Making Capitalism in China: The Taiwan Connection

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Making Capitalism in China

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Making Capitalism in China The Tttiwun Connection

You-tien Using

New York Oxford OXFORD UNIVERSITY PRESS 1998

Oxford University Press Oxford New York Athens Auckland Bangkok Bogota Bombay Buenos Aires Calcutta Cape Town Dar cs Salaam Delhi Florence Hong Kong Istanbul Karachi Kuala Lumpur Madras Madrid Melbourne Mexico City Nairobi Paris Singapore Taipei Tokyo Toronto Warsaw and associated companies in Berlin I bad an

Copyright © 1998 by Oxford University Press, Inc. Published by Oxford University Press, Inc. 198 Madison Avenue, New York, New York 10016 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 Hsing, You-den. Making capitalism in China : the Taiwan connection / by You-ticn Hsing. p. cm. Includes bibliographical references and index. ISBN 0-19-510324-6 1. Investments, Taiwan—-China. 2. Taiwan—Foreign economic relations—China. 3. China—Foreign economic relations—Taiwan. 4. Mixed economy—-China. 5. China—Economic conditions—1976I. Title. HG5782.H76 1997 332.6V351249051— dc20 96-26627

1 3 5 7 9 8 6 4 2 Printed in the United States of America on acid-free paper

For my parents, Hsing Fu-ying and Ma Liang-hsuan

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Acknowledgments

This book concerns ethnicity-based transnational networks of entrepreneurs. It is also a work supported by a transnational network of friends and colleagues that traverses ethnic boundaries. My gratitude first goes to Manuel Castells. Theories of society and space compose only a small portion of the world he has shared with me for more than a decade. Shirley Szeyun Liu's perceptive observations of Chinese culture and her delightful onion and ginger chicken, both prepared in her kitchen, have been more than inspiring. Miriam Chion, Emma Kiselyova-Castells, Maureen Sioh, Erika de Castro, Nancy Nishikawa, and Lisa Bornstein have been my comaraderie in all respects. The encouragement and intellectual guidance from Li Yiyuan, Terry McGee, AnnaLee Saxenian, Peter Hall, Michael Watts, Richard Walker, Aprodicio Laquian, Gillian Hart, Thomas Gold, and William Goldsmith have been crucial in sustaining my work. I also wish to express deep gratitude to the following colleagues who have provided many valuable comments on my draft at different stages: Aihwa Ong, Donald Nonini, Nigel Thrift, Gary Hamilton, Gary Gereffi, Barry Naughton, Hubert Schmitz, Koichi Mera, Alain Lipietz, Susan Shirk, Mayfair Yang, Laurence Ma, Cindy Fan, Richard Kirkby, Kara Wing Chan, Wong Siu-lun, Linda Lim, Li Siming, James Rauch, Kris Olds, Mark Fruin, and Chu Yunhan. My fieldwork in the Taiwanese factories in China would have been impossible without the help of Kuo Redian, Masateru Uehara, Jiang Shintien, and Lau Shienlin. My colleagues in China, especially Yao Lixin, Wong Lifang, and Zhang Jie in Beijing; Zhao Min, Peng Zhenwei, and Wong Bowei in Shanghai; Chen Haoguang, Bao Jigang, Qiu Jianhua, Li Lixun, Xue Desheng,

viii

Acknowledgments

and Li Ling in Guangzhou, have been tolerant of my endless questions. Friends in the shoe factories in Guangzhou and Dongguan, especially Wei Weicheng, Tao Yingzi, and many others whose names cannot be disclosed, not only taught me how to hold a shoe without being burned by the heated last on the assembly line, but also generously shared with me their dreams. Teachers and friends in Taiwan have helped me maintain ties with my rapidly changing homeland. Very special thanks go to Hsia Chujoe, Wang Hungkai, Bih Hernda, Shieh Gwoshyong, Chang Jingsen, Kuo Chunglun, John Liu, Huang Yinggue, Kwan Liwen, Wang Yuling, and Wong Weijen. I would also like to thank the United States National Science Foundation and the Institute of East Asian Studies at the University of California at Berkeley for providing the research grants for this project from 1991 to 1992. The Canadian International Development Agency-funded Asian Urban Research Network project at the Centre for Human Settlements, University of British Columbia and the Chiang Ching-kuo International Scholarly Exchange Foundation in Taiwan have provided funds for this research from 1993 to 1997. Finally, Mark Kremzner's good humor, patience, and intellect have been indispensable in the later stages of this project. My parents, Hsing Fu-ying and Ma Liang-hsuan, and the rest of my family are the reasons for the initiation and completion of this book. I only hope that I am able to return to them what they have given to me. Vancouver, British Columbia February 1997

Y.-T. H.

Contents

Maps xi Coastal Provinces of China Guangdong Province xii Fujian Province xiv

xi

Introduction: Ganbei to Networks 3 The Gold Treasure Restaurant, Meijie, Southern China 4 From Multinational Corporations to Transnational Networks Chinese Capitalism ?—Ethnicity-Based Transnational Networks of Entrepreneurs 8 1.

Taiwan, Southern China, and the New East Asian Economy Transnational Investors from East Asia 11 Taiwan and China's New Partnership 15 Southern China, and the World Market 21

2.

Networked Investors from Taiwan 40 The Trade of Styles 40 Taiwanese Fashion Shoemakers in the World Market 44 Networks of Creative Imitation 52 The Work of the Network: Trading Companies 60 Networks Move to China 67 Social Networks 71

<

11

x

Contents

3.

Chinese Workers and Taiwanese Competitiveness Taiwanese Investment Strategies 78 Labor Exploitation 83

4.

Culture and Labor Discipline 92 Managing Shoe Manufacturing 92 factory Daughters and, Capitalist Soldiers Regionalism and Shopfloor Politics 104

78

99

5.

Autonomy in Local China 108 Cooking and Eating in Separate Kitchens 109 Bureaucratic Entrepreneurs 118

6.

Reform Coalitions and Blood Connections 128 Transnational Business Partnership in Local China Gift Exchange and Guanxi Building 132

7.

