CBN and FDI Outflows to China

CBN and FDI Outflows to China Introduction and Research Problem Since its economic opening in 1979, China has become one of the worlds largest recipients of foreign direct investment (FDI). In 2007, inflows to China totalled over US$82 billion, bringing Chinas cumulative FDI to almost US$700 billion for the period 1979 to 2007 (CSB 2007). But what has particularly captured both academic and popular attention is the extent to which Chinas massive levels of FDI may be attributable to diasporic ethnic Chinese capital, what Harvard academic John Kao famously termed the Chinese commonwealth (Kao 1993: 24). It has often been asserted that some two-thirds of all the foreign investment that has poured into China originated from ethnic Chinese living outside of China (e.g., Wolf 2002: 134). This unprecedented level of intra-ethnic investment presents something of a headache to mainstream FDI theories, which, at the level of the firm, tend to explain internationalisation as an incremental process resulting from, variously, the pursuit of market power, an internalising of technological improvements, and the accumulation of foreign market knowledge and experience. Protesting against this type of theorizing as under-socialised and Western-centric, many Asia scholars (who are frequently also Asian) developed an alternative account drawn upon insights from network theory and some sociological studies of Chinese firms done in the 1990s. Their account—which in this dissertation is referred to as the Chinese Capitalism corpus—spans a variety of disciplinary frameworks including anthropology, economic geography and sociology, development economics, management, and Southeast Asia Regional studies, but has at its heart the premise that ethnic Chinese enterprises domin ate the economic activity of East Asia and FDI flows into China in large part because of their ability to draw upon dense, interlinked networks of social/family/political relationships that span national boundaries. These linkages are commonly known as Chinese business networks (CBN). The assertion that ethnic Chinese engage in pervasive networking on an international scale has become so ubiquitous in popular and academic literature that it is usually considered a stylized fact. But is it true that—despite citizenship in countries with differing social structures, political economies, and histories—the Chinese diaspora is linked by transnational webs of strong personalistic ties? And have these webs actuated and facilitated massive flows of FDI to China? If so, this would suggest that ethnic Chinese business operates in a distinctive manner, that it is proper to speak of a Chinese Capitalism in which flexibly linked Chinese enterprises might even form a competitive substitute for formally structured Western and Japanese multinational enterprises (MNEs). Alternatively, it has been suggested that the concept of CBN might simply be a cultural myth which obscures, possibly exaggerates and distorts, the internationalisation of ethnic Chinese enterprises (Mackie 2000). If so—if intra-ethnic networking is ill-defined, over-stated and under-researched—what should we make of the prevalence of the CBN discourse in economics-based discipline s? And, if they are not advantaged by networks, how should mainstream FDI theories be amended to account for the fact that at the turn of the 21st century we find so many Singaporean enterprises in China? The main purpose of my research was to move this debate forward. I did so by investigating claims of extensive intra-ethnic networking among the ethnic Chinese with an eye toward enhancing mainstream internationalisation theorising. More specifically, I tested whether evidence of CBN could be found in the transnational expansion into China of randomly-selected Chinese-Singaporean small-medium-sized enterprises (SMEs). This chapter has two main objectives. The first is to present my dissertations research question and to explain why it is important. The second is to provide an overview of how and why I investigated it as I did. To this end, the following section discusses the general context of my research problem and reviews the conventional theoretical frameworks that address the phenomenon of internationalisation. Section 1.1.2 explains why it is important that claims of extensive intra-ethnic networking be investigated. Next, the focus is narrowed to the specific research question that was tested. The concept of CBN is carefully defined in Section 1.1.3, and it is conceptually operationalised into testable sub-hypotheses in Section 1.1.4. Background of CBN Claims With some US$30 billion cumulative FDI invested in China between 1979 and 2006, Singapore ranked as Chinas seventh largest source of foreign investment, after Hong Kong, Japan, the Virgin Islands, the United States, Taiwan, and South Korea (CSB, 2007). In 2006, about 70% of the Association for East Asian Nations (ASEAN) FDI originated in Singapore, and between 1990 and 2006, over 15,000 Singaporean projects were set up in China. These figures are all the more remarkable given Singapores small size. Furthermore, as significant as Singapore now is as an investor to China, it is likewise true that China has become important to Singapore as an investment market. Since 