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The China business puzzle
The China Business Puzzle
Howard Myers 25 Howard Myers is president of PlanWright Associates, Inc., Mountain Lakes, New Jersey. Prior to his return to the U.S. in September 1986, he had spent ten years working in Southeast Asia, most recently as managing director of Pacific Telesis in Malaysia. The puzzle onp. 27 is from the Chinese game "Jungle" (R. C. Bell, The Boardgame Book [London: Marshall Cavendish Books, 1983]).
Chinese institutions have enduring legacies that affect today's business environment. The author looks at the impacts of the .China-first syndrome, the group connection, the noncompetitive ethic, and the control imperative. n retrospect, 1985 may have been the Year of the Joint Venture in the People's Republic of China (PRC). Over a thousand new foreign participation companies were formed, more than doubling the total since the first one in 1979. Now the pendulum is swinging back. Foreign business people are taking a puzzled second look, but the PRC's business environment is still not very well understood. Meanwhile, knowledge about Chinese culture and institutions is mounting impressively, thanks to a new generation of China specialists. A wealth of thorough studies cover China's economic, political, and social systems, as well as Chinese Communist ideology and values. But within these potentially rich sources, specific business implications are seldom addressed. Unfortunately for us, China watchers typically focus at the macro or national policy level. That leaves project planners and negotiators with "who's who" and "how to" guides, but without the necessary knowledge about how the system works. For them, the pendulum
I
swings of ideology shifts and policy reversals hold many surprises--some unpleasant, some unnecessary. A help in avoiding pitfalls is an appreciation of Chinese institutions and their driving forces----culture and values. Foreign business people need to study these major influences on economic development. Here the China scholars have a message for us. They emphasize that China has the longest historical tradition in human experience, with remarkably persistent patterns of culture and institutional behavior. Thus they look to historical perspectives to help understand today's China. Though the scholars have a different analytical focus, we can use their approach. The first step is to analyze history, to identify institutional influences on economic development projects. Continuities in such patterns can mean predictable impacts. But the real value is in knowing what to do next. This summary of business, policy issues in China takes both steps, to define: • The institutional context for eco-
Business Horizons / July-August 1987 nomic development; and • Implications for project planners, negotiators, and managers. I N S T I T U T I O N S AND DEVELOPMENT: A HISTORICAL PERSPECTIVE uring the late nineteenth t century, the failing imperial system reluctantly experimented with technological modernization. But new Western techniques proved only the beginning of many unwelcome changes. Conservative reaction hobbled modernization but could not save the dynasty from collapse. A century later, it is the Communists' turn on a well-trodden path: they are seeking "wealth and power" for China by adopting modern technology, while attempting to control the side effects. China scholars frequently remark on the many parallels between China then and now. That is not to say that history must repeat itself. But the Chinese are very much products of their past, which influences their values, their thinking, and their actions. Business people must be aware of historical continuities in Chinese institutions if they are to understand what makes today's system work. The Figure describes some of these institutions and their legacies. These patterns are not new with the Chinese Communist Party. They are clearly recognizable in nineteenth-century modernization attempts. Chinese institutions have a broad influence on the development process, often with specific impacts on individual projects. Being aware of the continuity of these institutions can give valuable perspective for today's project decisions.
D
26
CONTINUITIES AND IMPLICATIONS he foreign business representative in China quickly senses other realities beneath the veneer of official programs and party slogans. T h e perspective of China's development history can aid in deeper understanding of economic decisions and policies. But how does
T
historical data translate to useful business information? Here are four key components of the business environment in the PRC. What does each mean to project planners, negotiators, and managers?