129

Global Networks and Local Development 144 Networks of State-Based Powers 146 China and Transnational Networks of Chinese Entrepreneurs Foreign Investment and Local Development 155 Appendixes A Notes on Methodology B List of Interviews

161

165

C Production Processes and Division of Labor in the Footwear Industry 175 D Labor Contracts in Two Taiwanese Shoe Factories 179 Notes

183

Bibliography 215 Works in Chinese 215 Works in English 222 Index

243

147

COASTAL PROVINCES OF CHINA

xi

GUANGDONG PROVINCE

xn

xiii

FUJIAN PROVINCE

xiv

Making Capitalism in China

Now, what is really meant by making a business, that is, a capitalist undertaking, flourish? . . . The end of (the capitalist undertaker's) activities is necessarily projected into infinity. There is never a point in the future when the total profits are sufficiently great for the undertaker to say: It is enough. Werner Sombart, The Quintessence of Capitalism Like growing young trees, . . . the entrepreneur had to use all his competence to stretch and reach out in all directions,. . . "If one does not advance, one has to retreat, and if one retreats, one has to close down." But, in order to expand, one needs people, including those who are not family. Keong Lan Ang, a Chinese entrepreneur in Singapore, qtd. in Chang Kwok Bun and Claire Chiang, Stepping Out: The Making of Chinese Entrepreneurs

Introduction Gctnbei to Networks

By 1991, Taiwan had surpassed the United States and Japan to become the second largest investor in China after Hong Kong. Realized direct investment from Taiwan to China reached US$10 billion between 1978 and 1994, accounting for 10% of China's total foreign direct investment. If Taiwan capital registered as Hong Kong investors in China are included, the figure can be easily doubled.1 Taiwanese-funded factories provided more than 5 million jobs in China—of those, 70% were concentrated in Guangdong and Fujian Provinces (Sung, 1994:50; Kao et al., 1995:55). What makes the phenomena intriguing is not just the volume of capital involved but also the pace of growth. It was not until 1987 that the Taiwan government lifted the ban on Taiwanese visiting mainland China, after 40 years of political rivalry between the communists and the nationalists. The first Taiwanese to board the westbound flight were manufacturers of shoes and TVs. Under mounting pressure from the Organization for Economic Cooperation and Development (OECD) protectionists and the Association of South East Asian Nations (ASEAN) competitors, Taiwan's manufacturers found both new markets and lower production costs in China. Most of all, as a Taiwanese investor in China put it, "we [Chinese and Taiwanese] speak the same language and enjoy the same food."2 Indeed, the stomach directs the story. But how did the language and the food move capital across regional boundaries in such large strides? If "the same language and food" implies the significance of cultural affinity between the capital provider and the capital receiver, what is involved in such cultural processes? As Taiwanese invcstors^a,nbei(a toast before drinking liquor, literally "dry the glass") to their Chinese busi3

4

Introduction

ness partners, how are the transnational investment networks established with the facilitation of the cultural devices that are shared by Taiwanese and Chinese? How is the ethnicity-and-culture-based networking shaped by the institutional and historical conditions of Taiwan, China, and East Asia in the 1990s?

The Gold Treasure Restaurant, Meijie, Southern China In the spring of 1992,1 conducted my field research on Taiwanese manufacturing investment in Meijie,3 a semirural town of 25,000 people in the Pearl River Delta of Guangdong Province. I came to grasp the subject mostly at karaoke dinner parties. There are two karaoke bars, five karaoke restaurants, and more than 400 Taiwanese shoe factories in Meijie. In the karaoke restaurants, as Cantonese style steamed cod was being washed down by Pearl River Beer, I succeeded in making connections with representatives of Taiwanese investing companies and with local Chinese officials for interviews; the investors themselves met with local officials to discuss forming business partnerships. The language we shared was not only Mandarin, but also the linguistics of interpersonal relations. Through such interpersonal relationships (orguanxi'm Chinese) Taiwanese investors managed to maintain their time- and cost-based competitiveness in the world markets after moving production to China. Taiwanese manufacturing investment in southern China since the late 1980s represents a new pattern of foreign direct investment in the rapidly industrializing regions. This new pattern of investment is characterized by investors who are not vertically integrated giant transnational corporations. Instead, investors are mostly small- and medium-sized independent manufacturing firms, with 400-800 employees and an average investment of US$1.5 million. In addition, in contrast to the common practice of transnational corporations dealing with the national government, die new pattern of investment is for small investors to negotiate directly with low-ranking local governments in the region receiving the capital. The effectiveness of the investment results from two major favorable conditions: the newly gained economic autonomy of local governments in southern China and the cultural and linguistic affinity between the Taiwanese investors and their local agents in China.

Number 144, Lane 22, Darning Road, #902, Taichung, Taiwan At 9:25 A.M., June 3,1994,1 was sitting in the office of a Taiwanese fashion shoe trading company on the ninth floor of a commercial-residential tower in Taichung, central Taiwan.4 My interview with the owner-manager of the company of six was interrupted for the third time since we started the interview 20 minutes before by an emergency phone call. This time the call was

Introduction

5

from Hong Kong. The company's Hong Kong broker called to report the delay of a delivery contracted to a factory in Dongguan. As my interviewee shouted into the phone behind the sample shoes spread out on her desk, I noticed a document inching out from the fax machine. It was from Xiamen, Fujian Province in southern China, confirming her visit to the factories there in two days' time. Before we finally finished the interview, my interviewee had talked to China (twice, once each to partner factories in Foshan and Dongguan in the Pearl River Delta), Hong Kong (twice, including once to her husband, who's in charge of the Hong Kong operation), Los Angeles (the buyer), and Vancouver (sister and sales representative), and taken two local calls (one from the sample shoemaker, the other confirming lunch with a U.S. buying representative in Taipei the next day). And it was too late to call New York to negotiate a new date for the delayed delivery. While this was hardly a "big-time" worldwide operation, it was "globalized" enough for a six-person company. More intriguing is what was behind the office on the ninth floor of that tower in Taichung: the enterprise networks across sectors and territorial boundaries. Taiwanese industries maintain their flexibility in production and marketing on the basis of a network of firms. The networks are composed of producers, material and component suppliers, machinery builders, and marketing agents. The role of trading firms is crucial in coordinating both the production and marketing ends of the value chain. More than the results of a straightforward economic calculation, the networks are based on long-term social relationships among individuals across firms and a set of business practices embedded in Taiwan's export manufacturing industries. The well-coordinated social and production network provides flexibility for the cost- and time-sensitive export industry in Taiwan. When the manufacturers move to China, the production networks are stretched across the straits.

