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The Art of Chinese Management
This page intentionally left blank
THE ART OF
Chinese
Management
THEORY, EVIDENCE, AND APPLICATIONS

Kai-Alexander Schlevogt

OXPORD
UNIVERSITY PRESS

2002
OXPORD
UNIVERSITY PRESS

Oxford New York

Auckland Bangkok Buenos Aires Cape Town Chennai
Bar es Salaam Delhi Hong Kong Istanbul Karachi Kolkata
Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi
Sao Paulo Shanghai Singapore Taipei Tokyo Toronto
and an associated company in Berlin

Copyright © 2002 by Kai-Alexander Schlevogt

Published by Oxford University Press, Inc.
198 Madison Avenue, New York, New York 10016
www.oup.com
Oxford is a registered trademark of Oxford University Press.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise,
without the prior permission of Oxford University Press.

Library of Congress Cataloging-in-Publication Data

Schlevogt, Kai-Alexander.
The art of Chinese management : theory, evidence, and applications /
by Kai-Alexander Schlevogt.
p. cm.
Includes bibliographical references and index.
ISBN 0-19-513644-6
1. Industrial management—China. 2. Business enterprises—China
3. Corporate culture—China. 4. Industrial management—China—Case studies.
I. Title
HD70.C5 S35 2001
658'.00951—dc21 2001024731

9 8 7 6 5 4 3 2 1
Printed in the United States of America
on acid-free paper
TO THE PEOPLE OF CHINA
This page intentionally left blank
Can the strength of a hundred people be greater than that of
one thousand people? It can and is, when the one hundred are
organized.
V. I. LENIN

Science is systematized knowledge. . . . Art is knowledge made

efficient by skill.
J. F. GENUNG
This page intentionally left blank
 Preface

Ye Emperors, Kings, Dukes, Marquises, Earls, and Knights, and all other
people desirous of knowing the diversities of the races of mankind, as well
as the diversities of kingdoms, provinces, and regions of all parts of the
East, read through this book, and ye will find in it the greatest and most
marvelous characteristics of the people.
—The Travels of Marco Polo

The superior man understands righteousness, the inferior man understands

profit.
—Confucius

This book tells the story of a journey to the East, in search of new ideas
about organizing and managing human activity, which are shaped by an
ancient Oriental culture. It is the outcome of my preoccupation and in-
teraction with the Chinese people for almost a decade. The story that
emerges is both similar to and different from the Journey to the West, the
famous Chinese classical novel. Whereas the latter is a biting satire of
society and Chinese bureaucracy, this journey's gist is the discovery of the
art of management as practiced by Chinese companies, particularly the
newly founded private enterprises. What is similar is that both journeys
reveal human striving and perseverance—the novel, in the form of an al-
legorical tale; the present work, by reporting empirical results from the
first large-scale and quantitative survey of Chinese organizations. It is
unique in its detailed coverage of private and state enterprises in the north
and south of China, based on standardized face-to-face interviews with
124 CEOs and several in-depth case studies. These findings allow for

ix
groundbreaking statistical generalizations previously unknown in the
field.
Art is a combination of heart, thought, and action. The web-based
model of private Chinese management justifies this description. The
newly founded private Chinese enterprises on the mainland revive tra-
ditional Chinese family-based cultural values (which transcend the sim-
ple quest for profit) and readopt the clever business practices of their over-
seas Chinese compatriots. This powerful model explains much of the
dynamism inherent in the private enterprise revolution we are witnessing
in China.
This book combines facts with design. It is thus relevant for two groups
of readers. First, scholars will be interested in my explanation of the dis-
tinctive organizational choices made in Chinese companies, their driving
forces, and performance outcomes. Second, business leaders and policy
makers dealing with China and other emerging markets will want to un-
derstand the key success factors in the Chinese market, and learn how to
design new, effective organizations living up to the challenges of the new
millennium. Both groups will benefit from the strong fact base of the study,
which differentiates it from the usual anecdotes.
The management of mainland Chinese private enterprises is a new, ex-
citing research topic with important implications for organizational the-
ory and practice. I hope that by undertaking this pioneering study, I will
stimulate further research in this new area, which translates into
performance-enhancing managerial advice.
Kai-Alexander Schlevogt,
Spring/Summer 1999

x PREFACE
 Acknowledgments

This royal throne of kings, this scepter'd isle,

This earth of majesty, this seat of Mars,
This other Eden, demi-paradise;
This fortress built by nature for herself,
Against infection, and the hand of war;
This happy breed of men, this little world;
This precious stone set in the silver sea . ..
This blessed plot, this earth, this realm, this England
—Shakespeare, Richard II, ll.i.40

