BOOK REVIEWS

Liu Renjie et Feng Xiaoyun (ed.): The Giant Dragon of Asia

Liu Renjie teaches in the Department of Industrial Engineering at Donghai University in Taichung (Taiwan), and Feng Xiaoyun works in the Institute for Economic Research on the Special Administrative Regions of Hong Kong and Macao, at Jinan University, Canton. Both are graduates of Kobe University in Japan and, with the help of their doctoral students, have brought together three years of case studies and interviews with businesses (38 firms in all) in this work. Making use of original sources, they have taken an approach which is both macro-economic in its presentation of the trends of foreign investment in China, and micro-economic in its analysis of the strategies for investment, management, and division of labour for each firm. This book has the advantage of being the fruit of a joint effort undertaken by a Taiwanese scholar and an academic from the mainland, whose complementary view of foreign businesses in China is undoubtedly less subject to partiality than if it had come purely from either side of the Strait.

In an introductory chapter, the authors give a brief history of foreign investment in China. The opening up of China to foreign companies goes back to 1978, with the implementation of economic reforms in the two provinces of Guangdong and Fujian, and the creation of the Special Economic Zones (SEZ) of Shenzhen, Zhuhai, Xiamen and Shantou. Between 1978 and 1985, Hong Kong entrepreneurs were the principal beneficiaries of this opening up holding 70% of the capital invested. Ten thousand Hong Kong firms, undergoing restructuring, came onto the Chinese market via the so-called san lai yi bu method (1). During 1985, Peking decided to extend this opening-up experiment to 14 coastal cities, which stimulated foreign investment to the tune of US$14 billion between 1985 and 1990 (2). In the 1990s, especially after Deng Xiaoping’s inspection tour of the south in 1992, the policy which aimed at transforming the centrally-planned economic system into a socialist market economy system began to be put in place. In 1992 alone, direct foreign investment reached US$10 billion. This figure went up to US$27.5 billion in 1993, US$34 billion in 1994 and $38 billion in 1995. By 1994, 206,000 foreign firms had invested in China, employing 14 million people and accounting for 37% of China’s external trade. Today, foreign firms in China come from over 130 countries. In the last ten years, 61% of capital invested is from Hong Kong, 9% from Taiwan, 8% from the United States, and 7% from Japan. Joint ventures seem to be the favoured form of investment in mainland China (around 50% of cases) with industry being the sector preferred by foreign businessmen (45.9% in 1993). Recent trends are: a rapid expansion of investment to Shanghai and the Yangzi basin, as well as the interior provinces in the north, northeast and southwest; a diversification of the sectors of foreign investment (infrastructure, energy sources and transport). Similarly, an increase in the scale of investment is noticeable (less than US$1 million prior to 1990, US$1.33 million in 1993, and US$2.45 million in 1995), as is the increasingly frequent purchasing by foreign businessmen of Chinese public companies, which are subsequently transformed and enlarged.

The book is divided into three parts devoted to Taiwanese, Japanese, and Hong Kong firms respectively . In each of these parts, after recalling the development of direct investment in mainland China by the three dragons, the authors outline the history of the implantation and investment strategy of various firms on the mainland: nine Taiwanese, 14 Japanese and 15 Hong Kong companies are analysed.

