Comment: Political Risks as Perceived by Businessmen from Japan, Taiwan and South Korea in China: A Preliminary Comparison Hsin-Huang Michael Hsiao Introduction In classical foreign investment literature, political risks have not been taken as an issue for serious discussion as it was considered to be an evident and net disadvantage to engage in any direct foreign investment activity. No comparative advantage, no direct foreign investment. But when political risks are being counted into the calculation of the balance of cost-benefit or advantage-disadvantage in such an investment move, a rational choice is therefore to make effort to maximize the gains by minimizing the risks. However, most foreign investment or trade literature so far has paid very little attention to how to count the political risks into the cost factor. To a large extent, because the political risks cannot be easily quantifiable and quantified in the eyes of trade economists. It is really beyond their disciplinary boundary and even professional ability. Beyond academic writings, we also seldom encountered any historical accounts of any political risks incurred in trade or direct investments from one nation to another at political or military rivalry or confrontation. One may quickly think of the World War Two era. Under these extreme circumstances, trade or investment would be treated as the act of treason on the part of businessmen. Even under less extreme and more recent cases, we are not well informed either about trade or investment on the part of businessmen from free and democratic countries to those military-controlled dictatorial and authoritarian states in the third world after the post-war period. Certainly, acts like smuggling, illegal trade or unregistered investment are not in our research agenda. The attention here is the political risks confronted by businessmen in conducting normal trade and legal investment from democratic nations of Japan, Taiwan and South Korea to an authoritarian state of China. China is undoubtedly an anti-democracy authoritarian communist state, yet in the past twenty years, a state-dominated capitalist system was also created without proper regulation and monitor from society and market. To many critical observers, what appears to us in China now is the strange mixture of party-state-in-command communism and crony-privileged capitalism (red capitalism). Some may consider China no longer to be a communist state as its capitalist spirit has already widespread and grown. But it is an illusion of such Chinese capitalism, as the party-state has never let private economy and market self-regulate its practice, and many rising red capitalists are in fact beneficiaries of their political links to the party-state and its ruling political families. If the characterization is correct, one cannot imagine that the trade and investment environments can be properly regulated by rule of law. Under the above broader and larger political economic contexts, doing business in China can really be risky in many unthinkable ways. For that unique and complex business environment, the single discipline of economics or management studies won t be able to fulfil the challenge, sociology and political science are necessary to be brought in to tackle the most complex issues in front of us. This symposium with three case studies of business from Japan, Taiwan and South Korea of 48 Vol. 60, No. 3, July 2014
what political risks they have perceived and confronted and how they have been dealing with in order to survive and even to sustain their business endeavor in China. This concluding essay is designated to make a preliminary comparison of the three cases by providing some plausible analytical frameworks and with which the above three essays can be further appreciated and understood in a broader and comparative fashion. To start with, a few words about differences about the political situations where the business from the three countries who have been conducting their investment in China are in order. The business from Japan and South Korea regardless of their sizes, are fully under the diplomatic and political protection from their governments. But the Taiwanese business, due to its lack of formal diplomatic relations with China, they have been left outside the realm of legal and political protection from Taiwanese government. Besides, the China-Taiwan relations remain to be tense and conflictual. Under such rather odd and strange political economy context, the ways Taiwanese business manage their business and cope with their explicit and implicit political risks could therefore be quite different from those businessmen from Japan and South Korea. Moreover, it is believed that the foreign direct investment from the three countries should have included both small-medium and large business. In this symposium the authors also recognize the differences in managing and dealing with political risks by the businessmen of different sizes. However, besides the paper on Taiwan, the other two papers on Japan and South Korea have mainly focused their attention to those big business. Characterizing Taishang (Taiwanese business) in China: A Case Illustration Since the Taiwan experience is rather unique, a few more words about the Taiwanese business may be useful. The term of Taishang has been coined and created to refer to the Taiwanese business (merchant) outside Taiwan. The term has become popular after 2000 when Taiwan s overseas investment in China and Southeast Asia became evidently visible and even politically sensitive, though such transnational capital had already emerged in the early 1990s. In more than two decades, Taiwanese foreign direct investment (FDI) flows have been rapidly increasing, especially in China and Southeast Asia. By September 2014, Taishang has invested more than US$2303.4 billion overseas