Building a Harmonious Entrepreneurial Ecology: An Understanding Based on Emerging China Experience

Network of Asia-Pacific Schools and Institutes of Public Administration and Governance (NAPSIPAG) Annual Conference 2005 Beijing, PRC, 5-7 December 2005 Theme: The Role of Public Administration in Building a Harmonious Society Workshop on Innovations in Governance and Public Service to Achieve a Harmonious Society Building a Harmonious Entrepreneurial Ecology: An Understanding Based on Emerging China Experience Li Guojun Chancellor for Academic Affairs, Chongqing Administration College 160# YuZhou Road, Chongqing, China, 400041, ligj2005@yahoo.com.cn 1

Abstract: Starting from China s reform and opening, especially after the goal system of economic reform was identified as constructing socialism market system in 1992, building an attracting entrepreneurial ecology become an overwhelming task for local governments to advance social-economic development. Entrepreneurial intensity according to the report of GEM (Global Entrepreneurship Monitor) 2004 is comparatively high. However, renovating entrepreneurial ecology building for a sustainable, all-round, and people-centered one is crucial now to meet the new approaches of harmonious society and scientific development. Based on the review of entrepreneurial ecology evolution, and the integration of entrepreneurial ecology frameworks and empirical evidences in China, a construct of building harmonious entrepreneurial ecology, including 4 aspects of ecological justice, ecological support, ecological cost and ecological modeling, is came up with here to understand the emerging standard stage. Key Words: Entrepreneurship Entrepreneurial Ecology China Experience 1.Entrepreneurship evolution in China Entrepreneurship research is an emerging field that gradually integrates multiple disciplines. Low and MacMillan (1988) defined entrepreneurship as the creation of new enterprise and proposed that entrepreneurship research seek to explain and facilitate the role of new enterprise in furthering economic progress. According to this definition we can say China s entrepreneurial activities mainly start at the end of 1970s, stepping with China s reform and opening that were initiated in December 1978 at the Third Plenary Session of the Eleventh National Congress of the Communist Party of China (CPC). Generally speaking, the evolution of entrepreneurship can be divided into three stages in the past 27 years since then. The initiating stage covered from 1978 to 1984. Before the reforms, almost all of China's enterprises were uniformly of the ownership by the whole people, that is, they were state-owned and state run. A small number of collectively owned enterprises did exist, but their managerial system was not essentially different from that of state-owned enterprises. Enterprises of any other ownership were non-existent at all. State-owned enterprises are not enterprises in the real sense, but are administrative institutions under the control of the Party and the government. These so-called "enterprises" are merely "production units" that are neither independent nor creative. Starting from such basic reality, on the one hand, the government put forward the idea of "delegating power and sharing profits" with enterprises for carrying out reforms, on the other hand, household contract responsibility system with remuneration linked to output was gradually established in the countryside. So the responsibilities and rights of the State, enterprises, and farmer respectively are confirmed in the form of an economic responsibility system, allowing enterprises and farmers to posses a certain amount of financial resources and economical benefits at its own disposal. In October 1984, the Third Plenary Meeting of the Twelfth National Congress of the CPC passed the Resolution on Reforming the Economic system, which called for "the whole people, collectives and individuals to go all out", and encouraged all sectors of the economy, whether owned by the whole people, the collectives or individuals, or with foreign funds, to cooperate with each other by means of establishing contractual joint-ventures, equity joint-ventures or associations. Small state-red enterprises were allowed to be "let out" or "contracted" to collective-or 2