The authors highlight two main waves of investment by Taiwanese companies in mainland China. The first, roughly corresponding to the end of the 1980s, was due to businesses seeking out low production costs. The authors label it “passive delocalisation” (beidongxing chuzou: passive flow), the companies being forced to move their production offshore due to the fact that costs had become too high in Taiwan. The second wave, which appears during the 1990s, is conversely called “active delocalisation” (zhudong chuji: active attack), since it is embarked upon by firms out to conquer the Chinese market. If this distinction accounts for a real evolution, today it is tending to slacken off markedly, in so far as many firms are now placing equal importance on exports and sales to the Chinese domestic market. The authors characterise the investment of Taiwanese firms on the mainland as follows: 1) preference is given to the wholly-owned subsidiary and total control of the firm’s management; 2) whatever the initial size of the firm, there is a tendency for its production capacity in China to grow rapidly; 3) it was small and medium size businesses which started the movement, and the large firms have merely followed suit, with the result that the average size of Taiwanese investment in China, although on the increase, is still below that of other foreign firms (small and medium sized businesses take decisions quickly, whereas large conglomerates, whose schemes are also more closely controlled by the Taiwanese government, react more slowly); 4) in order to extend their sales on the domestic Chinese market, Taiwanese firms are striving both to promote their product brands, and to use a network of people, besides choosing a local representative; 5) they are moving more and more towards the domestic market (already in the 1980s, they were trying to increase their market share on the mainland); 6) they are skillful in quickly building networks of relations, but not very proficient in the use of organisations to mount pressure and obtain favours, and they are rather used to struggling along alone on the Chinese market (for instance, the enormous network of Taiwanese associations in China does not represent a real force, because their role, according to the authors, is often limited to information exchange).

To sum up, the authors describe Taiwanese firms in China as a “powerful army of ants” (mayi xiongbing) entering Chinese soil.

At the level of human resource management, the study enables a few important ideas to be drawn. The person in charge or shareholders of the parent company in Taiwan are used to personally taking control of the subsidiary on the mainland. As far as the sending across of Taiwanese executives is concerned, there is a significant turnover in the large firms, whereas the small and medium sized firms encourage their executives to take their family and settle abroad, particularly because they do not have any job to offer them on their return to the parent company. It must be said, however, that there is a trend all the same towards engaging local staff (rencai dangdihua), in order to offset the traditionally high rotation rate among Chinese employees and facilitate communication within the firm. Compared with the small to medium sized firms in Taiwan, those in mainland China are overstaffed, which raises the problem of rationalisation of the work force (some employees are idle while others are very busy). This problem is resolved in part by “binding the employees by contract” (hetong yueshu) and by introducing regulations. Finally, Taiwanese firms are trying to instill a business culture in their subsidiaires in China. Indeed, it must be said that the idea of a career plan is often missing among Chinese employees, who maintain the so-called “big rice-bowl” mentality (daguofan xintai) (3). In order to keep local executives and develop a family spirit in the firm, Taiwanese employers are counting on the example and influence of Taiwanese executives sent to the subsidiary, and on the enforcement of the slogan “respect work, enjoy work” (jingye leye).

The authors distinguish three waves of Japanese investment in China: 1984, 1988, and 1991. Between 1979 and 1995, the cumulative amount of Japanese investment amounted to US$8.8 billion (4), while the number of investment contracts signed by Japanese firms reached 10,792 (5). From 1994 on, a drop in the number of contracts can be notices, whereas the amounts invested continued to grow, signalling the arrival of large Japanese firms on the Chinese market.

The authors summarise their various remarks with an attempt to create a model for the management of the subsidiaries of Japanese firms on the mainland. They base this on two principles: 1) in order to adapt to local conditions, it is necessary to increase the “degree of localisation” (dangdihua chengdu), that is to employ more Chinese people; 2) in order to maintain the specific interests of the large international conglomerates, it is necessary to strengthen the “cohesion between subsidiaries and the parent company” (zigongsi yu mugongsi yizhixing). From those principles, they derive four models based on the type of relation between subsidiary and parent company: a) the subsidiary which obeys orders (tingming xing); b) the autonomous subsidiary (zizhu xing); c) the active subsidiary (zhudong xing); d) the vassal subsidiary (zhuhou xing). The first model describes a high degree of cohesion between subsidiary and parent company, but a weak level of localisation; the second, a weak degree of cohesion with the parent company, but a high level of localisation; the third, a high degree both of cohesion with the parent company and of localisation, and the fourth, a weak level both of cohesion with the parent company and of localisation. The authors have picked out the first three models from the Japanese firms they have studied, and list some specific characteristics for each of them. For example, the first type favours the wholly-owned subsidiary, the use of already commonplace technology, and the so-called “liang tou zai wai” method (6) (raw materials are imported from abroad, and the finished products are re-exported). The second type favours joint ventures, bolstered by a high level of confidence between Japanese and Chinese partners, the subsidiary makes flexible use of the technology of the parent company and of the skills of the local Chinese employees, and the firm is deeply rooted into the Chinese market (7). Finally, the third type, although it may also take the form of a joint venture, tends to preserve the style of management of the Japanese parent company at the same time as adjusting to local conditions. The long-term aim is, by using and training the local workforce, to break into the Chinese market.