1997, China—a vacuum cleaner for foreign direct investment, as Lee Kuan Yew has frequently called it—has each year received the largest share of FDI by Singaporean entities, replacing Malaysia as Singapores top investment destination (Hamlin 2002). In 2002, FDI to China accounted for over 17% of total Singaporean investment abroad (Department of Statistics 2002). It is clear from these figures that not only are Singaporean transnational enterprises (TNEs) a significant force in the rearticulation of China into the global economy, but that China has become an important factor in the regionalisation of Singaporean firms. How can we account for this tremendous and unprecedented diasporic transnational investment? Two corpuses of literature that purportedly shed light on this phenomenon are critically examined in this dissertation: the mainstream internationalisation construct and what I refer to as the Chinese Capitalism perspective. Three strands within the mainstream internationalisation literature are highlighted in this dissertation. The first is theories of the MNE, which grew out of Stephen Hymers seminal work on post-war multinational investment in Europe and has its roots in the utilitarian tradition of classical and neo-classical economics. This corpus of literature has expanded over the decades to encompass a range of views, but at its core is some version of the argument that MNEs are enterprises which, in response to market imperfection and a desire to exploit proprietary advantages, have internalised activities by investing abroad. A distinctive sub-group of these theories has arisen in response to the spectacular increase in developing-country MNEs since the 1970s. Within Developing-Country MNE theories, the leading argument is that emerging MNEs from developing countries follow an incremental internationalisation process driven by gradual internal technological accumulation. Internationalisation Process Models is the second important strand within the mainstream approach. With its roots in behavioural theories of the firm, it offers a more explicitly dynamic approach to understanding the process by which firms engage in FDI. Though there is some variation in the explanation employed in the models—for instance, some stress learning and others focus on technological accumulation—and though the process is variously described as cyclic, stage-based, or evolutionary, a key premise is that internationalisation is incremental by nature, as the firm acquires knowledge necessary for further internationalisation. A third major strand within the mainstream approach has explicitly incorporated the concept of network into internationalisation theorisations. It is important to note the schism in the network literature between viewing networks as a form of governance structure versus focusing on networks as social relationships. This has caused a number of definitional problems and contributed to a seemingly irreconcilable divergence between mainstream economics/business theories and an approach that has grown out of the sociology discipline. Of the former, perhaps the most important for this thesis is the Late Industrialisation framework, which treats the concept of networks as a distinctive mode of organisation through which learning and the adaptation of borrowed technology were combined to promote economic development in a number of late industrialising countries in the 20th century. These three strands within the mainstream internationalisation construct dominate much of the research on MNEs and FDI but they have their shortcomings. In particularly, many Asia scholars (who were frequently Chinese-speaking Asians) have objected that mainstream internationalisation theories, with their under-socialised and Western roots, cannot adequately explain the phenomenon of ethnic Chinese investment in the motherland (Yeung 2000: 10). These scholars have instead drawn upon the insights of network theory and several sociological studies of ethnic Chinese enterprises (that were done in the 1990s) to develop an alternative account—the Chinese Capitalism perspective—to elucidate the specific case of ethnic Chinese transnational expansion. As its name suggests, this large corpus of literature is exclusively concerned with ethnic Chinese enterprises because it is argued that they differ in important respects not only from Japanese and Western firms, but from other d eveloping-country enterprises (Kao 1993). Central to the Chinese Capitalism perspective is the premise that ethnic Chinese firms dominate FDI flows into China, and indeed much of the economic activity of East Asia, because of their ability to form and draw upon dense, interlinked webs of social/family/political relationships that span national boundaries and rest on trust and reciprocation (Hamilton 1996a: 17). These relationships—Chinese business networks (CBN)—are variously ascribed to cultural and/or institutional factors and ostensibly give ethnic Chinese TNEs a strong advantage, especially when entering culturally Chinese markets such as China, while non-ethnic Chinese businesses meet with less success (EAAU 1995). As Hamilton-Hart wrote: Investment and trade flows linking Southeast and Northeast Asia have been promoted by network-like relationships among firms and individuals. These