individually-owned enterprises. During this stage, there were 4 different entrepreneurial models arose in the eastern and southern China: WenZhou model styled by farmers with limited-resources rushing market (Fei Xiaotong,1986; Shi Jinchuan et al,2002), SuNan model based on villages and towns-owned enterprises tradition and technology assistant from Shanghai industry(fei Xiaotong,1983), ZhuJiang and JinJiang models benefited from oversea resources(gong Weibin, 2000; Xie Jian,2002). The Exploring Stage covered from 1985 to 1991. Beginning from the Third Plenary Session of the Twelfth National Congress of the CPC, the central emphasis for reforming China's economy system was shifted from rural areas to urban areas, and the reform of state-owned enterprises was identified as the central link in the reforms. During this period, the most prominent aspect of reforms in state-owned enterprises was the distinguishing of government and enterprise roles, and appropriate separation of the right to own and the right to run. The main measures for achieving this end were to promote the responsibility system of contracted operation, and to implement the system of leased operation in respect of some small state-owned enterprises. In 1987, the Thirteenth National Congress of the CPC further proposed that the joint-stock system as one of the forms for organizing properties might be tried out. The property rights of small state-owned enterprises may be transferred to collectives or individuals against remuneration. In December 1986, the Standing Committee of the Sixth National Congress passed the Enterprise Bankruptcy Law (Trial), which stipulates that enterprises in insolvency may apply for bankruptcy. In April 1988, the First Session of the Seventh National People's Congress passed the Enterprise Law. This is the first code law for state-owned enterprises since the funding of the People's Republic of China. In addition, policies, rules and regulations for protecting the non-state owned sector such as the Interim Regulations for the Administration of Urban and Rural Individual Industrial and Commercial Businesses, the Law of Foreign Invested Enterprises and the Provisional Regulations of Private Enterprises were successively promulgated, providing legal guaranty for the development of the non-state owned sector. The non-state owned sector made breakthrough advances in this period. Between the years from 1985 to 1991, the average annual growth rate of output by the state-owned industry was only 8.3 percent, while that of the non-state owned industry was as high as 23.9 percent. Compared with state-owned enterprises, non-state owned enterprises were on the whole independent market entities, possessing relatively independent market rights and pursuing relatively independent economic benefits. In addition, there was ZhongGuanCun entrepreneurial model arose in Beijing, which is the represent of technology entrepreneurship (Xie Jian, 2002). The expanding stage covered from 1992 to the present. In November 1993, the Third Plenary Session of the Fourteenth National Congress of the CPC passed the Decision on Several Issues for Establishing a Socialist Market Economy System by the Central Committee of the CPC, which stated that the "market was to play a fundamental role concerning the resources under the macro control by the State", that "the State was to create the conditions for all sectors of the economy to participate in the market competition on an equal footing, and enterprises from all sectors would be treated indiscriminately". In 1997, the Fifteenth National Congress of the CPC further stated that "the non-public sector is an important component part of this country's socialist market economy". This statement was incorporated into the 3

Constitution amended in 1999. From then on, the status and the role of the non-state owned sector, especially the private sector, in China's economic structure were officially confirmed. In 2003, The Third Plenary Session of the 16th Central Committee of the Chinese Communist Party made breakthroughs in non-state economic theory and policies, deciding to actively guide the development of the private sector. Constitution amended in 2004 definitized the lawful private property of citizens is inviolable. In 2005, The State Administration of Industry and Commerce reformed its registration system to better serve private enterprises. In addition, the transformation of state-owned enterprises aimed to establishing modern enterprise system was implemented in 1994. While the transformation of state-owned enterprises at all levels was continuously deepened in all dimensions, a mechanism for state-owned enterprises to exit was gradually taking shape. According to a survey conducted in 2002, 25.8% of private enterprises were transformed from state-owned enterprises. The confirmation and protection of the market entity status of the non-state owned sector by the policies and Laws of the State brought about the rapid development of the non-state owned sector. Entrepreneurial activities are expanding allover China, even including homing entrepreneurship (Wang Xiyu et al, 2003). To sum up, while China's reforms and development enterprises have realized transition to market economy, entrepreneurship has been continuously on the rise. Taking the SMEs for example, According to the statistics provided by the departments in charge of SMEs, there are around 10 million SMEs(with state owned SMEs of around 14.8% of the total) in 2004, accounting for 99% of the country s total registered enterprises and employing 75% of the labour force, 60% of the national industrial output value and 40% of the national revenue same to have come from the SMEs. 2. Entrepreneurial ecology: features and problems Entrepreneurial ecology refers integrated entrepreneurial environment. In China, it normally refers to the concept of development environment. Those words firstly were spoken by local administrators in their practice to further local economic development, and then became an approach to deepen reform and advance development. The Decision on Several Issues for Consummating a Socialist Market Economy System passed in 2003 by the Third Plenary Session of the 16th Central Committee of the Chinese Communist Party put forward that transforming the roles of government to serve market agents and create good development environment. The Decision on Strengthening the Party's Governing Capacity passed in 2004 by the Fourth Plenary Session of the 16th Central Committee of the CPC pointed out that the Party s governing capacity firstly embodies the Party s ability to leading development, and one of the most important aspects to leading development is to serve market agents and build good development environment. In this paper we use entrepreneurial environment, development environment, and entrepreneurial ecology in synonymous way. Gnyamali & Fogel(1994) defined an entrepreneurial environment as a combination of factors that play a role in the development of entrepreneurship. First, it refers to the overall economic, socio-cultural, and political factors that influence people s willingness and ability to undertake entrepreneurial activities. Second, it refers to the availability of assistance and support services that facilitate the start-up process. To use this definition to view the evolution of entrepreneurial ecology in China we got the major stylized facts as follows. Firstly, the widening of entrepreneurship is related to the Party's ideological and theoretical building. During the era of the planned economy, private property was viewed as 4