"Dominus illuminatio mea" (God is my light) is an appropriate prayer for

men of erudition and faith. It also suits a university like Oxford that wants
to promote truth in knowledge and blessed learning. This grand institu-
tion is the cradle of enlightened scholarship and its everlasting beacon.
Too well-known to be pointed out, it matches elegance of thought with
gracious style and refinement of manners. Like the venerable colleges in
the bustling city, the university as a whole is an oasis of deep and orderly
reflection in a superficial and chaotic world. Its collective brightness of
motifs, feelings, and thoughts has lit the way of the leaders of the world.
Whoever gained the privilege of admission to this unique community,
soon felt and embraced its ideals and spirit, and was transformed forever.
He acquired the intellectual and social skills to excel in the world,
whether as statesman, scientist, or in other vocations. I am greatly in-
debted to this academic kingdom and scholar paradise—"et in arcadia
ego" aptly describes my special attachment. I would like to express my
sincere gratitude to Dr David Barren of Jesus College, who was an impor-
tant source of suggestions and encouragement throughout my research
time at Oxford. I also thank Dr Richard Whittington of New College for
his valuable advice.
I extend my special appreciation to Christ Church (Aedes Christi), Ox-
ford's most famous college—the only one to be founded by a reigning king

xi
(Henry VIII) and to educate as many as 14 Prime Ministers and 11 Rulers
of India. I am grateful for its support of my field research in China through
generous grants. I am particularly indebted to the erudite Dean, the Very
Reverend John Drury, for accepting me in its community of great men and
guiding me through his example of devotion, faith, scholarship and un-
derstatement, blending the best of ages gone-by, the present, and the prom-
ise of the future. When I went down, he presented me with works of John
Ruskin, a fellow member of "the House" (1836). Even though not intended
that way, it happened to shape the way I conceptualized art, both in the
original sense and, as in this book, applied to human skills.
Let me now leave the dreaming spires of Oxford and its "splendid iso-
lation" and other-worldliness, in a move from inspiring thought to deter-
mined action, from the spiritual to the political center of a former empire
and sovereign of the seas. I would like to express my sincere gratitude to
Professor Peter Abell, the Director of the Interdisciplinary Institute of
Management at the London School of Economics and Political Science
(LSE). He inspired me ever since I first met him with his intelligence,
seemingly effortless power of reasoning, sharp wit, candor, and his non-
chalant, unassuming, and affable demeanors, which are fitting garments
particularly for a man of such high distinction in such a magnificent place.
Because of its invaluable human, intellectual and social capital, the LSE
is the unrivalled international leader in the esemplastic social sciences.
It taught me rigorous economics with a human face.
To complete my appreciation of the trustworthy Albion (when not at
war with Germany), its people and institutions, I would like to express
my gratitude to the British Economic and Social Research Council for the
generous award that I won in their national research competition.
Home is where one begins his journey and achievement is where one
ends. From the old world I ventured to the new world in the West, which
strives hard to surpass its master, and to the even newer old world in the
East, which is on the way to revive its ancient excellence. At Harvard
University, I thank the two successive Directors of the Fairbank Center of
East Asian Research, Asia Center, where this book was written, for inviting
me to their exclusive community of world-class scholars. The breadth and
depth of the various scholarly activities at the center is impressive. The
praise of the Chinese President during his visit to Harvard was therefore
clearly deserved. I also extend my thanks to Prof. Yasheng Huang for in-
viting me to join the Harvard Business School, which is one of the most
outstanding centers of business administration on the planet.
I first met Professor Lex Donaldson of the Australian Graduate School
of Management in Oxford. We had independently pursued rigorous
macro-structural analysis, but soon discovered our shared interest in striv-
ing for truth and true knowledge, embracing the positivist beliefs and as-
pirations despite the difficulties of realizing them. I was very impressed
by his outstanding scholarship, and his unrelenting pursuit of the highest
standards of integrity in research and social interaction. I thank him very
much for his inspiration and valuable advice.