relationships have fostered regionalization by reducing the costs and risks of transnational investment (Hamilton-Hart 2002: 1). Describing this advantage in an especially enthusiastic manner, Redding wrote that ethnic Chinese capitalism is essentially an economic culture characterized by a unique capacity to co-operate (emphasis added: Redding 1990: 79). And Hamilton, concluding that the Chinese diaspora will elbow out non-Chinese entrants in the China market, wrote: Many Westerners honestly believe that they have a real chance to sell to the one billion plus Chinese consumers, but I do not believe it will work out this way (Hamilton 1996a: 19). Journalists and management gurus have similarly embraced the concept of Chinese business networks (e.g., Seagrave 1996; Backman 1999; and Drucker 1994). The concept of CBN has historical roots in the centuries of mass migration that have fostered transnational ethnic Chinese communities which span the world. Many historians have argued that commercial and financial networks based on fictive and agnatic familism, pang or speech-group solidarities, and regionalism, were historically important social channels in some settings, such as for those emigrating to Southeast Asia from southern China. But the Chinese Capitalism literature, taking new life from the treatment of networks within the sociology discipline, extended this historical observation further. It not only asserted that CBN remained important at the turn of the 21st century, but it emphasized CBN as a distinctive characteristic or skill of the ethnic Chinese. Research Significance The skill or special ability to combine a firms resources with the complementary resources of its partners can no doubt be an important organisational capability. Among the benefits, networks lower business transaction costs, provide for better risk assessment, and lead to prompt decision-making. But is there evidence that networking has been a primary factor in ethnic Chinese transnational expansion? Does it explain why Singaporean FDI has flowed so far afield to China? My research contributes to academic understanding in a number of ways. It adds to the scarce academic research that has been published to date on Southeast Asian SMEs, and it contributes to a more rigorous definition of CBN and some of the terms associated with it, such as guanxi. But its most significant contributions are to the following three areas: 1) theorizing on internationalisation and FDI in general, and ethnic Chinese businesses in particular; 2) assessments of whether Singaporean FDI outflows to China represent actual or faux economic development, and what that implies for evaluations of Singaporean state developmentalism; and 3) the use of CBN as a small state strategy to facilitate economic development and to accommodate an ascendant China. Chinese Capitalism and Internationalisation Theorising Further research into CBN is necessary to enhance theorising in both the Chinese Capitalism and mainstream internationalisation corpuses. As discussed in detail in Chapter 3, the Chinese Capitalism literature has to date suffered from a serious lack of empirical evidence. Articles that discuss CBN do often reference prior academic works, but when checked these references typically are revealed to be rather insubstantial. There is also a marked tendency to repeat, mantra-like, the same three or four original works on the subject, but because these studies were largely descriptive and based on a tiny sample size, they do not provide an adequate buttressing for the claim of extensive intra-ethnic business networking. Moreover, there have been virtually no rigorous cross-cultural comparative studies, and little consideration has been given to the drawbacks and costs of operating through networks. My investigation into CBN also speaks to the appropriateness of the academic niche that has developed for Chinese Business. A virtual phalanx of Chinese business experts has popped up since the late 1990s, and it is common to find universities that have dedicated a Chair—or even a department—to the business practices of this specific ethnic group. In contrast, one is less likely to find similar attention to Russian or Indian business studies. Of course, this is due in part to the staggering market potential represented by Chinas 1.3 billion population, but it can also be traced to the essentially culturalist assumption that ethnic Chinese have unique business practices such as CBN. In fact, CBN has become so widely accepted that much of the academic discussion has shifted away from directly considering ethnic Chinese ties towards as pseudo cross-comparative approach that is problematic because it contrasts the fact of CBN with the lack of networking in other cultures. Research into how, for example, Nordic or Indian networks are not as strong as CBN have become common. In short, though some of the details of CBN may be contested, the general premise of the Chinese Capitalism literature has largely been accepted and is influential. This has been especially true in the international business rubric, but references to CBN abound in economics-based disciplines as well. For example, in an Institute for International Economics special report describing the lessons South Korea should learn from