The China-First Syndrome The persistence of the China-centered worldview presents a uniquely demanding challenge to the negotiator. The Chinese will expect absolute
Institutions and Their Impacts on Today's Projects
Institution
Influences
Impacts on Projects
Value System
Sinocentricism (Cultural superiority complex)
Resistance to assimilating fbreign skills and techniques Lack of empathy fbr fbreigners' risks and problems Official posts as the preferred career path Technical/vocational shortage Inhibition of entrepreneurial and competitive behavior Suspicion of profit motives and benefits to tbreigners
Ideology's role in education (the "Red or Expert" debate) Distrust of private transactions Economic concepts
Economy
Population pressure
Fiscal weakness Regionalism
Political System Strong central political control
Major labor force surpluses Lifetime employment entitlement Resistance to labor displacement Questionable ability to sustain major development investments Unbalanced development Inhibited access to national markets Centralized economic planning/ management Price controls, interference with free market mechanisms Possibility of arbitrary intervention by government or party in enterprise management
Society
Factionalism, particularism, demoralization, corruption trends
Legal System
Ambiguity, reluctance • Focus on personal commitment Careful negotiation, continuous to deal within specific legal frameworks renegotiation
Management System
Loose central coordination, lack of strategic focus Noncompetitive ethic
Personal loyalties often stronger than organizational affiliations Pervasive inefficiency Questionable outcome for economic reforms
Poor linkages between projects Bureaucratic inefficiency and infighting Reluctance to apply management incentives Inhibited use of monetary incentives to improve productivity Ambiguous role/career path for professionals and specialists
The China Business Puzzle
"There is seldom a legally enforceable position in China. More often there is an equilibrium of mutually perceived interests. The key here is perception. When that changes, so does the basis for the agreement." 27 sincerity and openness, combined with willingness to make c o m m i t m e n t s based more on personal relationships than formal contracts. The burden is on the foreigner to ensure that the Chinese fully understand all agreements. At the same time, events in the political arena can change Chinese positions dramatically, and the foreigner must be prepared to renegotiate. There is seldom a legally enforceable position in China. More often there is an equilibrium of mutually perceived interests. The key here is perception. When that changes, so does the basis for the agreement. Although the Chinese have made progress in spelling out an internationalstyle legal framework, it is unlikely to be sufficiently robust to protect the foreigner's interests when appearances demand renegotiation. Because written agreements alone are an incomplete response to the Chinese context, the scope of the negotiator's concerns must be broad. Workable business dealings in China must look beyond detailed commercial agreements. Although such agreements are needed to cover areas of potential conflict, they address only part of the problem. Proposals should be tested not only in the objective realm of commitment and project results but in other ways as' well. How, for example, might actions be announced and implemented to highlight what benefit the project and the foreign partners would have for China? If proposed actions run counter to the interests of party factions or other informal organizations,
what might these groups do? Ultimately, success will require large doses of sensitivity, sincerity, patience, and flexibility, combined with clearheaded negotiating skill.
The Group Connection Another important characteristic of Chinese culture is its complex of interpersonal ties, both formal and informal. This means much more than the familiar Western practice of fill-
ing in the informal lines on the organization chart in order to provide added insight into decision processes. Some of the most important groups in China cut across organizations, so the chart itself represents an incomplete perspective. A more realistic context for interaction with Chinese officials begins with an awareness of career planning as they see it. A very considerable portion of their potential for rewards-or threat of sanctions--may not fol-
~d
Business Horizons / July-August 1987 i
28
low formal organizational hierarchies at all. Instead, their careers may be more closely linked to the fortunes of some informal group, probably a party faction. Informal affiliations are likely to continue as a significant focus of loyalty for Chinese officials and industrial project management personnel. Such loyalties are potentially in conflict with the goals of formal organizations which sponsor industrial development. Thus the door remains open to some familiar patterns: weak central planning coordination, regionalized development, and syndicated corruption. The implication for project planners and managers is clear, if difficult to follow in pract!ce. Because objective criteria are not always sufficient to explain organizational behavior in China, informal organization must be recognized as real and tracked as such. Satisfactory progress will probably require continued, programmed effort. But the alternative is being uninformed about important influences on Chinese officials and project personnel.
