow the finance gap, and this financial innovation expressed the orientation of government toward venture capital funds operating in a more sustainable entrepreneurial system, as stressed in our preceding Part I. Chapter  6, Assessing the Impact of the New Medical Reform on China’s Pharmaceutical Supply Chain: The Case of Essential Medicines Distribution in Yuping, Luochuan, and Minhang Regions, focused on supply chain management in the medical sector. It concluded that besides the reforms, high distribution costs for medicines in rural regions still contributed to geographic disparity. This remained a prob- lem in a country where the rural regions account for approximately 70% of the total population. Chapter  7, Exploring MEH (Manager-Employee- Heterophily) in US-owned and Managed Plants in Taiwan, explored manager-employee-heterophily—ethnic differences between people. It con- cluded workplace stress arose from divergent values in management style between ethnically different local employees and foreign managers.

Part III of this book discussed the financial aspects of Chinese business. Chapter  8, Monitoring Maturation in Financial Intermediation, discusses whether government organizations and banking institutions play an inter- mediate role in financing contracting for SME. This chapter emphasizes the importance of peer-to-peer online lending. In the same line of argu- ment, Chapter  9, Internationalization Strategy and Service Adaptation in China: Perspective of Transnational Entrepreneurship, covered monitor- ing in financial intermediation. It concluded that delegated monitoring influenced both governance and responsibility upon a financial intermedi- ary. Debates exist concerning the relevance of government organizations playing an intermediate role in financial contracting. In that context, the major improvement for Chinese financial intermediation would be to establish more resilient financial governance. Chapter 10, China and India: Emerging Leaders in World Economy, presented the process of interna- tionalization strategies. Using the Transfer-Adapt-Scale framework, it sug- gested that a new internationalization model could emerge to meet the needs of transnational enterprises operating in Chinese industry. In that

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sense, this chapter contributed to a better understanding of China’s rising role in the international business domain.

The totality of these chapters is of assistance to investigate China busi- ness model. It allows us to examine it holistically and elucidate its strengths and weaknesses.

11.3 GENERAL STRENGTHS AND WEAKNESSES OF THE CHINA MODEL

Since 2012, China’s GDP growth has slowed. China posted its worst growth (6.8%) for a quarter of a century in January 2016. Indeed, India is set to overtake to China’s growth rate by reaching 7.8% in 2015–16. Consequently, China has entered a second phase of economic transition in order to restore a new trend toward better opportunity of expansion. What has been a source of major strength for China (the priority given to exports and investments) now needs to be readjusted toward increased domestic consumption and value-added outputs. This is the reason why the 12th Five-Year Plan for 2011–15 sought to steer the Chinese political economy away from a pure focus on growth toward a more-balanced eco- nomic development model. Special weight rests on boosting consumption and incomes whilst expanding public welfare services and environmental protection (National People’s Congress of the PRC, 2011). Rebalancing China’s political economy is crucial, for socio-economic development, for global economic growth, and general stability (Clover, 2015).

With this new orientation, China could be ready to pursue its expan- sion by limiting its weaknesses. One difficulty to be solved is the unequal regional development of the country. Massive social and geographi- cal inequality persists: a gulf between the country’s developed and under- developed regions, in spite of the progress achieved over the last few years in GDP growth and development policies undertaken by the authorities to support the country’s Central and Western areas. In 2009 some 50% of GDP was achieved in the coastal areas, as was discussed in Part I of our book.

A second problem is to how to define a more sustainable business model, one which can influence its managerial process. China’s economy has been facilitated by a combination of factors: a vast domestic market for goods and services, a large supply of natural resources, and a large, moti- vated workforce. Innovation and entrepreneurship has been encouraged and facilitated in a stable business environment, due to a stable political system and consistent government policies, as well as a sizeable inflow of

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Western technology and capital, and a currency exchange rate that allowed products to be exported at “dumping” prices. Today, China includes more sustainable criteria in their managerial methods in moving toward a more stable, expansionary trend, also discussed in Part I of our book.

A component of this transformation is the need to focus on the labor market and employee relations. This will be more important in the era of declining availability of workers due to demographic trends and skills shortages. They will need to be treated less as “disposable” resources, and as more as valuable assets. The model will need to incorporate the human resource (HR) factors and HR management (HRM), which in turn will encourage these increased value-added and upskilling, etc.

A third difficulty concerns the investment and financial issues in Chinese development. Since the 2008 Global Financial Crisis, the act of Western central banks pumping cheap money into the financial system was seen by many as having the dual purposes of kick-starting Western economies while pressing China to revalue its currency. Strict capital con- trols initially enabled the Chinese authorities to resist currency pressures. Yet, the dramatic rises in commodity prices resulting from loose Western monetary policies eventually caused rampant inflation in China. China was forced to raise interest rates and appreciate its currency to bring infla- tion under control. The Western central banks had been granted their wish of a revalued Chinese currency. This influenced investment policy and credit distribution, as was discussed in Part II of our book.