CBN, Young argued: In the 1990s, they [the Chinese diaspora] formulated an international strategy to form a global network of overseas ChineseThe experiences of overseas Chines e networks would be good models for Korea (Young 2003: 50). And how did Young define CBN? They are led by the unique Chinese personal network, guanxi, which links individuals, hometown associations, business associations in the same industry, and associations of people with the same family name (Young 2003: 53). Mainstream internationalisation theories also have significant shortcomings. The economics discipline has a long history of neglecting—often completely omitting—the social, political, and historical context in which firms are embedded. A large gulf between mainstream economics and other social sciences has developed, making each seem increasingly irrelevant to the other. Economics many insights and strengths are too often viewed as inapplicable to other disciplines, and disciplinary cross-fertilisation has been hampered. Sloppy theorisations arise and thrive in such an environment. One of the most significant ways that evidence for CBN affects mainstream theorising lies in its suggestion that informally-linked enterprises might serve as functional substitutes for Western and Japanese MNEs. Large firms, especially multinationals, enjoy significant benefits of scale and scope as well as learning and productivity advantages that are unavailable to smaller, isolated firms (Nolan 2001). In contrast, the relatively small size of ethnic Chinese firms, which tend to be family-owned and -controlled, is considered by mainstream theorists to limit their competitiveness in international business. But perhaps the 21st century will indeed be a network age in which the economies of scale that dominated in the previous period seem to have given way to network economies (Young 2003: 33). If so, then the concept of CBN suggests that ethnic Chinese firms are informally bound together in such a way that they can duplicate, and maybe exceed, the benefits derived from the larger sco pe of MNEs (Borrus 1997). This intriguing possibility—that the limitations on competitiveness inherent in a family-controlled firm may be overcome by networking—provides a further reason for why my research into claims of extensive CBN is significant. Moreover, as my results demonstrate in Chapter 5, irrespective of whether extensive intra-ethnic networking is taking the place, the effects of the CBN discourse are profound and have affected FDI decision-making. Mainstream economic theory would be improved if economists took a more open-minded and sophisticated approach to appreciating, understanding, and incorporating such social dimensions. Singaporean Development(alism): Actual or Faux? My research contributes in another key way. Empirical evidence (or its absence) of CBN should factor into evaluations of Singapores level of economic development and, hence, assessments of the states developmental policies. FDI from Singapore to China has not only been large but it continues to grow. Though this transnational expansion has been actively promoted by the ruling Peoples Action Party (PAP) through various policies, programmes, and an official discourse on creating an external economic wing, the state would have us interpret Singaporean investment in China as growing economic maturation, a sign that Singapore is moving away from MNE-led development to a stage in which home-grown capitalists diversify into new areas. Outward direct investments are beneficial to both firms and the home country as they provide access to strategic assets, technology, skills, natural resources, and markets. It is especially important for a small state with limited market size and resources to be able to access international markets and connect with global production/knowledge systems. The degree to which Singapore has experienced the social and technological progress associated with economic development has been a contentious subject for the PAP-state (e.g., Krugman 1994), and it is perennially anxious to demonstrate its effectiveness. As discussed in Chapter 8, signs of declining popular support for the PAP in election results since 1988, in conjunction with a series of accumulation crises over the past two decades, have the state very worried. Though recognized as highly intrusive, the state has largely been given credit for developing Singapore from a sleepy entrepà ´t into a major communications hub with a population that enjoys one of the worlds highest per capita incomes. Since the 1990s, the Singaporean state has to a striking degree officially embraced and propagated a (selectively Confucian) culturalist discourse alongside calls for the development of an external sector to help insulate the country from downturns in the world economy. Is this yet another sign of an enduring comprehensive developmental state (Pereira 2007) cheerleading the march towards the next stage in Singapores economic development, this time, in part, by encouraging latent networking capabilities in its ethnic Chinese population? This might imply that after years of neglect, the PAP-developmental state has reached a stage where it is prioritising the engagement of local capitalists in its economic strategies (Haggard and Cheng 1987). For while