The Peony Restaurant, Downtown Vancouver I was receiving a delegation from a southern province in China, this time in a dim sum restaurant5 in downtown Vancouver, British Columbia, on a rainy day in November 1995. The delegation was here to visit several B.C.-based Canadian companies that produce equipment for paper mills. The total budget for purchasing the new equipment was about US$15 million. The delegation included, among others, the general manager of the provincial Light and Textile Industrial Company (who was also the ex-director of the provincial Light and Textile Industrial Bureau), the vice director of the provincial Economic and Trade Committee, the director of Naiiping (NP) Municipal Economic and Trade Committee, and the chief engineer and the factory director of the provincial-owned NP Paper Mill (who was also the deputy chairman of NP City People's Political Consultative Conference). I asked the general manager of Fujian Light and Textile Industrial Company how they planned to finance the project. He replied, "mostly from our own pocket," that is, from the province's own foreign exchange reserve. Later

6

Introduction

on, the director of NP Paper Mill told me, " . . . in fact the province's foreign exchange is squeezed from the enterprises like ours." I asked him where his paper mill got the foreign exchange. He said, "We have a trading company in Hong Kong." I said I didn't know that his province exports paper products. He explained patiently, "Not much. But with the export and import license we can do a lot more than dealing with paper." That reminded me of a trade delegation to Vancouver from another coastal province in China two years earlier. After my interview with the general manager of a jituan gongsi (business group—a Chinese version of conglomerates) from a city in the province, who was also the deputy party secretary of the city, my interviewee asked me if I was interested in working for his company as the North American business representative. The energy of these delegates to Vancouver, as well as those officials I met in China, impressed me greatly. Their enthusiasm was very different from a stereotypical impression that the term "socialist bureaucrats" may have produced. In fact, in postreform China, local bureaucrats have been the most active entrepreneurs in the newly opened economy. The economic decentralization policies in China have provided local officials with unprecedented fiscal autonomy and authority over economic resources. From 1978 to 1990, the Chinese local governments' share of the total national revenue grew from less than 20% to 80%, one of the highest in the world (Wang and Hu, 1994:40). Local bureaucrats have been enjoying an administrative monopoly over capital (including foreign exchange), land, and circulation channels of commodity; they are also directly involved in local accumulation by running businesses, including foreign trade. Long gone are the days when the precious foreign exchange was available only to the Ministry of Foreign Economic Relations and Trade in Beijing, and when importing equipment from abroad was not within the reach of a factory director of a paper mill in a small city. Economic autonomy is not only enjoyed by the provincial officials but also by those at the subprovincial levels like county, city, even township and village. These active bureaucratic entrepreneurs in local China have, in turn, been the most important partners for the Taiwanese investors in the south.

from Multinational Corporations to Transnational Networks This book uses the case of Taiwanese investment in southern China to examine the interaction between local politics and transnational capital in the rapidly industrializing region. The key question it raises is: how is the process of such capital flows shaped by the cultural, institutional, and historical conditions? Since the early 1980s, although the OECD-based multinational corporations (MNCs) continue to play a critical role in the global economy, transnational investments by the newly industrializing countries have received increasing recognition (Agrawal, 1981; Dunning, 1981; Kumcr and McLeod, 1981; White, 1981; Chen, 1983; Lall, 1983,1984; Wells, 1983; Scrcovich, 1984).6 Most studies of the so-called Third World MNCs were generated

Introduction

7

from a framework that was similar to the one used for the analysis of the OECD-based MNCs. Consequently, the focus of the works on Third World MNCs has been how they behave differently from the OECD-based MNCs in terms of investment scales, levels of technological input, labor intensity, and establishment of local industrial linkages. While some writers believed that Third World MNCs have a greater potential in transferring more appropriate technologies to the host country and are under greater pressure to purchase inputs locally (Chen, 1983; Wells, 1983; Lall, 1984), others argued that although smaller in scale, the new MNCs are not qualitatively different from the traditional ones (Jenkins, 1987:159-162). However, given the increasingly diversified organizational characteristics of transnational capitals and their investment strategies,7 the dichotomy of OECD-based MNCs versus Third World MNCs has become less relevant to our understanding of the operation of transnational capital, which has never been homogeneous, including before the emergence of Third World MNCs. Meanwhile, the literature on the network form of production, as opposed to vertically integrated corporations, has provided a helpful alternative for the analysis of regional economic organization (Brusco, 1982; Piore and Sable, 1984; Aydalot and Keebel, 1988; Maillat and Lecoq, 1990). Compared to centralized corporations, the decentralized networks of firms have been more flexible and adaptive to different production and market conditions. Most important, the networks are shaped not just by rational, economic calculations, but also by socially embedded and territorially grounded relationships (Polanyi, 1944; Granovetter, 1985, 1993; Swedberg, 1987; Saxenian, 1990, 1994). Some formal and informal institutional elements contribute to the formation of such social networks underneath the economic networks. The formal institutions include trade associations, the structure of labor markets, and the dynamism of the local government; whereas the long-term, personalized, and face-to-face interactions among the agents are less formal, yet equally significant. The social networks generate the synergy of intellectual ambience, trusting relationships, and information exchanges, which will further enhance the flexibility, adaptivity, and competitiveness of the networked firms. If the production network is socially embedded and territorially grounded, what happens when the network expands from one territory to another? Under which conditions will investors from outside the region be able to establish effective social and business networks in the new territory? What kind of network will that be? And, how do we connect the question of border-crossing networks with that of transnational capital flows? The questions need to be pursued not just from the perspective of the investor but also from that of the host region. The diversification of transnational capital is not only the result of the organizational strategy of the capital provider but also is shaped by the receiving end of the capital flows. As suggested by Anthony Giddens (1994), globalization is conditioned by, and interacting with, local interpretations (p. 5). Studies of localities in the face of globalization (Bagguley et al., 1990; Ong, 1991; Hall, 1991) have