While the SOEs have the facilities to finance their investment proj- ects, private firms face greater financial constraints. Substantial variations exist in financial access among private firms, with SMEs facing more constraints, whereas the more established firms have access equal to their SOE counterparts. The most pressing financial restriction facing private firms is their limited ability to secure long-term funds toward investing for growth, as was discussed in Part II of our book. This explains why a liberalized capital market is seen as a means to help improve financing pol- icy for firms, subsequently inducing more profitability. Furthermore, inte- gration into global capital markets demands that the renminbi is moved toward a more-freely floating exchange rate, being used as an international trade settlement currency.

A fourth difficulty pertains to the banking sector. As a whole, the financial sector has suffered from an increase in “shadow credit.” A huge amount of liquidity has gone to infrastructure and real estate, creating a bubble, particularly for real estate. Chinese banks are also

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under-performing to a higher risk from their off-balance sheets and their nonperforming loans. In the aftermath of a crash, were Chinese banks to face severe financial problems, the chances are that GDP growth will be much slower than it is now and for a prolonged period of time. Moreover, micro- and SMEs are usually scattered in location, with frequent and urgent demand for loans, but lacking collateral. This explains why China has become the largest P2P lending market in the world. These issues were discussed in Part III of our book to give insights into the financial system and its impact on the productive issues.

11.4 IMPLICATIONS AND LESSONS

Based on the preceding conclusions and arguments, what are the impli- cations and lessons for the Chinese business model? Could we design a scenario for next decade regarding the opportunities of China in the glo- balized environment? In a World Economic Forum report (2006), vari- ous scenarios were constructed for China in 2025. All of them agreed that GDP will decrease—in comparison to the best decades, varying from 6% (pessimistic view) to 9% (most optimistic situation).

SMEs could become more important (Cunningham & Rowley, 2010, 2011). They, however, have similar difficulties in finding funds to finance their productive projects, as in most other country. Banks, because of a permanent systemic risk, will need to improve their risk management and their profitability to maintain their position in a liberalized financial world.

The second element on which China could improve its position concerned transparency of data and “rules of the game,” as mentioned by Bernanke and Olson (March 8, 2016, Blog Bernanke). As shown in Table  11.1, China has improved its position with regards to global trans- parency. Since the slowdown, however, researchers have expressed doubts as to the “smoothness” of economic data, which could partly explain the actual position of the country. In particular, China’s National Bureau of Statistics provides little information about its sources or statistical frame- work, preventing the possibility of checking data for validity (Wildau, 2015). If announcements concerning business results are over-evaluated, it provokes skepticism internationally (Zhao, 2012; Zuiderwijk, Gaseó, Parycek, & Janssen, 2014).

As far as the “rules of the game” are concerned, China has com- mitted to some transparency improvement on real economic aspects

Conclusion: Implications and What Can We Learn? 257

(Koch-Weser, 2013). Among several examples, we can stress the US-China Business Council in its 2015 Regulatory Transparency Scorecard, which underlined the Chinese government’s agreement to public com- ment periods of at least 30 days on draft laws, administrative regulations, departmental rules, and regulations. This trend toward greater clarity con- stitutes an improvement, but does not necessarily mean the rules are fairer. Regardless, it represents a step for better integration into the global scene.

11.5 COULD CHINESE BUSINESS PRACTICES BE AN OBSTACLE FOR FUTURE OPPORTUNITIES?

Having discussed the major outlines of macro-economic development, the specificities of the Chinese business practices are now discussed and the differing, typical Western and traditional Eastern and Chinese practices are summarized in Tables 11.2 and 11.3.

Table 11.1 Transparency index in selected countries

Source: http://www.transparency.org/cpi2015.

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Table 11.2 presents an extensive list of criteria to explain the differ- ences between Western and Eastern business (Rowley & Ulrich, 2012), while Table 11.3 concentrates more on business practices. Variations exist- ing between them help to understand the philosophy and values on which strategies are based to conduct companies.

Table 11.2 Differences in Western and Eastern business approaches to business managementa

Western Eastern

Time horizon Short term; how Long term; future Strategy Leading to allocation of

resources today Leading to positioning firm

for the future Management

philosophy Management by objectives Management by shared

mindset Decision making Fast to decide Slow to decide

Longer to sell and implement

Quick to implement

Accountability Personalized Shared Focused on “I” Focused on “we”

Work Linear Cyclical Focused on task at hand Focused on context in which

work is done Career orientation Generalist Specialist Rewards High gap between senior

executives and lower employees

Low gap between senior executives and lower employees

Based on performance Based on tenure and position Leadership

philosophy Hands on, walking ahead of

people Hands off, walking behind

people “Leadership is done from

in front. Never ask others to do what you, if challenged, would not be willing to do yourself.” Xenophon

“In order to guide people, the leader must put himself behind them. Thus when he is ahead they feel no hurt.” Lao Tzu

