Business groups in China: Is Qiyejituan membership a guaranteed advantage?

The qiyejituan — collections of companies and firms that are joined via social and economic ties — have been playing an increasingly vital role in China's economy, just as the "chaebol" have been so important to Korea and the "keiretsu" to Japan. Membership in these groups can help firms compete in the global marketplace, but a research team led by the W. P. Carey School's Robert Hoskisson has discovered that this may not always be the case. Some business groups — specifically those subject to heavy government intervention, or those managed by individuals coming from the central-government tradition — actually stunted innovation.

For all of its remarkable growth, the Chinese economy remains tied in many ways to its government-controlled past — and that's not always a good thing for the country's businesses. Though in recent years business has been allowed to thrive in China, thanks in large part to economic reforms put in place in the late 1970s, the vestiges of old-guard government control remain. Simply put, businesses in China still have Big Brother looking over their shoulder in ways Western firms don't.

Evidence of this can be seen, especially, in the nation's business groups. A qiyejituan, is a collection of companies and firms that are joined via social and economic ties. Since the 1990s they have been playing an increasingly vital role in China's economy, just as the "chaebol" have been so important to Korea and the "keiretsu" to Japan. Academics are only just beginning to explore these groups: how they are constructed, how they work, and how they differ from business groups in other nations.

This work has begun to shed light on how the qiyejituan gives affiliate firms a leg up on their competition. Researchers have been able to show that membership offers numerous benefits to firms, including access to capital and other resources they may not otherwise enjoy, as well as cost savings that might be seen across business functions. A team of researchers led by Robert E. Hoskisson, W. P. Carey Chair in Strategic Management, recently conducted a study of more than 1,000 qiyejituan member firms.

The research was published recently in the July 2008 issue of Management and Organization Review. The team discovered that membership in certain business groups can help companies compete in the global marketplace, excel in the realm of innovation and save money.

But researchers also found that some business groups — specifically those subject to heavy government intervention, or those managed by individuals coming from the central-government tradition — actually stunted innovation. This called into question the idea that membership is such groups is always beneficial and brought important nuance to the discussion of the qiyejituan.

Hoskisson says the research showed that members in government-styled business groups are often asked to sacrifice advances in innovation and global competitiveness in order to please local government officials who are striving instead to prop up employment numbers. In a sense, Hoskisson says, the study split China's business groups into two categories — those that look forward with a market-based approach, and those that look backward, reflecting the nation's tradition of tight central government control.

"If the business group has more government ownership, and the managers of the group came from a background of managing in a former government monopoly, they're going to be looking toward the past," Hoskisson says. "If the business group is run by managers who are not constrained by this [government] view of the past and is less constrained by government ownership, then they tend to spend more money on being competitive in the marketplace."

Common in developing nations

Business groups are very common in developing nations, for good reasons. In these nations, almost out of necessity, governments play an unusually active role in economic development, and Hoskisson and his fellow researchers believe membership in a business group actually helps protect member firms, or at least insulate them, from "the undesirable effects of government-sponsored changes."

The team writes: "In this study, we propose that one of the most important roles of business groups … may be to provide a micro-institutional setting where the affiliate firms are partially protected from the undesirable effects of government sponsored institutional changes. We further propose that groups help affiliate firms adapt to the pressure through facilitating change in the cognitive maps of the key executives on the one hand and, at times, resisting such change on the other."

But even in the realm of business groups, the challenge faced by Chinese business groups is a unique one: These groups are on one hand fighting to maintain and grow their market share in the face of increased foreign and domestic competition, but on the other working to satisfy government officials, who push companies hard to achieve high employment levels, thereby staving off social unrest.

It's a situation that forces these business groups and affiliate firms to make hard choices — often having to invest in either innovation or employment, but not both.

To find out how companies and executives handled the situation, and to see how business groups helped or impeded their efforts, Hoskisson and his co-authors — W. P. Carey doctoral candidate Robert E. White, Daphne W. Yiu from the Chinese University of Hong Kong, and Garry D. Bruton from Christian University — examined a database collected from the five largest member firms from each of the 250 largest business groups in China.

The team says this sample was chosen specifically because the Chinese government concentrates much of its influence in business on the largest and most powerful of the nation's business groups. And they point out that, even though they focused their work on only the largest companies in only the largest business groups, the sample nonetheless included more than 1,000 companies ranging in size from 80,000 employees to six employees.

The information was collected between the winters of 1998 and 1999. The researchers teamed with the Chinese National Statistics Bureau to gather and study a wealth of data, including the nature of some of these business groups' control systems — the means by which management directs a business group.

Hoskisson notes that more and more business groups in China are being run by management teams that utilize a more Western, market-based approach, while others remain in the control of managers either working on behalf of or in reflection of the traditional Chinese state model.

The contrast helped provide important context for the study, allowing the team to compare a number of variables in how business groups were controlled, managed and operated. "Business groups have developed a mindset of moving toward a market process in China," Hoskisson says. "Whereas before, you had a central planning mindset. They previously weren't very market-oriented."

Looking forward … or back?

In the end, the team's findings showed almost precisely what Hoskisson expected. When government exercised too much control of business groups — either through heavy-handed government policy, direct government ownership or government-based managerial mindset — the results were, at best, mixed. Specifically, employment levels increased — just as government intended — but innovation suffered. In short, the high employment numbers came at the expense of global competitiveness.

It's a finding that the team says should be instructive for Chinese policymakers, who must understand the trade-off of their at-times meddling ways. "In this study, we found that all three government influence factors increased firm employment levels, while both government ownership and government managerial mindset among the group leadership produced lower market innovation," the team concluded.

"Thus, our study suggests that increased government influence leads to negative results for the firm with regard to market innovation." At the same time, the study offers an important implication for managers looking out for what's best for their companies.

When choosing a business group with which to do business, Hoskisson says, "you would also want to look at how much the government is involved, who the managers are, how they're oriented. Are the mangers coming from a central planning monopoly, or from a position that was not sourced by the government but rather set up voluntarily for strategic reasons? You basically want to look at the business group — and the nature of the business group."

He adds: "I would definitely want to move forward with someone who is forward-looking rather than backward looking. When they're backward looking they may want you to substitute their employee interests rather than being more market oriented. In business you should be looking for a partner you'd want to move forward with rather than partner with one which is backward looking."

Bottom Line:

• Chinese business groups, known as the qiyejituan, have since the 1990s been playing an increasingly vital role in China's economy, just as the "chaebol" have been so important to Korea and the "keiretsu" to Japan.
• Different business groups are managed in different ways, with some being subjected to greater government control or at the very least government-styled control, while others are run in a more Western style.
• In a recent study, W. P. Carey researchers found that business groups managed in a central-government style do produce higher employment levels, but at the cost of market innovation, which suffers under these same circumstances.