xii ACKNOWLEDGMENTS
 I am greatly indebted to the dedication and commitment of the Oxford
University Press (OUP) teams responsible for editing, production, and
marketing. Even a German cannot help but be impressed by the meticu-
lous work and outstanding quality of the OUP staff. One advantage of
having one's work chosen for publication with OUP is that the submitted
manuscript underwent a double blind peer review that decided its accep-
tance. All publications bear the special Oxford University Press quality
imprint, which differentiates it from most other book publishers, which
do not mandate such a rigorous selection process. Like top academic jour-
nals, OUP invites in-depth reviews from two anonymous world experts
in the respective subject area. Apart from its staff, this exacting selection
is one of the major factors explaining the prestige and reputation associ-
ated with the Oxford name. The review process helps to identify the best
books, full of powerful ideas and rigorous scientific methods, avoids fad-
dishness, and ensures long book lives. Its rigor places onerous demands
on the reviewers. I would like to thank the two anonymous experts for
reviewing my work and providing me with helpful comments, which fur-
ther improved my work.
Finally, I would like to extend my gratitude to all the Chinese leaders
who spent a considerable amount of their precious time with me for the
interviews. Because I promised them confidentiality, I cannot list their
names, but I thank them all.

ACKNOWLEDGMENTS xiii
This page intentionally left blank
 Contents

I. INTRODUCTION AND DEVELOPMENT OF THEORY: LAYING THE

GROUNDWORK

1. Setting the Stage: The Miraculous Rebirth of Private Enterprise in

China, 3
Historical Background of Organization in China: Back to the
Origins, 6
Present Reforms and Development of the Domestic Private Sector:
Reasons to Celebrate, 10
Foreign Direct Investment In China: Growing but Failing? 14
Importance of Further Research on China and General Research
Question, 19
Research Contributions and Benefits for Different Readership
Groups, 19
Basic Research Model and Theory, 23
Research Methods: A Brief Overview, 24
Plan of the Book, 26
Summary, 28

2. The New Theory of Web-based Chinese Management, 31

Overseas Chinese Management: A Brief Overview of the
State of the Art, 32
Distinctive Characteristics of Chinese Management: The New
Web-based Model, 33
Influencing Factors of Chinese Management, 38
Chinese Management and Organizational Effectiveness, 43
Critical Appraisal of the State of the Art of Chinese
Management, 49
Distinctive Research Contributions of China Study, 51
Research Hypotheses: Operationalizing Web-based Chinese
Management, 53
Summary, 61
II. EMPIRICAL FINDINGS: ESTABLISHING THE FACT BASE

3. Distinctive Characteristics of Chinese Management, 65

Overview, 65
Comparison of Structural Profiles of Private and State
Enterprises, 66
Item-level Patterns of Organizational Structure in Private
Enterprises, 68
Comparison of Managerial Profiles of Private and State
Enterprises, 74
Comparison of Emphasis on Culture in Private and State
Enterprises, 78
Comparison of Company Size of Private and State
Enterprises, 82
Overview of Case Studies, 83
Tiger Corporate Identity Company, 85
Magnolia Education Group, 95
Cathay Industrial Bank, 99
Cross-Case Conclusions, 106
Summary and Conclusions, 110

4. Influencing Factors of Structure and Management in China, 113

Influencing Factors of Organizational Structure in China, 114
Influencing Factors of Management Practices in China, 125
Summary and Conclusions, 133

5. Organizational Effectiveness of Chinese Companies, 135

Key Success Factors Revisited, 135
Specification of Organizational Effectiveness Model, 136
Findings for Unconstrained Organizational Effectiveness
Model, 140
Nested Model Comparisons for Organizational Effectiveness
Model, 142
Incremental Contributions of Success Factors in China, 147
Organizational Effectiveness Stacked Model Subgroup
Comparisons between China's North and South, 148
Case Study: Value Destruction by State Enterprises and Sectoral
Comparison, 156
Summary and Conclusions, 160

III. PRACTICAL APPLICATIONS: USING THE FACTS FOR DESIGN

6. The Organization of the Future: Chinese Management as a

Model for the Twenty-first Century and Beyond, 165
Executive Summary, 165
Overview, 166

xvi CONTENTS
 Recapitulating the Distinctive Characteristics of Web-based
Chinese Management in Family Enterprises, 166
Effectiveness of Chinese Family-based Ownership Model, 167
A New Business Model for the Twenty-first Century? Lenin vs.
Sun Zi, 175
Use WCM to Deal More Effectively with Chinese Private
Enterprises, 179
Is Your Company a Candidate for Web-based Chinese
Management? 181
Emulating Private Family Ownership: Ideas for Implementation,
190
Summary and Conclusions, 199

7. Achieving Excellence in China: Key Success Factors in the

Land of Dragons, 201
Executive Summary, 201
Objective of This Chapter: The Keys for Uncovering Success in
China, 201
Concentrating on High-Impact Areas: The Importance of Key
Success Factors and Focused Leverage, 202
The Need for Fact-based Recommendations in China: Adopting a
Chinese Perspective, 203
What Really Counts in China: Recalling the Empirical Evidence,
206
The CHINA Framework: Strategic Recommendations for
Managers, 208
The Ten Golden Rules: Learning from Chinese Best Practice How
to Take Powerful Action, 209
Best Practice Corner: Applying the Learning from Chinese
Companies—The Case of AIU in Shanghai, 236
Key Success Factors for Different Regions: Implications for
Strategists, 241
Summary and Conclusions, 245

IV. CONCLUSIONS AND RESEARCH OUTLOOK: A GLORIOUS

PAST, CHALLENGING PRESENT, AND BRIGHT FUTURE AHEAD
FOR CHINA?