the root of all evil. But under the leadership of Deng Xiaoping beginning in the late 1970s, the government put forward a plan to develop private companies in order to adapt to the demands of people pursuing personal wealth. Indeed these policies have become a driving force behind China's economic growth. On the macro level, Transition from a planned economy to a market economy through the dual-track system is the most fundamental characteristic of Chinese economic system reform--developing the elements (or sectors) of a new system side by side with the old unreformed system, and then, if things go well, reforming the old system in line with the positive developments emerging from the new components of the economy. This reform strategy may not be justified by eliminating efficiency loss or minimizing the implementation costs of the reform, but may be rationalized by reducing the costs of political conflict the reform may generate in the real world. On the micro level, ownership reform is at the core of economic system reform in China. For example the State Statistical Office used to present data for seven different classes of enterprise ownership: individual ownership, private ownership, foreign ownership, joint ownership, shareholding corporations, collective ownership, and state ownership. Theoretically China's economic reform cannot completely succeed until major reform of the ownership structure is undertaken in the state sector, and the sooner and more aggressively actions are taken to improve conditions for conducting ownership reform, the lower the costs of the transition. However, ownership reform will not only encounter strong resistance but also be technically difficult to implement. Even today the ownership reform of state-owned enterprises is still evoking extensively discussion but with less insightful measures (Lang Xianping et al,2004). Ideological and theoretical building is interacting with policy practices, which are directly driving entrepreneurial activities. So there are uneven features in term of entrepreneurial opportunities. Among those typical models of entrepreneurship, ZhuJiang, ZhongGuanCun, and JinJiang, even SuNan models are opportunity-driving based on favorite policies or resources accessibility, with WenZhou model as an exception of necessity entrepreneurship drove by survivorship. In general the socialist planned economy was a quiet life under which everything seemed "fixed." Decision rights were concentrated in hands of a small group of people, the majority of people did not need make many choices for themselves, and even for those who were decision-makers, most of their work was routine since the environment was stable. There was little need for initiative, creativity, and innovation. For people who have lived for decades under such a system, it is not easy for them to adjust to a market economy where everyone needs to make his own choice in the face of an uncertain environment. It takes time for them to learn how to deal with price fluctuation, uncertainty, multiple-choices, and competition. It takes time for an entrepreneurial society to emerge (Drucker, 1984), and it also is promising in today and tomorrow China. Secondly, entrepreneurial ecology has been dominated by local government. China's economic reform has been an experimental process (Zhang Weiying et al, 2005), which is dominated by local levels. It seems hard to find a single reform program which has been implemented without experiment first. Reform experiments have been either region-based (typically city-based), or sector-based, or even firm-based. Typically a particular reform program is first tried in selected regions, sectors or enterprises. If success, it is implemented in other regions, sectors or enterprises; if a failure, it is stopped. Experiment is used not only for single reform programs, but also for "comprehensive reform program." Decentralization of 5