Beyond this distinction, the authors bring out features common to all Japanese firms in China. First, the Japanese give priority to collective action. In 1972 the Sino-Japanese Economic Association (Ri Zhong jingji xiehui) was created, with the objective of promoting the exchange of economic and cultural information. It has today become the bridge between Japanese firms and the Chinese authorities, and supports the work of “(local) friendship and liaison groups among Japanese companies” (Ri shang lianyihui). These groups meet once a month, and negotiate with local administrative departments. Secondly, the Japanese encourage staff stability and favour internal promotion. They train local executives and promote seniority in the firm. Thirdly, the management of Japanese firms in China is described by the authors as being “honest” (zhengpai jingying), in so far as it is not surrounded by an atmosphere of corruption with the local bureaucracy (which, according to them, is in stark contrast to the situation of firms from Taiwan and Hong Kong). In particular, all questions relating to investment and the setting up of the business are dealt with by the above-mentioned “liaison groups”. Fourthly, the Japanese are trying to establish a business culture. For example, all Chinese executives must take Japanese courses. The aim is to prevent any embarrassing situations linked to problems of communication. Fifthly, the production of the subsidiaries of Japanese firms in China bears a Japanese hallmark. The companies take pains to send their staff to Japan on training courses, and the parent company often sends over executives to ensure the proper integration of technology, as well as the transfer of know-how. When the firm is up and running smoothly, the number of Japanese executives in the subsidiary drops progressively. Sixthly, in every subsidary small groups are set up with the responsibility of collating the opinions of everyone and of making proposals (quality circles) (8). This system seems to be very widespread and constitutes an original feature of Japanese firms on the mainland.

As we have seen, companies from Hong Kong were among the first to invest in China, starting at the end of the 1970s. Just as for Taiwan, South Korea and Singapore, Hong Kong industry first focused on the labour intensive sectors (textiles, clothes, toys, plastics), but an increase in production costs (particularly labour costs) led these economies to restructure their productive system to gear it towards more capitalistic and technological sectors. The first three dragons were helped along this path by interventionist governments and central planning specialists. Hong Kong took a different route. Benefiting from the policy of opening up begun by Peking, Hong Kong firms began to move these ageing industries offshore, and to build rear bases of production in the coastal regions of southern China. In the mid-1980s, Hong Kong regained its position as a transit port for commercial exchanges, and the services linked to trade and finance were developed in the territory. From 1992, Hong Kong investments were extended to the whole of mainland China, and were directed to real estate, finance, trade, as well as basic infrastructure for transport and energy sources. According to the authors, no less than 80% of Hong Kong companies are thought to have invested in China. In the Pearl River Delta alone there are said to be more than 30,000, with investments worth more than US$7 billion, and employing about three million people.