Philosophical schools

Christianity Buddhism, Confucianism, Hinduism, Integral Yoga, Islam, Taoism, Zen, Han Fei

Source: Adapted from Rowley, C., & Ulrich, D. (2012). Lessons learned and insights derived from leadership in Asia. Asia Pacific Business Review, 18(4), 675–681. aSome of the differences of East vs West can be found in: http://www.1000ventures.com/ business_guide/crosscuttings/cultures_east-west-phylosophy.html referenced on July 15, 2010; http://www.thefreelibrary.com/East+versus+West+Philosophy,+Cultural+Values+and+Mindset+- +by+Hemant…-a01073951527 referenced on July 15, 2010. Hofstede (2001), Hofstede, Hofstede, and Minkoy (2010), Ouchi (1983).

Conclusion: Implications and What Can We Learn? 259

Time and relationships among partners are the main factors of the two tables justifying the differences in business practices. Consequently, Table  11.3 illustrates the main arguments of our book and leads us to question the guanxi model to reevaluate if it cannot be at the origin of the problems encountered by Chinese management (Rowley & Warner, 2011, 2014; Wang & Rowley, 2016). In particular, could such Chinese business practices be an obstacle for future opportunities? Foreign firms are con- cerned with compliance policies that may prevent them from realizing a satisfying profit. The development of a business network illustrated by the guanxi model could be at the origin of what for some are “corrupt” practices. How? Most MNCs founded their strategies on returns and short time horizons. On the other hand, Chinese firms privilege a nonlinear business paradigm, in which the government plays a core role. The time horizon on which profit is measured is much longer. So guanxi is often accused of encouraging bribery or corruption because it favors Chinese family, social systems, and traditional hierarchical values, which seems in contradiction to Western business practices. This incorrect understand- ing of the guanxi model explains the accusation of corruption in busi- ness practices from Western challengers, who, of course all too often act in capricious and unethical ways.

In fact, the coexistence and interpenetration of the guanxi model, and Western business practices could renew and reinforce Chinese man- agement. For example, MNC or TEs could create their own corporate guanxi mechanisms. One solution could be to transform their competitive approach into a more collaborative framework where all interested parties achieve shared objectives.

Table 11.3 Western versus traditional Chinese business practices Business practices Western model Chinese model

Main purpose Maximizing shareholder value

Privileging family interest

Financing sources Public sales of assets and banking loans

Family and friends P2P lending

Management Professional management based on recruitment focusing on competencies

Senior managers from the families to which company belongs

Time horizon Short term to satisfy shareholder value

Long term

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11.6 CONCLUSION

We have outlined the diverse elements in the development of the Chinese business model. Taking into account all of these factors we have covered, could China transform its business model to maintain it competitive advantage in the future? From the macro-economic point of view, as dis- cussed throughout our book, China should recalibrate its strategy by inte- grating both internal and external factors. To preserve its position, China will need to reconsider its currency, especially if it intends to play an inter- national monetary role. Globally, we conclude that the best strategy could be to protect its original Asiatic model and to adapt it to the new interna- tional constraints, whilst adopting more-transparent behaviors.

The future will also require the explicit and coherent recognition of issues in the labor market and employee relations. This will include the need to move up value chains and shift from competing by “perspiration” to inspiration’ (in Krugman’s terms). This requires employee upskilling, and investment in skills and training. These will be underpinned and partly driven by stark labor market changes, stemming from demographics and trends. There will simply be fewer workers. The over-arching ethos of the recent Chinese economic success will need to be reconsidered. From the managerial point of view, China could benefit from their own business practices by maintaining their primary characteristics, and by integrating a Western framework to adopt more transparent and sustainable strategies.

With regards to business practices, research has been produced to explore the corrosive aspects of guanxi (Su, Sirgy, & Littlefield, 2003). Some justify this management tool due to the immature legal and eco- nomic institutions in China (Su & Littlefield, 2001, 2003). Some note that Eastern and Western business practices are likely to become more simi- lar (Davies, Leung, Luk, & Wong, 1995), although a long and consistent stream of literature and research also shows this may not be the case and differences will continue (Rowley, 1998; Rowley & Benson, 2002, 2004), as will types of capitalism itself (Rowley & Yukongdi, 2016).

Western companies may tend to adopt more guanxi-type practices by relying on their management in personal relationships of trust and repu- tation. Alternatively, Eastern countries intend to improve their legal and institutional rules and regulation. Therefore, far from being delegated to a negative interpretation of business practices, guanxi could help to better understand how private and public domains could interact in management purpose. It could permit researchers and practitioners to analyze personal

Conclusion: Implications and What Can We Learn? 261

relationships and rational instrumentality within companies. In that sense, one could defend the idea that Western and Eastern management prac- tices could benefit from each other in order to a more ethical business model that better enables local, transnational, and foreign entrepreneurs in improving both the economic and social performance of their companies.

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