chapter  9
26 Pages

The evolution of Chinese entrepreneurial firms: township- village enterprises revisited CH ENGGANG X U A ND XIAO BO Z HANG

Introduction Township-village enterprises (TVEs), rural “collectively owned” entrepreneurial firms, had a great impact on the rise of China in the past three decades. A large body of literature has shown that TVEs were a major engine of China’s rapid rural industrialization. TVEs also played a key role in fostering entrepreneurship and served as a major stepping-stone for institutional changes when legal protections of private property rights were not in place and the state-owned enterprises (SOEs) were slow to react to changing market demand (Weitzman and Xu 1994; Che and Qian 1998; Mukherjee and Zhang 2007). A basic feature of TVEs is the deep involvement of local governments, particularly township governments.2 At the same time, the institution of the TVE is heterogeneous. The course of TVE development did not follow a one-size-fitsall blueprint. Instead, various models of the TVE emerged and evolved in adaptation to local comparative advantage and constraints. Well known models include the southern Jiangsu (Sunan) model, the Wenzhou model in Zhejiang province, and the Guangdong model. Despite differences in details, TVEs share the following key characteristics: all were led by entrepreneurs; all had vaguely defined ownership at the incipient stage, reflecting certain institutional constraints (Weitzman and Xu 1994; Li 1996); and all had an intimate relationship with local governments (Qian and Xu 1993; Chang and Wang 1994; Che and Qian 1998). As private ownership was gradually recognized legally, TVEs lost their edge in competing with private firms. After reaching its peak in the mid-1990s, the sector phased out quickly. Concurrent with the decline of TVEs was the rise of private entrepreneurship firms. In addition to the TVEs’ legacies of breeding entrepreneurship and spreading technology know-how, there is a common key factor that was responsible for the spectacular development of the TVEs and, later, of private firms – the local governments. In fact, many of the entrepreneurship firms’ origins can be traced to TVEs as many early private firms were spun off from TVEs. In the past two decades, industrial clusters with a concentration of private entrepreneurial firms coordinated by local governments have emerged rapidly in

vast rural areas in coastal provinces. In the clusters, production processes, which are usually integrated within a single firm in developed countries, are segmented into many small “firms,” each of them narrowly specialized in one process. Designers, suppliers, manufacturers, and merchants have organized themselves into a dynamic and entrepreneurial network. Instead of vertical integration, firms in industrial clusters experience a vertical division of labor. This feature of increasing the division of labor fundamentally alters ownership, operation, coordination, finance, and production. For example, with the division of labor, capital barriers to entry have been lowered, enabling more farmers with entrepreneurial talents to participate in the production process. Although a deepening division of labor might incur a higher coordination cost among different parties involved in the transactions, the benefits of industrial clusters might make this entrepreneurial network more efficient than alternative arrangements. Unlike the TVEs, the small “firms” are privately owned. Similar to the TVE arrangement, local governments, particularly the township governments, have played a central role in facilitating development. A very interesting point here is that many of the functions of local government were transformed after the fall of the TVEs from direct control and management of TVEs to coordination and provision of public goods essential for clustered private firms. We will discuss the trade-offs posed by these institutional arrangements. The following section discusses the origin and rise of TVEs. Section 3 presents the fall of TVEs and the rise of private firms. Section 4 concludes.