8

Introduction

focused on elements such as production organization, power structure, ethnic/racial constitutions, gender and labor relations, cultural system, historical construction, and the intersections of these elements as defining the problematic of a locality. In the local and global articulations, the question of the state still occupies the central stage. The model of Triple Alliance by Peter Evans (1979,1987,1995) regards the Third World's industrialization as a process of bargaining among three major actors: MNCs, the state of the host country, and the local industrialists. Works on the role of the nation-state in the globalizing world economies and the restructuring of international business have flourished in recent years (Johnston, 1986; McMichael and Myhre, 1991; Murphy and Tooze, 1991; Bienefeld, 1992; Castells, 1993; Logan, 1993; Martin, 1994; Roberts, 1994; Thrift, 1994).8 The question is no longer a dichotomy of the local versus the global but interaction and negotiation between them. It is the relationship, rather than the atomized variables, that informs the problematization and methodology of the investigation of globalization. The nation-state may be strengthened or weakened, yet a more intriguing question is the reconfiguration of the state in the course of globalization. As transnational networks of capital expand across national boundaries and build direct linkages with localities, the nation-state-centered power structure may transform into networks of local powers, including local states. Chinese Capitalism?—Ethnicity-Based Transnational Networks of Entrepreneurs While capital might be less concerned about national boundaries in the globalizing world economy (Ohmae, 1991), it is still shaped by institutional and cultural boundaries (Hsing, 1995, 1996a). One of the most evident examples has been the dominance of overseas Chinese capital in post-Mao China. Between 1982 and 1994, Hong Kong and Taiwan investors have contributed more than 70% of the total of $107.4 billion realized foreign capital inflows to China. The formation of the "Greater China Economic Circle," which involves China, Hong Kong, and Taiwan, has been discussed widely by policy makers and researchers alike (Y. Chen, 1994). The trading networks in Southeast Asia (Kuo, 1991; Menkhoff, 1993), including the emergence of Johor-Singapore-Riau growth triangle (Parsonage, 1992), have also contributed to the establishment and expansion of transnational economic networks among ethnic Chinese. Most importantly, overseas Chinese capitalism has expanded not only in geographical but also in sectoral terms (E. K. Y. Chen, 1993; East Asia Analytical Unit, 1995). Culture as an institutional and historical formation9 is a key characteristic of "Chinese capitalism" and the subject of many important writings (Lim, 1983; Numazaki, 1986; Hamilton and Biggart, 1988; S. Wong, 1988, 1991, 1992; Jesudason, 1989, 1994; Hamilton and Kao, 1990; Redding, 1990; Hamilton, 1991 (ed), 1996; Mackie, 1992a, 1992b; McVey, 1992; J-S. Chen, 1994). The major concerns in the literature include the trans-

Introduction

9

formation of Chinese family firms; the long-term personalistic ties (guanxi) on which a trusting business partnership is built; and most of all, the relationship between the state and Chinese business networks. The decentralized network was seen either as a response of the private sector to counter the dominant state, or as a development despite the absence of the state apparatus (G. Wang, 1991; S. Wong, 1991; Hamilton, 1996). Although guanxi networks were seen as a way of bypassing state control and opposing state power (Yang, 1994), it was also argued that guanxi strengthens state power through the patron-client ties between bureaucrats and their dependents (Walder, 1986). This book proposes that networks and the state are not necessarily two polar opposites. Rather, networks of entrepreneurs can be reinforced by a decentralized state structure, and vice versa. Investors from Taiwan have established investment networks with local bureaucratic entrepreneurs in southern China. In the new political economy ofpostreform China, the major dividing line is hardly society versus the state. Instead, the tension and bargaining between the central and the local, and the local's direct linkages with the global, have set the tone of the workings of the Chinese business networks since the mid-1980s. Institutional conditions in southern China have shaped the forms of guanxi between Taiwanese investors and local Chinese bureaucrats.10 The question of interpersonal ties in economic processes has had a long tradition in anthropological and sociological studies, especially within the framework of "gift exchange" (Malinowski, 1961; Mauss, 1967; Sahlins, 1972; Geertz, 1973; Bourdieu, 1980; Curtin, 1984; Yang, 1988, 1989, 1994). Gift exchange is understood as a process of building trusting interpersonal relationships in economic activities. It is established through the maintainance of reciprocal assistance and enduring indebtedness between the parties involved by exchanging favors and gifts. What makes the Chinese way of gift exchange different is the cultural tools used for gift exchange, such as linguistic familiarity that helps to read hidden messages; the measurements of the value of the gift; the meaning and practice of time in the sequence of exchange; and the demarcation of space, such as private and public domains when legal and moral issues are concerned. The increasing economic autonomy of Chinese local governments (in terms of their regulatory role, administrative monopoly of economic resources, and direct involvement in accumulation), combined with the tradition of Chinese bureaucracy in its flexible interpretation and implementation of policies, has provided an institutional framework in which the actual practices of gift exchange between Taiwanese investors and local Chinese bureaucrats are carried out. The paternalism- and regionalism-based shopfloor politics and labor disciplinary schemes have constituted another dimension of the ethnicity-based transnational capital flows. The massive interregional migration pushed by the increasing regional disparities and pulled by a loosened household registration system has provided an abundant supply of workers with diversified qualifications in southern China. Within such an institutional context, the

10

Introduction

family and military metaphor in the male-dominated factories and the narrative of "modern and rich capitalist Taiwan versus poor and backward communist China" flourished. Facilitated by the common language they share with the local workers and aided by the local Chinese shopfloor managers, Taiwanese investors managed to improve productivity and to transfer managerial know-how and the capitalist ideology of efficiency to China, and thus paved a fast lane for local China to link up with the world market. This book is divided into seven chapters. Chapter 1 examines the economic transformation of Taiwan and China in the new East Asian economy, including capital outflows from Taiwan, southern China's opening up to the world market, and the trade and investment linkages between the two territories. Chapter 2 focuses on Taiwan's industrial restructuring in the global competition, represented by the export fashion shoe industry. The network of creative imitation of the fashion shoe industry and its expansion across the straits are discussed. Chapters 3 and 4 examine Taiwanese investors' labor-related production strategies and labor practices in southern China, as well as the culturally informed and institutionally enhanced labor disciplinary schemes in Taiwanese-funded factories. Chapter 5 provides an analysis of China's new political economy, with an emphasis on the increasing local economic autonomy and the emergence of bureaucratic entrepreneurs who have become the most important business partners for Taiwanese investors. Chapter 6 analyzes the way cultural connections between Taiwanese investors and local Chinese officials have facilitated the investment networks. Chapter 7 assesses the research direction that frames the global/local articulation and economic/ cultural interaction with the links between local states and ethnicity-based global business networks; and most of all, the impact of such global networks on China's local and regional development. The methodology adopted in this research can be found in the appendixes.

