Networks and norms help private firms thrive

Much has been said about China's extraordinary economic success in the past 30 years, and much research has focused on the nation's private, export-oriented manufacturers, especially in the coastal regions.

Many have noted and praised the strength and adaptability of these companies, which get little State support.

Cornell University professor Victor Nee was not the first to note that China's private economy bubbled up from below. But he raised other questions: Why did a dynamic private economy emerge from a socialist country chained by Soviet dogma? How could entrepreneurs overcome formidable barriers to entry?

Nee and his team visited more than 700 manufacturers in the Yangtze River Delta region in 2006, 2009 and again in 2012.

The study's key finding was that networks and norms are critical to understanding the success of China's private economy.

"Networks are not about guanxi, which refers to developing a patron-client relationship. A network is simply a personal connection between friends, business associates or people in the market that is based on mutual advantage," Nee told China Daily recently on the sidelines of the International Association for Chinese Management Research conference in Beijing.

The IACMR conference, a biennial academic conference, was held by the Business School of Renmin University of China.

"The network is built on direct or indirect exchanges: I may help you but expect nothing from you and do not take advantage of you. When someone else hears about it, my reputation goes up. You may work with me in the future because you trust I am a good person," he said.

He stressed this kind of reciprocity takes place not only among relatives and friends, as many observers think, but also among strangers, perhaps after meeting at a convention.

That comes to another concept: norms, or social expectations. It is not a written code of conduct but a form of "community sanction" if someone breaks it. It is much more important than laws or decrees, since people self-enforce it.

"Networks" and "norms" work extraordinarily well in the Yangtze River Delta, an area with deep-rooted business traditions and the largest industrial cluster in the country.

The concentration of businesses in the delta makes it almost impossible for an entrepreneur to avoid the web of connections.

"People talk about someone who has cheated or has been opportunistic. What we heard from so many CEOs is that reputation is so important that if you cheat once, that is it," Nee said.

These companies' strengths were sometimes displayed in a way people would not imagine. When Nee and his team visited them in the second half of 2009, they expected many of the companies they visited in 2006 might have gone bankrupt following the global financial crisis. To their great surprise, fewer than 1 percent had failed.

The reason was a highly flexible labor market. When the crisis culminated in early 2009, factory workers, mostly migrant workers, had returned to their villages because of the Spring Festival. They stayed in the villages until the economy recovered in response to a huge government stimulus that restored jobs in the cities.

Another reason, ironically, is that these companies did not have debt, essentially because they were not able to borrow from State-owned banks. They had to rely on their internal resources and network lending.

When Nee's team visited again in 2012, it found the biggest problem for companies had become a massive worker shortage. The shortage drove up wages and competition for talent.

"Small companies could not find workers, especially skilled workers. Some closed. Interestingly, it is not because they were running bad businesses but because they could not find workers," he said.

Again, adaptability, a hallmark of modern capitalism, was on display.

Some companies that had anticipated the worker shortage had automated their production lines. Those that reduced their reliance on labor were able to keep competitors at bay.