within which China enjoyed the lion s share of 61.37% with the total of US$1413.53 billion investment, just for the period of 1991 2014. Southeast Asia also accounted for as high as 36.31% with US$836.32 billion in total, between 1952 and 2014. The remaining 2.32% of Taiwan s transnational investment or US$53.55 billion has gone to the rest of the world market in the whole post-war era (Investment Commission, Ministry of Economic Affairs; Department of Investment Services, Ministry of Economic Affairs, 2014). As for the total number of companies, there is no accurate government statistics, only the number of approved investment case is available. In China, it is estimated that about 50,000 Taishang business units actually do business there under the management and supervision of about 400,000 Taiwanese business owners and their company managers and staff (Taigan). On the other hand, in Southeast Asia, there are about 10,000 Taishang companies there owned and managed by more than 250,000 Taiwanese bosses and their managers. Concerning Taishang s business practice and managerial styles, available evidence has demonstrated the following major features in Southeast in particular. As known publicly, the most important reason for some companies to move abroad was the need to secure cheap labor followed by low cost of land and relaxed environmental regulations. Once Taishang moved to Southeast Asia, the first strategy to take was then to persuade suppliers Comment 49
in the same production network in Taiwan to move to the same region as well so as to allow them to remain competitive (Jou and Chen, 2002). The seemingly new production networks have, in fact, been transplanted directly original production networks in Taiwan. A sort of enclave network was established among Taishang, perpetuating the past business experiences and reinforcing Taiwanese managerial cultural affinity. This group of new Taishang rarely cooperated with indigenous Southeast Asian business to form any production network, nor did they work with those old local ethnic Chinese capitals. So it is the new kind of Taiwaneseness that has built Taishang business network in Southeast Asia, not the conventionally believed Chineseness. Such Taiwan connection has been also observed among Taishang in China. The second unique feature of Taishang production relations has been to utilize the local ethnic Chinese and their relatives, friends, or customers to help Taishang mediate their initial investment, handle official documents, deal with local bureaucracy, and even manage the company and local labors. So a rather different kind of ethnic mobilization was employed by Taishang in that local ethnic Chinese professional-managerial class rather than ethnic Chinese business was effectively mobilized. And the third distinct characteristic of Taishang s labor management has been its authoritarian labor control practices. Taishang in Southeast Asia even preferred to hire cross-border migrant workers who were more subordinated to coercive discipline means (cf. Hsiao, Kung, and Wang, 2010) Without the proper and effective legal protections provided by the Taiwan government in many of the host countries, Taishang s political position has been rather vulnerable. They have to find out their own personal and back door strategies to either enhance or defend their business interest and sometimes even their own personal safety. Political risks faced by China s Taishang are more severe and dramatic. Taishang has to develop a localized, and even personalized, partnership with different levels of governmental bureaucrats in order to safely engage in business practice. The small and medium Taishang usually dealt with the lower level of local city-county government officials, while the larger Taishang would go to the higher central government leaders to seek political patronage. Such unique political connection between Taishang and individual officials is something other foreign multinationals cannot develop, and it was gift exchange and guanxi building in nature (Hsing, 1998). It was further discovered that Taishang was regarded as an asset to the local political economy and even a resource for particular local governmental officials personal fortunes (ee, 2012). Moreover, the smaller Taishang has become less privileged in the eyes of local government officials and more vulnerable in facing the unexpected political risks. As expected, though Taishang has organized their own Taishang Associations at different levels and in many localities, these associations are in fact weak in organizational effectiveness and quite restricted in all aspects in dealing with business-government relations under the present China s authoritarian political rule (in and Keng, 2012). To a great extent, most Taishang Associations are even under the political control of a special China s government agency Taiwan Affairs Office at all levels. In no way, those Taishang Associations can function like autonomous civil society organizations to protect Taishang s business and legal interest, much less balance the current unequal power relations between them and China s authoritarian state. A Comparative Typology of Political Risks Facing Foreign Businessmen in China Political risks can be conceptualized in both macro and micro perspectives. The existence or absence of macro political risks can refer to how China market is being perceived in the international economic systems. To some countries and their business circles, the rise of China 50 Vol. 60, No. 3, July 2014