8. The Art of Chinese Management? Change the Present to Restore

the Past and Create the Future, 253
Mainland Chinese and Overseas Chinese Management, 254
The Art of Chinese Management? 257
Chinese Private Enterprises on the International Stage:
A New Global Force? 276
Chinese Management and the Development of China's
Economy, 278

CONTENTS xvii
 Dynamic Implications for Chinese Economic Development and
Policy Making: The Need to Focus on the Micro Level, 280
Change the Present to Restore the Past and Create the Future, 292
A Reminder for All of Us "Big Noses": That's What Friends
Are For, 296
From East to West to East to West, 299
Research Limitations and Outlook: A Call for Further Studies,
302
Summary and Conclusions, 308

APPENDICES

A. Detailed Survey Methodology, 313

B. Qualitative Research Design, 327

C. Sample Characteristics, 331

D. Retranslated Company Questionnaire in English, 339

E. Pearson Correlation Matrices for Research Models, 357

Glossary, 359
Notes, 363
Bibliography, 369
Index, 385

xviii CONTENTS
PART I

Introduction and Development of

Theory: Laying the Groundwork
This page intentionally left blank
 1 Setting the Stage:
The Miraculous Rebirth of
Private Enterprise in China

Napoleon's warning has become reality. The sleeping giant, one of the
oldest civilizations on the surface of the planet, dating back more than
five thousand years and having written records for nearly three thousand
years, has reawakened.1 The titan, comparable in size to the whole of Eu-
rope, has finished the long period of hibernation, stretches his legs, and
is ready to walk tall again. Due to the success of its economic reforms, the
People's Republic of China (P.R.C.) has become strategically important in
both political and economic terms. Politically, it has developed into a
powerhouse in the Pacific Rim with ever increasing military might. Eco-
nomically, China boasted double-digit growth rates for most of the 1990s,
making it the third largest economy in the world. In addition, given that
over one-fifth of the human race lives in China, the increase in purchasing
power makes it the largest, and potentially also one of the most profitable,
national markets in the world. As a consequence of its growing impor-
tance, China, as the "last true business frontier" (Johnson 1996, p. 39),
attracts increasing interest from both businessmen and academics in di-
verse disciplines, including political science, economics, management,
and anthropology.
One particularly spectacular but little researched aspect and driving
force of this rapid development is what I like to call the "entrepreneurial
revolution" taking place in China, that is, the dramatic growth in private
economic activity, fueled mainly by the success of domestic private en-
terprises, with foreign direct investment producing less uplifting results
from the investors' point of view. The scale and speed of this revolution
are unrivaled by any other enterprise boom in the world—nothing com-
parable has happened at any time in human history. Domestic private
firms already represent the largest share of the enterprise population in