1 Taiwan, Southern China, and the New East Asian Economy

The increasing intraregional investment within Asia has been one of the most distinctive phenomena in Asia's new economy. The four East Asian dragons—Hong Kong, Taiwan, Singapore, and South Korea—have not only changed their role from capital receivers to capital exporters, the main destination of their direct overseas investment has also been within Asia, especially in the ASEAN countries and China.1 This chapter discusses the emergence of the new transnational investors from East Asia and takes a closer look at Taiwan's trade and direct investment in China. The chapter also examines two local conditions in southern China in which Taiwanese-funded manufacturing projects have been concentrated: southern China's economic connections with the outside world via Hong Kong, and a large pool of labor with diversified qualifications. These two conditions have set the platform for southern China to interact with transnational capitals, including those from Taiwan.

Transnational Investors from East Asia The impressive economic performance of the East Asian newly industrialized countries (EANICs), namely South Korea, Taiwan, Singapore, and Hong Kong, since the 1960s has been a well-told story. Despite major differences in their historical and social conditions, these four countries have converged on a path of growth based on strong state intervention in the processes of export-oriented industrialization (Gold, 1986; Deyo, 1987; Gereffi and Wyman, 1990; Haggard, 1990; Wade, 1990; Castells, 1992). The EANICs 11

12

Making Capitalism in China

have also become the model of development for other newcomers in the developing world (Lubeck, 1992). As policy makers in other developing countries try to reproduce the EANICs' experiences, however, the EANICs themselves have been struggling since the early 1980s to transform their economies into a new phase of industrialization. The oil shocks of the mid- and late 1970s slowed growth and created macroeconomic instability in the OECD countries, the EANICs' major markets. Protectionist policies, such as imposing quotas on labor-intensive manufactured imports, in the OECD markets arose in the 1970s and worsened in the 1980s. Meanwhile, the EANICs began to feel the threat of the new competitors from the second-tier exporters of labor-intensive manufactured products in Southeast Asia. The EANICs have also experienced tightening labor markets and rising real wages, demanding a shift in their competitive strength away from low labor costs alone (see Table 1-1 for the increase of wage level in East Asia). Large bilateral trade deficits with the United States brought economic policy in the EANICs under closer scrutiny. The EANICs were pressed to liberalize trade in and to relax constraints to foreign investment. After the mid-1980s, the EANICs were pressured by the United States to allow their currencies to appreciate rapidly (see Table 1-2). Erom 1986 to 1992 the Taiwan dollar appreciated 50% (Chung, 1994:3). Although the EANICs' responses to external constraints were varied, there were also broad similarities. Each of the EANICs made efforts to upgrade labor-intensive industries and to diversify the economy. Each made greater efforts to attract foreign investment and launch new initiatives for upgrading local technological capabilities (Amsden, 1989; Evans and Tiger, 1989; Schive, 1990; Ernst and O'Connor, 1992; Evans, 1995). The EANICs also diversified into different markets, developing trading ties with other developing economies as well as the emerging markets in Eastern Europe (Chen, 1993; Clark and Kim, 1995; Hoon and McBeth, 1995). They manufactured more technologically sophisticated products at home, while shifting the production of low-end products to the newly industrializing countries in Asia. The increasing intraregional foreign direct investment by the EANICs within Asia has been one of the most distinctive characteristics of the New Asian economy since the mid-1980s. By 1990, the EANICs were the largest investors in all ASEAN countries except for Singapore (Tan et al., 1992), and overtook Japan's leading role in the ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines) (Yue, 1993:85). For instance, Hong Kong has been the largest investor in China, and Hong Kong companies employed more manufacturing workers in China's Guangdong Province than at home.2 Singaporean companies made a big push into neighboring Malaysia and Indonesia (Ho, 1994); and South Korean and Taiwanese manufacturers are emerging as major investors in Vietnam, Thailand, the Philippines, and China (Wells, 1983; Chiu, 1992; Kao, Lee, and Lin, 1992; Chang and Thomson, 1994; Chung, 1994; Hsing, 1995; Kao et al., 1995). In 1987, more than

Taiwan, Southern China, and the New East Asian Economy

13

Table 1-1 Change of Industrial Wage in the Asian NICs (in US$) Average industrial monthly wage (US$)

Increase (%)

1980

1984

1988

1993

1984-1988

1988-1993

302 325 363

633 598 544

1,103 1,092 745

110 84 50 (1982-1988) 32 145

74 83 37

Singapore China

159 196 289 (1982) n.a. 65

106 101

Thailand

57

58

146

South Korea Taiwan Hong Kong

Philippines

n.a.

Indonesia Malaysia

n.a. n.a.

547 416 167 68 (1983) (1989) 117 74 (1983) (1989) 158 75 (1983) (1989) 110 n.a. 236 n.a.

1,125 335 288 297 (1992) n.a. 254 (1990)

111 88 (1983-1989) (1989-1992) n.a. n.a. n.a. 8 (1988-1990)

Source: Various issues of Monthly Statistics of Republic of Korea; Yearbook of Labor Statistics of Singapore; Monthly Report of Wage Levels and Producticity in Taiwan; Annuaire Des Statistiques du Travail, Thailand; Anuario de Estadisticas De Trabazo, the Philippines; Philippine Statistical Yearbook, 1994; Business Week, May 15,1989; Statistical Yearbook for Asia and the Pacific, 1993 and previous years; The Economist Country Intelligence Unit, various issues; Buku Tahunan Perangkaan, Yearbook of Statistics, 1992, Malaysia.