reform governance was one of the central leaders' styles of governing the reform (Shi et al, 1993). So government entrepreneurship at local even grass-roots is an important feature to impel reform process. Many reform programs have been initiated by local governments and even by the grass-roots, and then recognized and adopted as national policies by the central government, such as agriculture reform in Anhui Province, industry reform in Sichuan Province, and stock exchanges in Shainghai and Shenzhen. In fact, local governments and grass-roots are one of the important inner-system forces to fight against more conservative central ministerial bureaucrats. This does not necessarily mean that local governments' movement is against the central leaders' will, but more advantages in term of feasibility to practice and influences to overall cause. Much of the planning system was dismantled by local governments. Many local governments have been far ahead their national leaders in reforming economy. The whole reform has been a combination of top-to-bottom and bottom-to-top process (Chen, et al, 1992). Local governments entrepreneurial endeavors have been harvesting comprehensive advances to some extent in both economic development and public administration reform. On the one hand local economic development is the main force to push local administration reform owing to the political reform in depth dimensions is lagging to economic reform on overall. On the other hand the local administrators have strong development impulses owing to the performance appraisal is mainly based GDP. Taking Chongqing for example, this young municipality is directly under central government in 1997. From then on Chongqing is struggling on the way to the economic center of the up reach of Yangtze Rive. In 2000 Chongqing unfolded comprehensive renovation activity for development environment aimed to become one of the best areas in west China in term of entrepreneurial ecology by means of efforts from everybody, anytime, each action, and everywhere in 3 years. So city state planed measures called 10 passels in each year. In 2002 the 10 passels included to frame a set of measures coping with WTO entry, to study out a set of consumption-boosting policies, to criterion a series of administrating actions, to beat a set of fake-makers, to houseclean a part of tour products, to renovate a set of farm products trade, to form a set of speciality markets, to eliminate a set of hidden troubles of production safety, to clear up a set of fountainheads of pollution, and to brush up a set of units and areas as windows. For the growth pressures and tour of duty, however, local governments may take some shortsighted actions, such as focused on land or mine exploitation, oriented to revenue maximization, etc. Based on the differences of resource endowments and policy opportunities among local levels, entrepreneurial activities have exhibited great regional variations. Those are related to the last and also are a mirror of the evolutionary process in spatial dimension. Some regions have been running far ahead other regions. In the later 1980s, some coastal areas such as Guangdong Province became quasi-market economies, while most of inland areas were still planning-dominant. The spatial picture of entrepreneurship is similar to the spatial picture of economic development. Taking the private owned enterprises as example, there are 3.44 million in 2004, and 8 provinces or municipalities of Jiangsu, Guangdong, Zhejiang, Shanghai, Shandong, Beijing, Liaoning, and Sichuan, each which has private owned enterprises more than 1 million, account for 63.24% of the total. And the contribution of the 8 provinces or municipalities to GDP is more than half. As for the entrepreneurs, Zhang Yuli et al(2003) pointed out that the motives of entrepreneurs from coastal areas are opportunity-focused, 6

while their counterparts from the west China are necessity-drove. Thirdly, the entrepreneurial ecology is now facing plentiful problems. The reform with an approach of groping for stones to cross the river is inevitable to proceed with problems by problems. Several surveys conducted in the latest years on development profiles of private owned enterprises described the main problems of entrepreneurial ecology and its evolution. In 2001 Basic Units Census indicated that the private owned enterprises faced such problems as to unify market entry criterion, to fair taxes and fees, to regulate government-enterprise contract, to provide finance service and assurance for credit, to make policy procedures open, stable, and consecutive, to building credit system, and to safeguard property right. In 2002 a survey organized by the United Front Work Department of Central Committee of CPC, the All-China Federation of Industry & Commerce, and the Society of Private Economy Research opened up that social security, industry entry, fair competition, nonstandard fees, finance accessibility, and incapability to outstretch oversea markets are main problems for private-owned enterprises development, and that exchange less-honesty formed heavy barriers to develop. In 2003 China Entrepreneur Survey System recognized that entrepreneurs running the private owned enterprises pay much attention to bureaucratic procedures predigesting, administrating by law, opening policy procedures, reform on finance system, untangling financing barriers, breaking through monopoly bulwark, and reform on earnings tax system. In 2004 the Corporation Survey Group under the State Statistic Office revealed that there were 5 problems of financing inaccessibility, self-discipline of public servants, warps during policy implementing, social security system, and less-educated human resources for non-stated enterprises to need settled. 3. Building entrepreneurial ecology: An emerging understanding Although the concept of development environment arose in the special background of China transition, the study on entrepreneurial ecology can be dated back the entrepreneur research in West. Pennings(1982,1983) investigated how human ecology and urban life quality influence organizational birth frequencies variations among 70 urban-metropolitan areas of the United States. Specht (1993) combined two streams of research and theory development, resource dependence and population ecology, to develop a model of relationship between organization formation and environmental munificence and carrying capacity. Environmental munificence refers to the degree of resource abundance. Carrying capacity is related to the density or number of organizations competing for the same resources in a niche. So Specht (1993) came up with a 5 dimensions construct. Social dimension refers to social networks, support of social-political elites, and cultural acceptance. Economic dimension refers to capital availability, aggregate economic indicators, unemployment, etc. political dimension refers to support of government. Infrastructure dimension refers to quality of life, education system, transportation and communication system, nature of local labor market, information accessibility, etc. market emergence dimension refers to niche emergence and technological innovation. Gnyawali & Fogel (1994) developed a framework to understand the environmental conditions conducive for entrepreneurship. This framework consists of 5 dimensions that link respectively to the core elements of new venture creation, such as developing opportunities, enhancing entrepreneurial propensity, and promoting entrepreneurial ability. The 5 dimensions include government policies and procedures, social-economic conditions, entrepreneurial and business skills, finance support and 7