3
terms of numbers. The core belief expressed in this book is that much of
this boom and many of these dramatic changes are associated with new
forms of organizational structures and management, particularly in the
private sector. Complementing the usual macroeconomic reasons explain-
ing development, it shifts and broadens the perspective on potential
sources of economic growth by emphasizing the importance of structure
and management, i.e., microeconomic forces, for economic development.
The key theme of this book is to argue that the distinctive management
of Chinese private enterprises has contributed to the rapid development
of the private sector and constitutes a form of art, in the sense of the "skill
of doing something well." Their sophisticated techniques are also pieces
of art or cultural artifacts, influenced by long-standing Chinese cultural
traditions. What is more, in their unique combination, they potentially
can serve as a new management paradigm for the twenty-first century. I
will show that Chinese private enterprises have readopted a particular
"Web-based Chinese Management" (WCM) model, parts of which so far
have been assumed to be practiced only in overseas Chinese communities.
The term "management model" describes the structural and managerial
choices of an organization.2 Much as the advent of traditional Chinese
medicine has helped patients in the West, so the new "managerial drug"
will help businessmen to meet the key challenges of the new millennium
in a systemic and holistic way. WCM might become the Eastern acupunc-
ture needle of management to heal organizational diseases and strengthen
corporate power in the West. As mentioned above, this management
model is closely intertwined with and causally related to the reemphasis
on traditional Chinese cultural values in private enterprises and, due to
its emphasis on social capital, informal structures, and adaptable leader-
ship style, is a highly effective instrument for dealing with the increasing
uncertainty and complexity of economic transactions (compared to a few
decades ago), as well as with motivational problems of employees in large
companies. The classical models of organizational strategy, structure, and
process, tailored to predictable and stable environments, have proven to
be inadequate for these tough new (or reemerging) issues (Schlevogt, 2000,
p. 9).
It should be noted that despite frequent comments referring to the es-
sential stability and stagnation of Chinese society, there is no nation on
Earth that has undergone more violent times of turbulence and change
than the Central Kingdom. Examples range from the Warring States period
to the Great Cultural Revolution. The alleged "unprecedented" change
taking place everywhere in the world in the wake of globalization is
therefore only a caricature in comparison to these dramatic upheavals in
China. How can anybody seriously compare the recently somewhat more
intensive advertising battles and jockeying for position in international
markets with the fundamental life-and-death struggle of a people? This
assessment can come only from people who lack historical perspective
and are greedy to come up with new ideas, although they have no original
insights for the present times.

4 LAYING THE GROUNDWORK

 Due to their familiarity with uncertainty, complexity, and change we
can be confident that the Chinese developed distinctive leadership, man-
agement and other organizational design skills that alone were powerful
enough to cope with this turbulence, making it possible to adapt to new
circumstances and ensure the survival of a great civilization. These skills
may lie dormant now in some quarters, but they did not die. Having ex-
perienced so much turmoil, the Chinese might have concluded that it is
necessary to actively foster continuity instead of mindlessly calling for
ever more change (but not improvement). The ancient Chinese thus put
great emphasis on social relations and social capital, mutual obligations
and cooperation, as well as on harmony and cohesion in society. Above
all, they understood that all things move in cycles and do not extend
linearly. Their time horizon surely was longer than fifty years. But we do
not have to go back to long-gone ages to show that the present global
turbulence is not unique. Look what happened in the twentieth century:
trade and factor mobility (especially labor mobility through immigration)
on a global scale before World War I, recovery in the 1920s, Trotsky's
speculation about an integrated world economy, then nationalism, fol-
lowed by World War II and "global integration" again. Everything that
integrates will fall apart later. The next wave of breakup—be it along eth-
nic or other lines—will soon come. It is good to be prepared with time-
proven management tools.

The bare branches that survived for centuries and centuries will bear blos-
soms again.

Given all these facts, it is my vision that China's long historical con-
nection with the development of strategy and organization and the transfer
of managerial ideas to the West would, after a long interruption, find a
continuation in the twenty-first century, which might once again be a pe-
riod of great Chinese influence in Asia and the rest of world. The bare
branches that survived for centuries and centuries will bear blossoms
again. The inflow of advanced management ideas from the West will be
greeted by an outflow of new strategic and organizational ideas from
China.
My mission is to set this process in motion. To narrow the huge research
gap related to Chinese management, this book has the main objective of
laying down a theoretical and empirical basis for the study of enterprises
in mainland China, particularly private enterprises. In the process, I will
analyze key factors for success in China. The work will also illuminate
ways of improving the lackluster performance of many multinational com-
panies in China. To achieve the research objective, based on the first large-
scale and quantitative survey of 124 Chinese companies and several case
studies, I will analyze the nature, causes, and effectiveness of organiza-

SETTING THE STAGE 5

tional structures and management practices of private and state enter-
prises located in the north and the south of China; I also will translate the
empirical findings into best practice recommendations for executives. The
term "state enterprise" covers both state-owned and collective enterprises
and is used to mark the contrast of this group of enterprises with private
enterprises. Although anecdotal evidence has suggested that significant
differences exist between private and state enterprises, as well as between
companies in the north and the south of China, systematic research on
these issues has been rare. The quantitative nature of this pioneering study
makes it possible, for the first time, to draw statistical generalizations, and
the case studies help to embed the findings in real-world contextual rich-
ness. Unlike many other books, this work includes all research instru-
ments in an appendix, to enable other scholars to replicate and extend its
findings.