the developmental state is expected to be the most powerful political and economic player during much of development, at some point state strategies should pay off and produce a vigorous and competitive domestic capitalist class (Periera 2007: 3). But what should we make of Singaporean FDI to China, and the states insistence that these flows are rooted in Chinese exceptionalism, if evidence suggests that CBN claims are over-stated? Justifications for Singapores domineering one-party state have always pointed to the Republics strong economic performance. If public proclamations about Chinese business networking turn out to be rather more wishful thinking than actual practice, then the government may be judged to have taken a serious mis-step, especially considering its own massive investments in China and the problems associated with some of them (, The New Frontier, Far Eastern Economic Review, December 6, 2001, BY Ben Dolven e.g., the Suzhou Industrial Park). The implication would be that Singaporean investment in China represents, at least in part, something other than the cool, independent economic rationalism upon which PAP political legitimacy rests; concerns might be raised about the optimum use of resources and the degr ee to which political considerations have lead the state to invest heavily in China itself, push its GLC sector to do so as well, and create a discourse in which local capitalists are encouraged to make the risky move to China. More importantly, high levels of Singaporean FDI to China might not represent maturation out of the MNE-dependency that is widely recognized to now seriously limit economic growth and make the island-state exceptionally vulnerable to fluctuations in a world economy beyond its control. And it may hint that the hither-to developmental PAP-state is losing some of the political insulation, technocratic skills, and discipline it needs to continue to lead Singapore. In summary, my research contributes to assessments of the PAP-developmental state. Should Singaporean FDI to China be interpreted as a sign of economic development, with all the benefits this implies for a small state that has to date been extremely exposed to world economic conditions? Or, alternatively, is it at heart a sort of faux development that does not bring the social and technological progress that accompanies actual development? This important topic—the role of the PAP-states CBN discourse in FDI decision-making—is discussed at length in conjunction with the results of my research in Chapter 8. CBN as a Small State Strategy My research also contributes to an understanding of how CBN and the discourse surrounding can be used by a small state wishing to punch above its weight in its engagement with the international environment, especially an ascendant China. By this I am referring to Singapores strategic use of culture and ethnicity to further its economic and national security/foreign policy goals. Chinas growing economic and military strength is increasingly presenting a dramatic challenge to world, particularly East Asian, power relations. Tapping into (or manufacturing) the Chinese-ness of a states population or subgroup may be an excellent strategy for accommodating a rising China, especially for small states such as Singapore which are looking for ways to compensate for their power deficit. A small state faces an integration dilemma when it considers Chinas growing markets and reach (Goetschel 1998: 28). It can insist on economic and security independence but risk being abandoned or isolated, with the disadvantages this would like cause. Or it can accept a constraint on its freedom to act in ways that are contrary to Chinas economic and security goals and instead try to accommodate, identify with, even in some sense integrate with, China. Stressing as it does not just civilisational fluency but actual networks with China, the CBN discourse functions as a novel way of enabl ing Singapore to do the latter. Whether Singapores strategy might successfully be imitated by other small states remains to be seen. It is interesting to speculate how, for example, Africas over 7 million ethnic Chinese and Perus 1.3 million, might factor into their states strategic possibilities for engaging China (e.g., Mung 2008). Singapore has tried to modify the international environment through its cultural discourse in another sense. As discussed in Chapter 8, this former British colony has for the two decades heavily marketed itself as the Gateway to the East. Its stated goal since Singapores regionalisation drive was announced in 1993 has been to be the regional hub, a place where MNEs locate their headquarters and higher value-added operations (such as research and development), while situating lower value-added parts in China and other areas of East Asia where labour is cheaper. The clear implication of the self-orientalising discourse of CBN is that Western firms are unlikely to be successful if they invest directly in China. They need instead to engage a mediating force, such as Singaporean firms, in order to become part of the transnational networks in which Chinese business is accomplished, or so the story goes. As a Singaporean government minister put it: Those who have knowledge of the culture and cultural nuances are able to