The Noncompetitive Ethic A third component begins with tile Chinese .perspective on group motivation and reward for industrial workers, so different from the Western focus on the individual. This is not a promising area for major initiatives in personnel management. Even with incentive packages that have worked'well elsewhere, advance study
and pilot programs tailored to individual cases are strongly indicated. But Western personnel management constructs are only part of a broader context. Management's experiments with workers' incentives should recognize the close links between economics and politics in the Chinese factory. A narrow focus on searching for the right keys to individual motivation may fail to recognize that every change in wealth distribution has a political dimension. When on this turf, the Western manager can avoid unpleasant surprises by considering the values and positions of the key political stakeholder--the Communist Party.
The Control Imperative
ical Western context assumes that rew a r d s - - o r lack of t h e m - - c o m e through the organization, in proportion to the employee's contribution toward goals of output and efficiency. Yet in China the organization's need for operational efficiency may be in conflict with even stronger political considerations. Management must recognize that employment in a foreign project does not remove a Chinese employee from the political e n v i r o n m e n t , with its personal pressures and risks. Even operating-level decisions cannot be made in the vacuum of inputs and outputs. Thus, managers must take thorough account of all the forces acting upon those who must implement supervisory procedures.
The ultimate baseline in China is the Communist Party's tight control of the political, economic, and social systems. Those in power seem unlikely to relax their control, even at the expense of inefficiency or slower progress toward modernization. This primary focus on control means that when political order seems at risk, the typical project may come off second best. Trade-offs may compromise output results in order to limit potential unrest. In sensitive areas such as incentives, leadership styles, layoffs, or sharing the underemployment burden, the price of political calm for the senior partner may prove higher than expected. The pervasive influence of politics holds potential frustrations for the operating manager as well. The typ-
espite these problems, China Ioffers immense long-term opportunity for foreign business. But the game in China is sometimes played by different rules, and the new player must find out how they work. To be effective, the Westerner must understand the Chinese context and be prepared to operate within it. This means not only knowing who is in charge, but also: • What the game is; • What the rules are; • Who all the players are; • What team(s) each is on; and • How they keep score. These are difficult and sometimes subtle challenges. But the lion's share of China's business rewards await those with the perceptiveness and tenacity to overcome them. []
D
Howard Myers 25 Howard Myers is president of PlanWright Associates, Inc., Mountain Lakes, New Jersey. Prior to his return to the U.S. in September 1986, he had spent ten years working in Southeast Asia, most recently as managing director of Pacific Telesis in Malaysia. The puzzle onp. 27 is from the Chinese game "Jungle" (R. C. Bell, The Boardgame Book [London: Marshall Cavendish Books, 1983]).
Chinese institutions have enduring legacies that affect today's business environment. The author looks at the impacts of the .China-first syndrome, the group connection, the noncompetitive ethic, and the control imperative. n retrospect, 1985 may have been the Year of the Joint Venture in the People's Republic of China (PRC). Over a thousand new foreign participation companies were formed, more than doubling the total since the first one in 1979. Now the pendulum is swinging back. Foreign business people are taking a puzzled second look, but the PRC's business environment is still not very well understood. Meanwhile, knowledge about Chinese culture and institutions is mounting impressively, thanks to a new generation of China specialists. A wealth of thorough studies cover China's economic, political, and social systems, as well as Chinese Communist ideology and values. But within these potentially rich sources, specific business implications are seldom addressed. Unfortunately for us, China watchers typically focus at the macro or national policy level. That leaves project planners and negotiators with "who's who" and "how to" guides, but without the necessary knowledge about how the system works. For them, the pendulum
I
swings of ideology shifts and policy reversals hold many surprises--some unpleasant, some unnecessary. A help in avoiding pitfalls is an appreciation of Chinese institutions and their driving forces----culture and values. Foreign business people need to study these major influences on economic development. Here the China scholars have a message for us. They emphasize that China has the longest historical tradition in human experience, with remarkably persistent patterns of culture and institutional behavior. Thus they look to historical perspectives to help understand today's China. Though the scholars have a different analytical focus, we can use their approach. The first step is to analyze history, to identify institutional influences on economic development projects. Continuities in such patterns can mean predictable impacts. But the real value is in knowing what to do next. This summary of business, policy issues in China takes both steps, to define: • The institutional context for eco-