40% of the foreign direct investment in Malaysia came from developing countries, of which 93% was from within Asia-Pacific. Between 1986 and 1990, South Korea and Hong Kong were the second and the third largest foreign investors in Thailand after Japan (US$10 billion), with the total investment of US$5.5 billion and US$2.5 billion respectively, ahead of the United States (US$2.4 billion) (Yeung, 1994a:1934~-42). While the dominance of Japan's capital in Asia and other parts of the world has been comparatively well documented,3 it is the new transnational investors from East Asia—the Four Dragons and their overseas investments—that demand more attention. Taiwan has been no exception in the EANICs' economic transformation in the last decade. Low labor costs formed one of the competitive edges of the Taiwanese manufacturers in Taiwan's initial phase of export-led industrialization. In the mid-1970s, wage levels in Taiwan began increasing rapidly. The average monthly wage in the manufacturing sector increased from US$95 in 1975 to US$353 in 1985, US$821 in 1990, and US$1,086 in 1992.4 As more high school graduates were attracted to the higher waged industries and the expanding service sector, the manufacturing sector faced a severe shortage of mid- and low-skilled labor. The unemployment rate dropped from 2.4% in 1975 to 1.7% in 1988, and 1.4% in 1993.5 In addition, despite various controls on labor organization and activity by the gov-

14

Making Capitalism in China Table 1-2 Change in Exchange Rates of the Four EANICs' Currencies against the U.S. Dollar

Year 1986 1987 1988 1989 1990 Percentage change on U.S. dollar (1986-1990) 1991 1992 1993 1994 Percentage change on U.S. dollar (1991-1994)

Singapore dollar/US$

Taiwan NT$/US$

Hong Kong dollar/US$

South Korea won/US$

7.803 7.798 7.806 7.800 7.789 +0.18

881.450 822.570 731.470 671.460 707.760 +19.71

2.177 2.060 2.012 1.950 1.812 +16.77

37.838 31.740 28.588 26.407 26.893 +28.93

7.771 7.741 7.726 7.738 +0.43

733.350 780.650 808.100 788.700 -7.55

1.726 1.629 1.608 1.461

26.815 25.164 26.626 26.240 +2.14

+ 15.35

Source: Key Indicators of Developing Asian and Pacific Countries, Asian Development Bank *Average of Period, no adjustment for inflation

eminent, Taiwanese workers are becoming more militant, as opposition politics in Taiwan began to emerge in the early 1980s (Hsiao, 1992:63-64). In addition to the low-cost labor, Taiwan's price competitiveness in export in the 1970s was facilitated by the government's protection of the New Taiwan dollar from any surge against major foreign currencies, especially the U.S. dollar (Taiwan's manufacturers depended heavily on the U.S. market). In 1987, the U.S. market absorbed nearly 50% of Taiwan's exports while providing only about 11% of Taiwan's imports (Dittmer and Choy, 1991:5). Commodity exports to the United States accounted for 34% of Taiwan's total in 1975 and grew to 48% in 1985.6 As the Taiwan-U.S. trade surplus grew, the United States pressured the Taiwanese government to liberalize foreign trade and to allow the New Taiwan dollar to appreciate. From 1978 to 1988, the New Taiwan dollar appreciated 22.4% (from NT$36.00 to NT$28.59) against the U.S. dollar.7 The cost of Taiwan's exports rose sharply. Together with the wage spiral, the rising New Taiwan dollar and import quotas imposed by the U.S. government threatened Taiwan's competitiveness as a low-cost exporter. Meanwhile, the second-tier NICs in Southeast Asia—Indonesia, Thailand, Malaysia, and the Philippines—with their abundant supply of cheap labor (see Table 1-1 for the comparison of wage levels between the first- and the second-tier NICs in Asia) and export-driven policies, were catching up rapidly. As Taiwan struggled with the bottleneck of further economic growth

Taiwan, Southern China, and the New East Asian Economy

15

after the mid-1980s, Indonesia, and Malaysia have been expanding their lowcost, labor-intensive export industries and elevating their competitive positions in the world market. The result of the crises was falling investment and international trade, and decline of GNP growth rates. Taiwanese companies' profits outside the financial industry fell by one-third. Annual growth of GNP fell from around 10% in 1986 to 5% in 1990; and consumer prices grew from nearly 0% in 1985 to almost 5% in 1990.8 Taiwanese export manufacturers began to search for cheaper labor in other countries such as Malaysia, Thailand, the Philippines, and Indonesia. Between 1986 and 1989, direct Taiwanese investment in the four ASEAN countries was close to US$10 billion and grew to US$14.8 billion by the end of 1993 (see Table 1-3). The direct investment in these countries was also for the markets of the countries ASEAN exporters have access to—especially the European Community and the United States (Chang and Thomson, 1994:116). However, the cultural and linguistic barriers have made it very difficult for the small- and medium-sized Taiwanese manufacturers who have had little experience in and resources for conducting manufacturing outside Taiwan.9 In my interviews with the Taiwanese manufacturers who had managed production in Southeast Asia, the "untrustworthy" business partners and "lazy" workers in those countries were often mentioned.10 They even complained about religious holidays and dietary intake controls in the month of Ramadan in Malaysia, which often weakened the physical strength of workers and thus affected productivity. Political instability in the Philippines, racial conflicts in Malaysia, limited favorable investment conditions for foreign investors, restrictions on majority ownership of foreign investors, and rapidly rising wage levels in these second-tier NICs have also reduced their attraction to Taiwanese manufacturers. In the early 1980s, before the Taiwanese government lifted the ban on Taiwanese residents' contact with mainland China, some adventurous Taiwanese manufacturers began to discreetly move their production to China under the cover of paper companies registered in Hong Kong, Singapore, or other countries. In 1987, for the first time in 40 years, the Taiwanese government allowed Taiwanese residents to visit their relatives in China. Many Taiwanese manufacturers took the first flights to China and found it a more appealing location to set up production than other Asian countries.