means an emerging opportunity for them to get associated with and even try to benefit from such association and engagement. To others, however, China s rise may present to be an emerging threat in both economic and political terms and they become very cautious and guarded about any China connection. It can logically predict to observe more business contacts with and direct investment in China when China is being seen as an economic profit-making market to make profit from. On the other hand, if China is being witnessed as a political threat-generating system, any direct business contact will be conducted with great caution and concerns. From the papers presented here, to many South Korea big businessmen, China has largely been viewed as good economic opportunities to be seized, though in recent years, they have become more and more conscious about the growing political uncertainties in China. To many Japanese businessmen of large or small alike, the image of China has been greatly shifted from economic opportunities to political risks. Investment in China from Japanese business has also been changed from the act of diplomacy of friendship to that of business with danger over the past thirty years. Finally, to Taishang, China has long been conceived to be sources of both opportunities and risks all along since 1990s. It was especially true to those small and medium Taishang when they made decision to move into China market. Under the contrasting opportunity vs. threat macro perspectives above, the businessmen from the three countries have been acting differently in their business making and risking coping. Another macro perspective on the sources of political risks facing businessmen in China lies in its very nature of centralized-communist-authoritarian political control over economic and business affairs. Such nature appears to be unpredictable and non-transparent to all foreign business in China. It is the primary source of political risks for doing business. In the three cases under investigation here, all businessmen from Japan, Taiwan and South Korea have definitely sensed such authoritarian political systems under which they need to cope with, and that certainly has made them uncomfortable and sometimes stressful in doing business in China. However, to some big Korean business representatives, they seem to be confident in managing by simply ignoring it. To Japanese businessmen, the biggest political risk in facing the authoritarian China has been its never-forgotten collective hatred toward Japan which is still held by communist Chinese governmental officials. Such government s resentment toward Japan can be easily mobilized by the government into mass anti-japanese business campaign and riot. To Taiwanese businessmen, on the other hand, China s communist authoritarian rule reminded them of their past encounter with KMT back in Taiwan in the past. So, put their heads down as well as keeping their mouths shut is seen to be the critical survival and ritualistic game. But the fear and worry about the big brother watching and China s united front warfare targeting at them can anytime intrude into their business practices. The first micro source of political risks facing foreign business in China should be its somehow unregulated bureaucratic-administration-legal environments and their many incomprehensible and unaccountable regulations or practices. To those large businesses from the three countries, these issues such as customs, tax action and workers social insurances regulation probably can be more easily resolved by their concerned personnel staff. So they may not appear to be much a problem to the big businessmen. But to those small and medium businessmen, bureaucratic red tapes and local government charges and levies could cause big troubles to their business survival. So in this regard, size of business matters more than the origins of business. The second micro sources of possible and inherent political risks come from the managerial issues such as labor disputes, environmental regulations and community relations. The various magnitudes of these risks can vary from one locality to the other. And they can also be caused by special and accidental conditions or events, though in some cases, such risks could also be derived from the above macro political settings such as the tensions between Japan and China or between Taiwan and China. Furthermore, the faced managerial risks have been heard more Comment 51
Table 1 Comparative Analytical Scheme of Political Risks Perceived by Foreign Businessmen in China Macro Micro IPE PS BAR MI GP Japan S. Korea Taiwan IPE: International Political Economy PS: Political Systems BAR: Bureaucratic-Administrative Regulations MI: Managerial Issues GP: Guanxi Politics : arge Business : Small-Medium Business among Taiwanese businessmen than those from Japan and South Korea. The last micro level political risk issue has something to do with so called guanxi politics such as the calculated cultivation of interpersonal connection with the central and local government officials in China. In many cases, businessmen from the three countries all expressed to have encountered with the unspoken rules and even learned how to deal with the risks by playing games to go along. It is especially crucial to Taishang business simply due to the unique political situation they are in. Based upon the above illustrations drawn from the observations made in the above case studies on what and how the large and small-medium businessmen from Japan, Taiwan and South Korea have confronted with related political risks in making investment and conducting business in China, a preliminary scheme for further comparative analysis can be presented in Table 1. A Comparative Typology of Coping Strategies to Political Risks by Foreign Businessmen in China In general terms, foreign businessmen in China in facing the above many political risks can take the following two rational options. The first option is to find solutions to cope with the specific risks and to stay in business. The second one is to move away from the current business endeavor by not to deal with the particular risks in question. In taking the