Following their survey, the authors bring out the following features for Hong Kong firms in China. Firstly, among the Hong Kong firms, some play a dominant role in the management of the subsidiary: either the Hong Kong partner owns the whole or the major portion of the capital, or else it is a minority shareholder, but has technology not available on the mainland. But others leave the management of the subsidiary up to the Chinese partner: this is especially the case when the capital of the Hong Kong firm includes funds from mainland China. Nonetheless, following numerous conflicts which appeared in the co-management of joint ventures, in the 1990s a system was introduced whereby the Chinese partner gave up its right to oversee the management, in exchange for a set level of profit (the authors talk about “set priced management” [chengbao jingying]). Secondly, a certain number of firms from Hong Kong, through investing on the mainland, saw their existence evolve from an “insular” (xiaodao xing) model into a “mainland” (dalu xing) one. Their scale of production, as with the spread of their brand, thus went from a regional level to a national one, and as the territory’s economy became integrated with China, Hong Kong businessmen started to become aware of their role in the economic development of China. Thirdly, the initial model of the division of labour between the parent company and the subsidiary on the mainland, which the authors call “qian dian hou chang” (at the front, the shop, at the back, the factory) (9), has also undergone a change. The system of cross-border circulation of goods, based on large quantities of materials being imported by subsidiaries in China, and large quantities of finished products exported via Hong Kong (da jin da chu), has in part turned into a system of intra-border circulation (jing nei xunhuan), according to which the client firms (providers of raw materials and purchasers of goods) also moved into China where they set up factories and trading offices. Fourthly, over the past few years, an appreciable number of Hong Kong firms have formed alliances with foreign companies to invest on the mainland. The appeal of this type of joint venture is for the foreign firm to benefit from the experience of Hong Kong people on the Chinese market, and for the Hong Kong firm to make the most of the management skills, reputation of the brand, and commercial networks of the foreign partner. Fifthly, relations between businessmen from Hong Kong and those from mainland China have evolved over the years. At the very beginning of the opening up of the Chinese economy, Hong Kong firms relied upon the system of liang tou zai wai (10), and on the inexperience and lack of knowledge of the Chinese partners concerning international markets and modern methods of management, in order to better safeguard their control over the business. For example, through the method of transfer pricing (11), they could, without the Chinese partner knowing about it, transfer abroad the profits of the subsidiary. This practice, rather widespread according to the authors, eased off at the same time as China further opened up to the outside. Today, one can even find long-term Sino-Hong Kong partnerships in high tech sectors, designed especially to show off the abilities of the mainland Chinese in the area of basic research.

In conclusion then, this work is of interest in taking case studies as raw material, in order to present the diverse investment strategies of Taiwanese, Japanese and Hong Kong firms in China. From this point of view, the authors distinguish themselves from a great many studies which are based on questionnaires sent to companies and often analyse the results from a purely statistical point of view. At the level of the history of direct investments in China, the lack of critical analysis of the figures given is perhaps to be regretted, in that the reliability of statistics is at the very least to be treated with caution. For instance, the authors pinpoint the peak of Taiwanese investment in China as being in 1993, without mentioning that in actual fact this was no more than a catching up in the reporting of firms, which were already established in China, to the Investment Commission of the Taiwanese Ministry of Economic Affairs (MOEA) (12). It would also perhaps have been worthwhile to develop further the comparative analysis of the investment strategies of firms from Taiwan, Japan and Hong Kong. It is true that the authors present a final comparative table, together with some commentary, but it is a pity that this only appears in the work in the form of a conclusion. That said, we have here an original work on the popular subject of foreign investment in China, which provides additional information on a great number of firms. However, our view is that the strategies presented need to be taken as the reflection of the diversity of firms’ approaches to the Chinese market. If without any doubt common threads can be detected running through companies from the same country, by dint of their history and culture, it seems to us that we need to bear in mind the fact that the strategy adopted by a firm is also the result of its own particular features (size, field of activity), which will guide its investment strategy. For instance, the investment strategy of a small to medium sized company from Taiwan in the footwear industry may be closer to that of a small Japanese business in the same line than to that of a Taiwanese conglomerate in the food and beverage processing industry. Thus, if a country-by-country approach is useful for understanding the various strategies adopted by companies, one should nonetheless not lose sight of economic basics.