lower business risks [for foreigners]. The Chinese overseas understand Chinese culture because they are ethnically Chinese themselves, but they also understand the world outsideThey are like modems. They modulate and demodulate and add value in the process. (George Yeo, quoted in Crovitz 1993: 18). With its middleman familiarity with both East and West and its purportedly dense transnational networks with China, the CBN discourse therefore places Singapore in the enviable niche position of knowledge arbitrageur (Tan, K.B. Eugene 2006). It is a striking example of the claiming of territoriality over knowledge (Brown and Menkhoff 2006), in both a conceptual and quite literal sense. Defining the Concept of CBN Unfortunately, a clear-cut definition of the concept of Chinese business networking does not currently exist. Much of the Chinese Capitalism literature is largely descriptive rather than theoretically precise, and to the degree that a definition is specified it varies significantly from author to author. Some scholars discussing networks have stressed their origin in qiaoxiang (usually defined as ancestral homeland ties), kinship, religious, and/or school ties (Hamilton 1996; Liu 1998, 1999; Yeung 2000d). Other scholars have used a broader definition that characterises Chinese business networks as long-term, but extensible, personalized networks, based on trust and upheld by the indispensability of reputation within such a system (Tracy et al. 2001: 262). These are contrasted with what are characterised as the generally weak, situational, and non-enduring ties of the West (Zahra et al. 1999: 45). A particular problem with the fuzziness surrounding CBN is that this concept is often—and unhelpfully—confused with guanxi. Like CBN, the latter term suffers from a lack of definitional rigor. Guanxi has commonly been translated as both connections and relationships, but neither of these terms adequately gives a sense of how this multi-faceted concept is commonly understood by Chinese. A more sophisticated definition is, the concept of drawing on connections in order to secure favors in personal relations (Luo 2007: 2). There are obvious similarities between the concepts of CBN and guanxi, but closer scrutiny of the academic literature as well as the results of my fieldwork led me to a conclusion, shared with a few researchers (e.g., Fan 2002), that guanxi is not identical to CBN. For example, it is not generally considered to be something that is exchanged between family members or childhood friends, nor is it usually described as having any sense of qiaoxiang or ancestral homeland sentiment. Also, unlike CBN, guanxi has on occasion been described quite negatively by a few researchers. Fan, for example, argued that guanxi and corruption are inextricably intertwined in 21st century China (2002). This assessment was supported by my fieldwork, as most of the SME owners I interviewed ascribed negative qualities to the practice of guanxi. Some of them described guanxi as a payment—on occasion they used the term bribe—that must be paid to local government officials as a cost of doing busine ss in China. Others equated it with an obligation to pay for lavish dinners and parties for customers or suppliers in the (frequently forlorn) hope of receiving enough business in return to justify these outlays. When one of my interviewees was asked to define guanxi, he summed it up as, If you want to do business in China, you must pay to play (Interviewee #6). In summary, though any attempt to definitively delineate these two unwieldy and messy terms (Luo 2007) is beyond the scope of this dissertation, the results of my research, combined with a close scrutiny of the academic literature, led me to the conclusion that they are not identical. While creating guanxi with someone may lead to a close networking relationship, it should not be confused with the networking relationship itself. So, though these concepts overlap, it is important to carefully define and distinguish between them. Yet in many accounts of Chinese business practices these two terms—guanxi and CBN—are used as though they were interchangeable. As discussed further in Chapter 5, the frequent conflation of what are actually two separate concepts adds to the confusion surrounding intra-ethnic networking and has important ramifications for my research conclusions. In light of the definitional jumble surrounding CBN, it was important in this thesis that the concept be defined in such as way as to convey the general intent of the Chinese Capitalism literature, yet be specific enough to be rigorously tested. To this end, I chose to draw upon the definition of Chinese business networking suggested by Gomez and Hsiao (2001). They argued that the Chinese Capitalism literature is characterised by an emphasis on Chinese exclusivity, a special conception of trust, and an explicit challenge to existing theories of transnational expansion. Thus, contrary to the very broad definitions typically put forth or assumed, the concept of CBN must necessarily imply a precise, strong connection among businessmen that goes beyond the common, and casual, use in the West of the term business networking (Gomez and Hsiao 2001). More specifically, Gomez and Hsiao claimed that the concept should be reserved for: The e