Home Political science Dancing with the devil : the political economy of privatization in China
FDI Entry Mode and Resource Dependence
Deviating from centrally defined policies and preferences regarding FDI gatekeeping and regulation involves varying degrees of political risk for local officials. A relatively safe route is to stretch centrally defined limits while following the precedents set by ad hoc measures that the national government has taken to open up select areas of the economy. Inspired by the centrally initiated experiments with SEZs, coastal open cities, and NETDZs in the 1980s, for example, many local governments set up their own special foreign economic policy enclaves, where more liberal rules were often implemented to attract foreign investment and promote foreign trade (Zweig 2002; Wang 2013). A less safe step was to allow extensive use of organizational forms that the central government held a general bias against—especially during the early years of reform and in regions and sectors where the usage of these organizational forms was discouraged but not explicitly restricted or banned, including WFOEs, JVs with declining public ownership, and even Sino-foreign private JVs. A more risky move was to allow foreign investment to threaten the vested interests of higher level authorities through entry into regions and sectors already populated by centrally or provincially owned SOEs. The most risky behavior was to bypass or directly violate the stipulations, restrictions, and bans explicitly laid out in the national FDI guidelines on organizational form and sectoral access.
To be sure, unlike adopting accommodating policies for domestic private business during the early years of reform, providing special incentives for foreign investors beyond centrally defined boundaries was generally a less “sinful” act. Even the formation of private-foreign joint ventures might seem more legitimate than the promotion of domestic private enterprises before the drastic policy change on ownership restructuring in 1997, as it contained an element consistent with the national strategy on economic internationalization. Because of the CCP’s trial-and-error approach to economic change and because of inconsistencies between old and new rules, there were also various “gray areas” where existing rules could be stretched in the name of reform experiments.
Nonetheless, the political risk of rule bending was real. In the mid-1980s, for example, several leading officials (including Lei Yu, the party secretary) in Hainan were reprimanded and removed from their positions for bypassing centrally imposed restrictions to authorize the importation of a large number of cars that were then resold by the importers for huge profits. Similar (albeit not as high-profile) cases involving lower-level officials abound. The periodic anticorruption campaigns waged by the CCP leadership also cast a shadow on local officials’ rule bending with weak buffers, which could become leads to the uncovering of related and/or deeper problems of deviance. Moreover, the competitive nature of the political performance assessment process made it imperative for local officials, especially local leaders, to minimize their vulnerability to decisions concerning ideologically and politically sensitive issues, which could tilt the balance in comparative evaluation with political rivals.
Where the ability to manage this vulnerability was weak, local officials might not be strongly motivated to make significant concessions to foreign investors, especially during the first two decades of reforms, when restrictions on foreign capital were more stringent. Furthermore, FDI could also pose a threat to the vested interests of local officials, especially when the foreign entrants operated in sectors already populated by local (especially public) enterprises. To contain such threats, local governments could seek to block the entry of FDI or limit it to the joint venture form in the affected sectors. In so doing, their behavior was more likely to be in line with centrally defined policies than otherwise. Since different locales do not have a uniform economic structure and since their relationships with higher-l evel authorities may be bound by different political and economic considerations, their gatekeeping and regulatory strategies toward FDI are likely to vary.
Accounting for such variation will provide a useful angle from which to illuminate the mechanisms whereby the privatization function of FDI has played out. Given the multiplicity in the level of FDI gatekeeping and regulation in China, it is important to consider the dynamics of intragovernmental relations. In particular, I argue that the degree of local regulatory laxity or flexibility depends greatly on the bargaining positions of local governments with higher-level authorities, which directly affect their abilities to contain the political risks in rule bending. This emphasis differs from conventional approaches to the study of the FDI entry mode, which is the focus of a large body of literature in international economics and business studies.
The dominant paradigm in existing studies is a firm-centered view that emphasizes factors influencing the organizational choice of investors between joint ventures and wholly foreign-owned subsidiaries (which are called wholly foreign-owned enterprises in China). Among the factors identified as key determinants are cultural distance, risk management, proprietary asset protection, and local investing experience. Most studies in the literature also recognize the importance of the gatekeeping policies of host country government regarding the entry points and organizational forms of FDI. Yet they either treat such policies as given without further probing or view the policy impact as stemming from a unitary authority (e.g., Contractor 1990; Gomes- Casseres 1990), while focusing their investigation on the formulation of strategies at the firm level.
Although the resultant findings are quite useful, the lack of close attention to the regulatory constraint faced by foreign investors leaves open serious questions about the relationship between FDI entry mode and the ecology of the host country’s political economy. When such constraint is significant and varies greatly across jurisdiction levels and boundaries, the explanatory power of a firm-centered approach may be limited. This condition, interestingly, is what foreign investors have faced in post-Mao China. On the one hand, the central government has both formal and informal entry rules and maintained a policy bias toward joint ventures; yet on the other hand, local gatekeepers have enforced the rules and bias with varying degrees of force. To account for the variations in the depth of foreign ownership and hence the privatization function of FDI, therefore, one needs to consider not only firm-l evel characteristics and strategies but the regulatory environments of different locales.
A key question here is what explains the varying abilities of local governments to tackle the potentially negative consequences of bending centrally imposed rules on the locational and organizational choice of FDI. Addressing this question requires an examination of the relationship between local governments and higher-level authorities. An important dimension of this relationship is interdependence between superior and subordinate authorities in the generation, pooling, allocation, and use of resources for various state functions (Bardhan and Mookherjee 2006; Treisman 2007). In this connection an extension of the analytic logic of the resource dependence theory may lend a revealing perspective.
The gist of the theory, originally formulated by Pfeffer and Salancik (1978), is that because organizations depend on external sources of resource supply for survival and growth, managing critical power relations among interdependent parties constitutes a key element in organizational strategy. The focus of the theory and its many applications largely centers on organizations outside the political system (Davis and Cobb 2010; Hillman, Withers, and Collins 2009; Pfeffer and Salancik 2003). Yet a parallel can be drawn for
the study of the behavior of political actors, whose decision-making, like that in economic and social organizations, is both resource driven and resource constrained. Examining how the interplay of different resource dependence relationships shapes the cost-benefit calculation of local officials will help illuminate how they respond to centrally defined policy guidelines and manage the consequences of their responses.
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