Business Horizons / July-August 1987 nomic development; and • Implications for project planners, negotiators, and managers. I N S T I T U T I O N S AND DEVELOPMENT: A HISTORICAL PERSPECTIVE uring the late nineteenth t century, the failing imperial system reluctantly experimented with technological modernization. But new Western techniques proved only the beginning of many unwelcome changes. Conservative reaction hobbled modernization but could not save the dynasty from collapse. A century later, it is the Communists' turn on a well-trodden path: they are seeking "wealth and power" for China by adopting modern technology, while attempting to control the side effects. China scholars frequently remark on the many parallels between China then and now. That is not to say that history must repeat itself. But the Chinese are very much products of their past, which influences their values, their thinking, and their actions. Business people must be aware of historical continuities in Chinese institutions if they are to understand what makes today's system work. The Figure describes some of these institutions and their legacies. These patterns are not new with the Chinese Communist Party. They are clearly recognizable in nineteenth-century modernization attempts. Chinese institutions have a broad influence on the development process, often with specific impacts on individual projects. Being aware of the continuity of these institutions can give valuable perspective for today's project decisions.
D
26
CONTINUITIES AND IMPLICATIONS he foreign business representative in China quickly senses other realities beneath the veneer of official programs and party slogans. T h e perspective of China's development history can aid in deeper understanding of economic decisions and policies. But how does
T
historical data translate to useful business information? Here are four key components of the business environment in the PRC. What does each mean to project planners, negotiators, and managers?
The China-First Syndrome The persistence of the China-centered worldview presents a uniquely demanding challenge to the negotiator. The Chinese will expect absolute
Institutions and Their Impacts on Today's Projects
Institution
Influences
Impacts on Projects
Value System
Sinocentricism (Cultural superiority complex)
Resistance to assimilating fbreign skills and techniques Lack of empathy fbr fbreigners' risks and problems Official posts as the preferred career path Technical/vocational shortage Inhibition of entrepreneurial and competitive behavior Suspicion of profit motives and benefits to tbreigners
Ideology's role in education (the "Red or Expert" debate) Distrust of private transactions Economic concepts
Economy
Population pressure
Fiscal weakness Regionalism
Political System Strong central political control
Major labor force surpluses Lifetime employment entitlement Resistance to labor displacement Questionable ability to sustain major development investments Unbalanced development Inhibited access to national markets Centralized economic planning/ management Price controls, interference with free market mechanisms Possibility of arbitrary intervention by government or party in enterprise management
Society
Factionalism, particularism, demoralization, corruption trends
Legal System
Ambiguity, reluctance • Focus on personal commitment Careful negotiation, continuous to deal within specific legal frameworks renegotiation
Management System
Loose central coordination, lack of strategic focus Noncompetitive ethic
Personal loyalties often stronger than organizational affiliations Pervasive inefficiency Questionable outcome for economic reforms
Poor linkages between projects Bureaucratic inefficiency and infighting Reluctance to apply management incentives Inhibited use of monetary incentives to improve productivity Ambiguous role/career path for professionals and specialists
The China Business Puzzle
"There is seldom a legally enforceable position in China. More often there is an equilibrium of mutually perceived interests. The key here is perception. When that changes, so does the basis for the agreement." 27 sincerity and openness, combined with willingness to make c o m m i t m e n t s based more on personal relationships than formal contracts. The burden is on the foreigner to ensure that the Chinese fully understand all agreements. At the same time, events in the political arena can change Chinese positions dramatically, and the foreigner must be prepared to renegotiate. There is seldom a legally enforceable position in China. More often there is an equilibrium of mutually perceived interests. The key here is perception. When that changes, so does the basis for the agreement. Although the Chinese have made progress in spelling out an internationalstyle legal framework, it is unlikely to be sufficiently robust to protect the foreigner's interests when appearances demand renegotiation. Because written agreements alone are an incomplete response to the Chinese context, the scope of the negotiator's concerns must be broad. Workable business dealings in China must look beyond detailed commercial agreements. Although such agreements are needed to cover areas of potential conflict, they address only part of the problem. Proposals should be tested not only in the objective realm of commitment and project results but in other ways as' well. How, for example, might actions be announced and implemented to highlight what benefit the project and the foreign partners would have for China? If proposed actions run counter to the interests of party factions or other informal organizations,
what might these groups do? Ultimately, success will require large doses of sensitivity, sincerity, patience, and flexibility, combined with clearheaded negotiating skill.