This chapter is organized in eight sections. First, I will provide some con-
text for the study by painting a broad historical canvas of the long-standing
Chinese preoccupation with organizing. I will not elaborate on traditional
warfare strategies, which warrant a separate study. The aim of this section
is to show that, with this study, organizational theory arrives back at the
place where the first concepts of organizational structure and management
were developed (Lui 1996, p. 390) and from which they were most prob-
ably transferred to the West. This historical sketch is followed by a quick
look at the most recent organizational experiment, that is, the present eco-
nomic reforms and emergence of private enterprise. The dramatic impact
of domestic and foreign private investment makes the organization of Chi-
nese companies a compelling research object. Next, I will briefly outline
the general research question and benefits for academic and practitioner
readers in terms of study contributions. This section is followed by an
outline of the basic research model and theory, and methods employed to
test it. The final part provides an overview of the chapters.

Historical background of organization in China: Back to

the origins

A journey of 1,000 li starts with the first step

—Ancient Chinese Proverb

Visitors to China in 1978 and even later were surely startled by its relative
poverty, and thought that they were visiting a desert. They were like peo-
ple seeing a gaunt and bare mountain whose vegetation had been cut by
farmers and trampled by cattle. Although the mountain was once covered
with lovely trees and flowers, the visitors most probably imagined that it

6 LAYING THE GROUNDWORK

was bare from the start. Like the mountain, the natural state of China was
very different in the past from what now appears, but there is no reason
to doubt that it can return to the golden state of old or reach an even higher
level of civilization.
Whether teaching in Lanzhou, Shenzhen, Shanghai, or Beijing, I usu-
ally start the inaugural lecture by showing my students a simple picture.
It shows a huge, ancient Chinese ritual vessel, the Si Mu Wu tetrapod. The
first question I ask is when the vessel was made. The students usually
dramatically underestimate its age—oldest dates guessed being about
twenty-five hundred years. In fact, it was made more than three thousand
years ago, during the first historical dynasty (the earliest dynasty to leave
written records), the (late) Shang (1766-1122 B.C.). Upon hearing this, the
students are usually astonished, some of them amazed by the high level
of craftsmanship, but they then expect me to start lecturing about a more
important topic—that is, management—because that was why they came
to listen to me. The reader of this book might feel the same.
But the vessel does tell us a great story—a tale about management and
about China. It is evidence for the sophisticated organizational skills of
the Chinese at a time when the Western peoples were still living in prim-
itive conditions. It is also a powerful testimony to China's past glory.
Think about it for a moment. The vessel weighs 875 kilograms and is
beautifully decorated. It clearly proves the high level of indigenously de-
veloped technological competence in China at this early period of human
history. Could anybody have produced it alone? No. Large-scale, labor-
intensive metal production was needed for a bronze casting of this size
and character. A huge group of people with very different skill sets and
levels, and different characters and temperaments, ranging from creative
artists to manual laborers (ore miners, fuel gatherers, foundry workers,
ceramists, etc.), had to divide their work and be managed by a project
leader. This prescriptive control by the model designer and labor manager
required coordinative mechanisms such as centralized direction, hierar-
chy, rules, and procedures. Incidentally, the prestige of owning such a
metal object came partly from having political control over other people.
To sustain this incredible effort it was also necessary to motivate the hu-
man resources by devising incentive schemes and methods of punishment
that would lead to high levels of social discipline. Much of the control
was possibly implicit, through socialized values—a forerunner of the im-
plicit contracts of corporate culture. We can conclude that the ancient
Chinese were masters of coordination and control, the two essential pre-
requisites of successful management.
The descendants of these early illustrious masterminds maintained the
momentum of innovation and progress. It is well recognized that until
about A.D. 1400 China outperformed the West in terms of living standards,
and probably also with respect to social order and cohesiveness. The trade
deficits of Rome with China are famous, as are the four great technological
inventions: paper, printing, fire powder, and compass. They were later
adopted or, if we trust ethnocentric Western account, "(re-)discovered" by

SETTING THE STAGE 7

the Occident. In the spiritual area, Confucianism was the most ambitious
design and grandest project ever undertaken to realize the dream of the
perfect human society. These lessons in social engineering, unfortunately,
were never learned by the West, which went in almost exactly the opposite
direction—rampant and aggressive individualism—eventually destroying
the fabric of its society.
As regards the art of government, the first emperor, Qin Shi Huang (259
B.C.—210/209 B.C.), was one of the earliest known organizer-managers on
earth and one of the greatest leaders of all time. The ancient city of Xi'An,
the capital he established in 221 B.C., was the starting point of the world-
famous Silk Road, along which, in ancient times, together with people
and goods, the extremely advanced knowledge and ideas of China traveled
to the West (Fukuda 1989). Among those ideas there presumably were
concepts of organization. After unifying the nation into an empire, Qin
envisioned and implemented networks of roads, canals, and fortresses that
he eventually linked to form the Great Wall. Early on, he also understood
the importance of universal standardization. He is celebrated for estab-
lishing not only the basic measures and weights, but also standardizing
things like the axle lengths of carts, the written language, and laws. Stan-
dardization is still highly relevant—just think about arguments over stan-
dards for such technologies as high-definition television and "smart"
cards.