first option, there are also two strategies to choose, either by means of formal/official ways to resolve or by informal/ personal approaches to take care of political risks. Moreover, there also exist three possible ways to exit from the existing business practice, either to close the business and move back home, or to move to China s inland, and the last one is to transfer the business to the third country, the most likely site will be in Southeast Asia. Drawn from the above discussions in the three case studies, the following general observations seem to be reasonable. The Japanese and South Korean businessmen of large and smallmedium sizes alike tend to opt for formal and official strategies to cope with those confronting risks. The Taishang seem to be forced to take informal and personal strategies to resolve the troubles, problems and risks facing them. Furthermore, all businessmen from Japan, South Korea and Taiwan have also been, in recent years, choosing to withdraw some of their endeavors from the current investment and business making, for various reasons. Some have moved back to their home countries, some have moved to other localities in China s inland, and some 52 Vol. 60, No. 3, July 2014
Table 2 Comparative Analytical Scheme of Coping Strategies by Foreign Businessmen in China Japan S. Korea Taiwan To stay To withdraw Formal Informal Move back Move to inland China Transfer to the third country others have even transferred their business practices to Southeast Asian countries. Table 2 presents such comparative analytical scheme for further illustrations of the various coping strategies adopted by Japanese, South Korean and Taiwanese businessmen. Concluding Remark Included in this symposium are three featured papers dealing with different aspects of political risks as perceived and confronted by Japanese, Taiwanese and South Korean businessmen in China. Shigeto Sonoda s paper traces the past thirty year historical development of Japanese multinationals in China, its investment politics, FDI pattern, corporate attitude changes toward China market opportunities, and finally their changing perception of political risks in doing business in China. Joon-Shik Park s piece focuses on the perceptions of big South Korean business toward the rise of China s market opportunity and its macro and micro political risks. These two papers have mainly targeted at the big business from Japan and South Korea investing in China, and less about the small and medium business aspect. The third article by Chih-Jou Jay Chen, on the other hand, has covered both sizes of business from Taiwan on their respective strategies to cope with their political risks. The three papers have also attempted to assess the success and failure of coping strategies toward the respective political risks faced by business from Japan, Taiwan and South Korea. They do a good job in mapping the sources of and responses to political risks of businessmen from the three East Asian countries. It is important to note that the stories and analyses provided by the above three papers have not filled all cells as indicated in Tables 1 and 2. Some blanks are still to be completed by further research findings. Finally, it is interesting to characterize the general mindset of foreign business from Japan, South Korea and Taiwan toward China s investment market and its related political risks. The Japanese businessmen have been becoming more and more watchful in their attitudes toward doing business in China as they have confronted with increasing threats caused by the mobilized collective anti-japanese sentiment. To many South Korean businessmen, especially those big corporation CEOs, China is still a land of opportunities and they tend to be ambivalent toward the incurred political risks. Finally, there is a dividing feeling and response held by Taiwanese businessmen between big and small and medium sized enterprises toward China s market and its political risks. The Taiwanese big businessmen are generally hopeful about China s investment environment and they are confident in taking care of emerging political risks by means of formal and informal coping strategies. But to many Taiwanese small and medium businessmen, China has appeared to be an unpredictable political system and an uncertain investment market and they have become much more careful and even pessimistic about doing business there. Comment 53
References Department of Investment Services, Ministry of Economic Affairs (2014), http://www.dois.moea.gov.tw/main. asp Hsiao, Hsin-Huang Michael, I-Chun Kung and Hong-Zen Wang (2010), Taishang: A Different kind of Ethnic Chinese Business in Southeast Asia in Chu Yin-Wah ed. Chinese Capitalisms: Historical Emergence and Political Implications, New York: Palgrave Macmillan, pp. 156 175. Hsing, You-tien (1998), Making Capitalism in China: the Taiwan Connection, New York: Oxford University Press. Investment Commission, Ministry of Economic Affairs (2014), http://www.moeaic.gov.tw/ Jou, Sue-Ching and Dung-Sheng Chen (2002), atecomer s Globalization: Taiwan s Experiences in FDI and Reproduction of Territorial Production Networks in Southeast Asia (in Chinese) in Hsin-Huang Michael Hsiao, Hong-Zen Wang, and I-Chun Kung eds. Taishang in Southeast Asia: Network, Identity and Globalization, Taipei: Center for Asia-Pacific Area Studies, Academia Sinica. pp. 33 94. ee, Chun-Yi (2012), Taishang and China s ocal Government: Swing between Dependence and Self- Governance in Keng Shu, Gunter Schubert, and Ruei-Hua in eds. Taishang Studies, Taipei: Wu Nan, pp. 243 269. in, Tuei-Hua and Shu Keng (2012), Voluntary Associations and Civil Society: Taishang, Associations in China in Taishang Studies, op. cit., pp. 189 241. Institute of Sociology, Academia Sinica, and College of Hakka Studies, National Central University, Taiwan 54 Vol. 60, No. 3, July 2014