The Group Connection Another important characteristic of Chinese culture is its complex of interpersonal ties, both formal and informal. This means much more than the familiar Western practice of fill-
ing in the informal lines on the organization chart in order to provide added insight into decision processes. Some of the most important groups in China cut across organizations, so the chart itself represents an incomplete perspective. A more realistic context for interaction with Chinese officials begins with an awareness of career planning as they see it. A very considerable portion of their potential for rewards-or threat of sanctions--may not fol-
~d
Business Horizons / July-August 1987 i
28
low formal organizational hierarchies at all. Instead, their careers may be more closely linked to the fortunes of some informal group, probably a party faction. Informal affiliations are likely to continue as a significant focus of loyalty for Chinese officials and industrial project management personnel. Such loyalties are potentially in conflict with the goals of formal organizations which sponsor industrial development. Thus the door remains open to some familiar patterns: weak central planning coordination, regionalized development, and syndicated corruption. The implication for project planners and managers is clear, if difficult to follow in pract!ce. Because objective criteria are not always sufficient to explain organizational behavior in China, informal organization must be recognized as real and tracked as such. Satisfactory progress will probably require continued, programmed effort. But the alternative is being uninformed about important influences on Chinese officials and project personnel.
The Noncompetitive Ethic A third component begins with tile Chinese .perspective on group motivation and reward for industrial workers, so different from the Western focus on the individual. This is not a promising area for major initiatives in personnel management. Even with incentive packages that have worked'well elsewhere, advance study
and pilot programs tailored to individual cases are strongly indicated. But Western personnel management constructs are only part of a broader context. Management's experiments with workers' incentives should recognize the close links between economics and politics in the Chinese factory. A narrow focus on searching for the right keys to individual motivation may fail to recognize that every change in wealth distribution has a political dimension. When on this turf, the Western manager can avoid unpleasant surprises by considering the values and positions of the key political stakeholder--the Communist Party.
The Control Imperative
ical Western context assumes that rew a r d s - - o r lack of t h e m - - c o m e through the organization, in proportion to the employee's contribution toward goals of output and efficiency. Yet in China the organization's need for operational efficiency may be in conflict with even stronger political considerations. Management must recognize that employment in a foreign project does not remove a Chinese employee from the political e n v i r o n m e n t , with its personal pressures and risks. Even operating-level decisions cannot be made in the vacuum of inputs and outputs. Thus, managers must take thorough account of all the forces acting upon those who must implement supervisory procedures.
The ultimate baseline in China is the Communist Party's tight control of the political, economic, and social systems. Those in power seem unlikely to relax their control, even at the expense of inefficiency or slower progress toward modernization. This primary focus on control means that when political order seems at risk, the typical project may come off second best. Trade-offs may compromise output results in order to limit potential unrest. In sensitive areas such as incentives, leadership styles, layoffs, or sharing the underemployment burden, the price of political calm for the senior partner may prove higher than expected. The pervasive influence of politics holds potential frustrations for the operating manager as well. The typ-
espite these problems, China Ioffers immense long-term opportunity for foreign business. But the game in China is sometimes played by different rules, and the new player must find out how they work. To be effective, the Westerner must understand the Chinese context and be prepared to operate within it. This means not only knowing who is in charge, but also: • What the game is; • What the rules are; • Who all the players are; • What team(s) each is on; and • How they keep score. These are difficult and sometimes subtle challenges. But the lion's share of China's business rewards await those with the perceptiveness and tenacity to overcome them. []
D