Taiwan and China's New Partnership Direct Taiwanese investment in China did not happen overnight. After four decades of political rivalry between the Taiwan and China regimes and social separation between the two peoples, the economic connection between the two territories in the 1980s began with bilateral indirect trade through the mediation of Hong Kong.11 In order to support the rapid growth of light industries since the 1980s, China imported a large amount of industrial materials and intermediary

Making Capitalism in

16

Table 1-3 Direct Taiwanese Investment in Four ASEAN Countries (US$ million)

Malaysia Thailand Indonesia Philippines Total

ASEAN

Total

1993 Total

741 124 903 7

4,347 2,968 2,168 408.3

5,900 4,500 4,030 440

3,903 1,775

10,341.3

14,870

1987

1988

1989

1990

91 4 300 70 8 18 0.4 0.9

313 842 913 110

815 871 158 149

2,383 761 618 141

92.4 399.9 2,178

1,993

1986

1991

Source: Chiu and Chung, 1992:8. Statistics of ASEANs are based on information collected by Industrial Development and Investment Center, Ministiy of Economic Affairs, October 1991. The 1991 values are recorded in different months: June for Thailand and Indonesia, July for the Philippines, and August for Malaysia. Industrial Development and Investment Center, Ministry of Economic Affairs, 1994.

manufactured goods. Taiwan became one of the major suppliers of such goods. Textile fabrics, yarns, television tubes, parts and components of electronic appliances, machines and mechanical appliances for the rubber and plastic material industries, and parts of footwear were the leading commodities Taiwan shipped to China (Chiu and Chung, 1992:15).12 China shipped agricultural (e.g., herb medicine) and industrial materials to Taiwan. In 1981, the Taiwan-China trade was worth about US$460 million, and almost doubled in 1985. In 1988, the Taiwan government approved 50 commodities, mainly agricultural and industrial materials, to be indirectly imported from China; by 1989, the number jumped to 153. By 1992, 705 types of semifinished industrial products were permitted to be imported from China (Kao et al., 1995:53-54). The value of the bilateral trade escalated from less than US$1 billion in 1985 to US$5 billion in 1990, and to US$14 billion in 1993 (see Table 1-4). Between 1988 and 1993, the total value of the TaiwanChina trade was US$32 billion (Kao et al., 1995:27). If the increasingly prevalent smuggling was counted, the size of the trade across the Taiwan Straits was even greater.13 Table 1-4 also shows that Taiwan has enjoyed a large trade surplus with China. In 1993, Taiwan sold more than US$12.7 billion worth of commodities to China, making up 92% of the total value of Taiwan-China trade. The importance of the China market for Taiwan's foreign trade increased rapidly. Taiwan's export to China accounted for 3.21% of Taiwan's total exports in 1985 and rose to 16.47% in 1993. Import from China to Taiwan accounted for only 1.4% of Taiwan's total imports in the same year. It was projected that after 1997, Taiwan's exports to China will exceed 25% of Taiwan's total exports.14 In addition to trade that involved shipment through Hong Kong of commodities produced either in Taiwan or China, another type of trade, the so-called "triangular trade" between Taiwan and China, which was not

Taiwan, Southern China, and the New East Asian Economy

17

Table 1-4 Taiwan-China Direct and Indirect Trade (excluding the Triangular Trade) (in US$ million)

Year 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (first 2 months)

Export from Taiwan to China (1)*

Export from China to Taiwan (2)**

TaiwanChina trade (l) + (2)

Percentage of Taiwan's total trade

384.2 194.5 157.8 425.5 986.8 811.3 1,226.5 2,224.2 3,244.8 4,171.3 6,928.3 9,696.8 12,727.8

75.2 84.0 89.9 127.8 115.9 144.2 288.9 478.7 586.9 765.4 1,125.9 1,119.0 1,103.6

459.4 278.5 247.7 553.3 1,102.7 955.5 1,515.4 2,702.9 3,831.7 4,936.7 8,054.2 10,815.8 13,831.4

n.a. n.a. n.a. n.a. 2.17% 1.49% 1.71% 2.45% 3.23% 4.05% 5.79% 7.05% 8.44%

1,815.4

166.1

1,981.5

7.58%

Source: 1992 Taiwan—China Economic Statistics Yearbook (liangcin jingji nianbao), Taipei: Chunghwa Institute for Economic Research, 1994, pp. 437. *(!)= (Exports from Taiwan to Hong Kong, based on Taiwan's statistics — Imports from Taiwan to Hong Kong, based on Hong Kong's statistics! x 80% (estimated percentage of Taiwan's exports to Hong Kong that are reexported to China) **China's exports to Taiwan through Hong Kong

counted in the official statistics, was also on the rise. Triangular trade means that Hong Kong-based trading companies would ship commodities produced in overseas production sites directly to overseas markets without going through Hong Kong. The size of the triangular trade in 1991 was estimated to be US$34.8 billion, as large as half of the total transshipment trade through Hong Kong. A major portion of Hong Kong's triangular trade included Taiwan-China trade. If the triangular trade was included, the total value of Taiwan-China indirect trade would have mounted to US$15.5 billion in 1992, 43.5% greater than the official figure of US$10.8 billion (see Table 1-4 and Table 1-5). Taiwan's export to China counted for more than 17% of Taiwan's total export in 1993. The Tiananmen massacre in June 1989 marked a turning point in Taiwanese investment in China. After the crackdown in Tiananmen Square, OECD countries condemned the Chinese government with a series of economic sanctions. In the face of uncertainties, many foreign firms withdrew or held their investments. The total number of approved foreign investment projects in China dropped from US$2 billion in the fourth quarter of 1988 to $0.9 billion in the first quarter in 1990, resulting in a major investment

18

Making Capitalism in China

Table 1-5 Taiwan-China Indirect Trade through Hong Kong (including the Triangular Trade) (in US$ billion) Year

Reexport trade

Transshipment trade

Triangular trade

Total

1988 1989 1990 1991 1992

2.721 3.483 4.043 5.793 7.407

1.362 1.742 2.022 2.897 4.444

1.360 1.741 2.019 2.893 3.701

5.443 6.966 8.084 11.583 15.552

Source: 1992 Taiwan—China Economic Statistics Yearbook (liangan jingji nianbao), Taipei: Chunghwa Institute for Economic Research, 1994, p. 212.