non-finance support. Armington & Acs (2002) examined the role of human capital, training and education, and entrepreneurial environment on new firm formation in 394 Labor Market Areas of the United Sates, as a result variations in firm birth rates were explained by industrial density, population and income growth. They think such variables based new growth theory as the thick of labour markets and localized knowledge spillovers are the determinants of new firm formation. Those different frameworks provide us with an integrated but multi-prospects understanding to entrepreneurship. Li Shaomin et al (2004) used data covering 30 provinces, 566 cities, 2612 counties and over 20000 townships in China to empirically analyze the variations of the ownership structure of new firms. Their evidences indicated: 1) the higher the level of development of a legal and physical infrastructure in a region, the higher the frequency of privatization among newly formed enterprises in the region. A more developed physical infrastructure, such as road, transportation, power supply and communication networks, will facilitate business operation and enhance businesses ability to compete in the market and be profitable. The establishment of a better legal system, including an independent judiciary and the supremacy of common law courts, substantially improves the security of property rights and lowers transaction cost. 2) The higher the degree of government intervention in the region s economy and the higher the opportunities for rent seeking in the region, the lower the frequency of privatization among newly formed enterprises. The opportunistic behavior of government and its preferential treatment toward different types of businesses tends to discourage the birth rate of private firms. 3) The lower the level of government holding the responsibility for the approval and control of new establishments, the higher the frequency of privatization among newly formed enterprises. The government level to which an enterprise reports affects enterprise s competitive position. 4) The higher the degree of privatization within a region, in the neighboring regions or within the industrial sector, the higher the frequency of privatization among newly formed enterprises. The frequency and salience of a particular behavioral pattern within a region are to have a strong powerful impact on imitation. Table 1: 4 aspects to understand today s entrepreneurial ecology building in China Entrepreneurial ecology Respectively main contents Ecological justice equal treatment, procedure justice, interaction justice, etc. Ecological support Physical infrastructure, social-economic, ability, information, etc. Ecological cost Economic cost, institutional cost, and moral cost, etc. Ecological modeling Entrepreneurial atmosphere, models to learn, cultural acceptance, etc. To integrate those problems the above mentioned, those understanding frameworks, and empirical research evidences, we can construct 4 salient aspects to understand today s building of entrepreneurial ecology as table 1 shows. Social justice is now an important challenge in China owing to the big differences between city and countryside, between the East and West China, and among classes in term of income. The latest Some Opinions Regarding the State Council's Encouragement and Support of the Development of the Non-state-owned Economy issued by the State Council has recognized the need to provide the non-state-owned economy with an environment of competing on the equal footing; a system based on the rule of law; and a policy and market environment and policy measures that encourage, support and guide the development of the non-state-owned economy. Since 8

private owned companies have faced discrimination in various areas, it is significant that the government has made clear its intention to grant them national treatment. Ecological supports are which entrepreneurs have been striving for bit by bit and never enough. However the ways to support should change somehow for support is firstly dominated by justice. Ecological cost includes not only economic cost, but also institutional cost and moral cost. After 1992, local government mainly paid more attention to the hard environment building, and focused on economic cost, for example to sell land resource by less-valued price competitively each other in order to attract capital investment. Today government s entrepreneurial ecology building shall put more efforts to the soft and deeper part. Ecological modeling is the basic way for entrepreneur to learn socially and extend entrepreneurial activities. Entrepreneurship is crucial for efficiency of a market economy. Entrepreneurship is also a basic precondition of economic growth (Piazza-Georgi, 2002). After 27 years of reform China's private sector economy is becoming a force equal to that of the state-owned economy. Future economic development in China depends on the dissolution of this dual economic structure in which a vibrant private sector coexists with a lethargic state-owned sector. As Premier Wen Jiabao (2005) asserted when discussing Some Opinions Regarding the State Council's Encouragement and Support of the Development of the Non-state-owned Economy, Not only does encouraging, supporting and guiding the development of the non-state-owned economy help promote the economic prosperity in urban and rural areas and increase fiscal revenue, it is also beneficial in creating new jobs, bettering the lives of the people, improving the economic structure and accelerating economic growth. It also has important strategic significance in realizing an all-round well-off society and in pushing forward the process of socialist modernization. The entrepreneurship featured by non-state-owned economy will emerges with stronger intensity. Hu Jintao (2005) put forward the harmonious society, which is featured by democracy and nomocracy, justice and equity, honesty and fraternity, energy and vitality, stability and orderliness, and concordance between human and nature, as the social target to build the socialism with China style. To realize the entrepreneurial ecology building related to the China s reform, which by its nature is a learning-by-doing process, the ongoing process outstretches its fourth stage --standard stage. References are available on request. 9