Voltaire pointed out that the Chinese administrative system was the most
perfect structural arrangement the world has ever known.

Another of Qin's organizational innovations was a fully centralized ad-

ministration and strong military organization, which helped to avoid the
rise of independent satrapies. This made China the first bureaucratic
nation-state in the world. The term "mandarin" is still epithet for a bu-
reaucrat, though with negative connotations in our times.3 Voltaire
pointed out that the Chinese administrative system was the most perfect
structural arrangement the world has ever known—the fact that China is
the only ancient civilization that still survives is a powerful testimony to
its historical effectiveness, inner strength, and adaptability. The bureau-
cratic and administrative structure created by the first emperor remained
the enduring basis of all subsequent dynasties in China, even though he
was officially criticized by later dynasties. The attacks were particularly
strong in the Han dynasty, which wanted to propagate its new state ide-
ology of Confucianism, whose aim was to achieve control through cultural
values, which were to glue society together and facilitate cooperative eco-
nomic efforts. Its rules of social behavior promoted morality and moder-
ation. The use of learning for self-cultivation and rituals and music for

8 LAYING THE GROUNDWORK

socialization purposes was originally espoused by Confucius and Men-
cius, and later systematized by Xun Zi—the molder of ancient Confucian-
ism and, given his impact in such a large and populous country, one of
the greatest philosopher the world has ever known. It contradicted Qin's
totalitarian legalism, which followed in the theoretical footsteps of Han
Fei Zi, the leading legalist philosopher of the classical period. The Con-
fucian ideology helped the Han dynasty (206 B.C.-220 A.D.) to become the
longest lasting empire in Chinese history.
The administrative system, which unlike in the later state of Prussia,
for example, was not replicated for the management of private enterprises,
was rooted in a meritocracy based on selection through rigorous testing
in the imperial exams and promotion according to capability. Its flexibility
and capacity for survival were demonstrated by the fact that it allowed
for transitions from incompetent leaders to new dynasties. Both meritoc-
racy and flexibility were impressively evidenced by the ascent of a former
beggar, Zhu Yuan Zhang, who became emperor by founding the Ming dy-
nasty (1368-1644).

China was the most advanced country in the world—it regarded the rest of
the world as inferior and barbarian.

Thirteenth-century China was remarkable for its modernism (Gernet

1962, p. 17) and innovation. An analysis of its government, economy,
technology, infrastructure, transport, trade and arts, provides startling
evidence for this assertion. Through bureaucratic excellence, the govern-
ment efficiently managed pivotal institutions and thus could control the
economy. An important corollary of the well-functioning administrative
system was the efficient collection of taxes. This provided a solid reve-
nue stream for investments in government-sponsored projects. The
economy was strictly monetary, without any trace of barter. Regional di-
vision of labor was marked; enterprises producing tea and salt were so-
phisticated. The city of Hangzhou became the richest and most popu-
lous metropolis in the world. Besides, the technological achievements
impress us even today. The transportation infrastructure was highly de-
veloped and used intensively. Trade flourished both nationally and in-
ternationally. An armada of vessels sailed natural waterways and an ex-
tensive web of intercity canals. Large seagoing junks reached India,
Arabia, and East Africa to trade in silk and porcelain. In the arts, China
reached ever new peaks. In almost any field of social organization and
creation, it thus was the most advanced country in the world. From its
ethnocentric perspective as the Middle Kingdom, it regarded the rest of
humankind as "barbarian" (76221017). Who could really criticize this
snobbish attitude?

SETTING THE STAGE 9

 The Japanese sages were right that the reputation of a thousand years may
be determined by the conduct of one hour.

After this glorious period full of original thoughts on leadership and

organization, the Chinese nightmare of institutional stagnation and de-
cline began. The ruling elite became corrupt, internally divided, and
sought pleasure instead of Confucian virtues—which proved to be a recipe
for disaster.4 The Japanese sages were right that the reputation of a thou-
sand years may be determined by the conduct of one hour. China missed
the time in the life of every problem when it is big enough to see, yet small
enough to be solved easily. As a consequence, after its brilliant peak in
the late Song dynasty, the downfall set in with the invasion by the "bar-
barian" Mongols, first with the fall of the capital of northern Song (1126),
and later with the capture of the southern city of Hangzhou (1276). China
was occupied for the first time in its history. After a short revival in the
Ming, this decline culminated in China's becoming a target of colonial
ambitions and a dumping ground for opium during another foreign-
dominated line of rulers, the Qing dynasty (1644-1912), established by
the Manchu invaders.
As a reflection of these aberrations that led to an unprecedented nadir,
in modern times China started yet another "natural experiment" in orga-
nizational theory (Shenkar 1984). In a sense the Great Cultural Revolution
wanted to prove the invalidity of contingency theory.5 The revolutionaries
claimed that organizations do not need formalization and specialization
under any circumstances, since they are only inherited faces of hidden
power without any functional rationale. Therefore, the Red Guards abol-
ished, for example, sterilization rules in hospitals and claimed that nurses
could easily perform surgery. The resulting loss of life provided strong
evidence for the rejection of this thesis.

Present reforms and development of the domestic

private sector: Reasons to celebrate

The contrast between shiny glory, full of innovative organizational forms,

and shameful defeat is startling. But after the Cultural Revolution, China
obtained a new lease on life, moving along a steep path toward a great
cultural and economic revival. To realize this dream of a national renais-
sance, China's leaders kicked off another organizational experiment. They
created an allegedly new economic system called "socialism with Chinese
characteristics", managing the transition from a centralized planning sys-
tem to a socialist market economy.
In the aftermath of the "liberation" in 1949, communist revolutionaries
quickly removed the non-governmental individual economy through col-

10 LAYING THE GROUNDWORK

lectivization in the mid-1950s. Only a few street barbers and other li-
censed artisans remained as strange relicts of times gone by, serving as
curious reminders of the "old society." An important pillar of the subse-
quent reforms that the late paramount leader Deng Xiaoping's started in
1978, was the recreation of a private economy. He intended to achieve this
objective by developing special economic zones in China's southeastern
coastal areas, and, at the same time, introducing new forms of ownership.
After the official endorsement of the "open door policy" during the Com-
munist Party's historic Third Plenum in December 1978, Shekou was es-
tablished in January 1979 as the first "special economic zone." In 1981,
the government encouraged entrepreneurs to set up individually-owned
enterprises (getihu qiye] in urban centers, followed by collective "town-
ship and village enterprises" (TVEs) in rural areas in 1984. Liu Shaoqui's6
prediction—"If we eliminate it [the private economy] too early, later we'll
have to invite it back" (Gao and Chi 1996, p. 23)—thus proved to be right.
Apart from these ownership changes, another key element of Chinese eco-
nomic reforms at the macro-level were changes in the state-business re-
lationship. Through the "director responsibility system", the state sepa-
rated government functions and officials from enterprise management
(see, for example, Schermerhorn 1987 p. 346; Hunt and Yang 1990).
The ownership-related policies caused a boom in nonstate economic
activity, which was particularly dramatic in the case of individually-
owned enterprises. The nonstate sector became an invaluable driver of
growth and employment. Private enterprises developed most rapidly in
Guangdong (Gao and Chi 1996, p. 26). They also grew at a fast pace in
other booming cities along the coast and in the south. The number of new
millionaires in private mainland Chinese enterprises, especially in these
areas, increased steadily. In contrast to this rosy picture, the Western hin-
terland did not fully participate in this entrepreneurial revolution and
capitalist bonanza, inspiring tremendous efforts to correct the imbalance
(Schlevogt 2000i).
The share of nonstate-owned enterprises in gross industrial output
grew from 24% in 1980 to 73.5% in 1998, while the share of state-owned
enterprises dropped sharply from 76% in 1980 to 26.5% in 1998. The
growth trajectory of the nonstate-owned economy was interrupted only
once. After it developed quickly in the first decade of reforms until 1989,
the Tian'anmen incident halted its development. In the aftermath of Deng
Xiaoping's famous inspection of south China in 1992, it resumed rapid
growth, breaking the 50% mark of total industrial output for the first time
in 1992. In the five-year period from 1994 to 1998 alone, the share of
individually-owned private enterprises in gross industrial output rose
from 10.1% to 16% (see Figure 1-1). Output grew at a compounded av-
erage rate of 30.2%, significantly exceeding the compounded average
growth of GDP in the same time period, which reached only 14.2%. This
demonstrates the enormous dynamism of this new class of enterprises.
From 1994 to 1998, the share of other private enterprises increased from
14.8% to 21.5%, with output growing by 27.2% annually on average. Pri-

SETTING THE STAGE 11

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