vacuum in China. The seriously disrupted domestic economy, especially with the foreign debt and unemployment problems, pressed the Chinese government to win back foreign capital. Failing to reestablish the OECD multinationals' confidence in China's social and political stability and the investment climate, the Chinese government tried to appeal to overseas Chinese investors from Taiwan, Hong Kong, and Macao by offering a tax holiday and other favorable investment conditions. Several industrial zones in Fujian Province, birthplace of Taiwanese ancestors, were designated to Taiwanese investors. As a result, direct Taiwanese investment in China increased by 75% in the first eight months of 1990. One hundred thirty Taiwan investment projects were approved, marking a 64% increase from the same period in 1989 (Dittmer and Choy, 1991:18-20). The year 1990 also saw a financial crisis in Taiwan that facilitated the flow of Taiwanese capital to China. The Taiwanese stock market began to soar in late 1988. Stock speculation return rates of several hundred percent attracted manufacturers to shift their capital to the stock market after they closed their plants or stopped production. In mid-1990, Taiwan's stock market collapsed and all the bubbles in the economic boom since late 1988 disappeared overnight. The stock market index dropped from 12,000 points to about 3,000 points in three months. Disillusioned Taiwanese manufacturers had few options but to pack up and move to China. They expected to find the "second spring" of business in China, which offered a 10 times cheaper labor force15 (see Table 1-6 for the structure of production costs in Table 1-6 Structure of Production Costs in Taiwan and China

Taiwan China

Material

Labor

Gross profit

49% 64%

36% 12%

15% 24%

Sales price 10%-15% lower than those made in Taiwan

Sot-tree: Dai, ct al., 1989:3, cited in Kao, Lee, and Lin, 1992:36. Reprinted by permission.

19

Taiwan, Southern China, and the New East Asian Economy

China and Taiwan), an immense potential in the domestic markets, and lucrative incentive packages offered by the government. Taiwanese cultural and linguistic affinity with mainland Chinese made it relatively easier for the small- and medium-sized investors to cross the straits. According to a survey, labor costs, linguistic and cultural affinity, and land costs were the top three reasons for Taiwanese investment in China (see Table 1-7 for the Taiwanese electronics, textile, and food processing manufacturers' motivation in investing in China). In 1990, under pressure from Taiwan's business communities and industrial organizations, the Taiwan government finally allowed Taiwanese firms to conduct indirect investment in China via a third country. The new regulations enacted in 1988, which liberalized foreign exchange transactions, also made overseas investment easier. Most of the Taiwanese investors in China were small- and medium sized, independent manufacturing firms. The average size of Taiwanese investment in the late 1980s was about US$500,000-700,000,16 increased to US$1 million in 1991 (Kao, Lee, and Lin, 1992:194), and US$1.35 million in 1993 (Kao et al., 1995:161), smaller than that of Hong Kong (US$2 million), West European (US$9 million), and U.S. (US$4 million) investments in China (Pearson, 1991b:191). However, the aggregate volTable 1-7 Key Motives for Taiwanese Investing in China*

Motives Abundant supply of cheap labor Cultural and linguistic affinity Low-cost land Domestic markets Expanding production capacity Making use of redundant ^uipment equ ^admg risk Spreac ess to raw materials Access breaks Tax bi Most>t Jfavored nation eatment and quota trea Low7 ccost research er Other

Electronics manufacturers (percentage)

Textile manufacturers (percentage)

Food processing industry (percentage)

95.12

100.00

100.00

95.12 73.17 46.34

88.23 76.47 70.58

87.10 80.65 67.74

34.15

44.11

25.81

26.83 34.15 19.51 41.36

41.17 23.52 17.64 14.71

16.13 29.03 38.71 25.81

21.95 9.76 2.44

11.76 5.88 2.94

6.45 6.45 16.13

Source: 1992 Taiwan-China Economic Statistics Yearbook (liangan jin0ji nianbao), Taipei: Chunghwa Institute for Economic Research, 1994, p. 160. * Figures show the percentage of the total firms surveyed that chose each listed reason for investing in China.

20

Making Capitalism in China

ume has been much more impressive. By 1992, Taiwan was among the top foreign investors (Hong Kong, the United States, and Japan) in China, surpassing the United States, Japan, Singapore, Korea, Canada, Thailand, the United Kingdom, and Germany. China also rose to the top of the list of Taiwan's overseas investment sites (see Table 1-3, and Kao et al., 1995: 53-54). From 1979 to 1992, Hong Kong and Taiwanese investors contributed 72% of the total contracted direct foreign investment to China17 (see Table 1-8). By the end of June 1993, assuming the two investors contributed the same percentage in utilized capital, the actual investment by Hong Kong and Taiwan in China was US$77.3 billion out of the total of $107.4 billion (calculated from Table 1-9).18 It has been widely recognized that the actual size of capital outflows from Taiwan to China has been much higher than the official figures. The gap was mainly caused by the ambiguous political relationship between Taiwan and China, and by the semiunderground nature of the cross-straits investment in which the majority of Taiwanese investors in China did not register their investment projects in China with Taiwan's Ministry of Economic Affairs (MOEA). A high-ranking official in MOEA admitted that the Taiwan government did not have any reliable data on cross-straits trade and investment.19 Most Taiwanese companies have invested in China via their subsidiaries or paper companies in Hong Kong or other tax havens.20 The official statistics show that by the end of 1994, there were 24,599 Taiwanese companies investing a total of US$16 billion in China, making Taiwan the second largest foreign investor there.21 Plastic and rubber products, electronics and electronics appliances, food processing, and metal products were the dominant industries (see Table 1-10). Table 1-8 Contracted Foreign Investment in China by Country of Origin, 1979-1992

National total Hong Kong Taiwan United States Japan

1979-1990

1991

1992

1979-1992

45,244 (100) 26,480 (58.5) 2,000 (4.4) 4,476 (9.9) 3,662 (8.1)

12,422 (100) 7,531 (60.6) 1,392 (11.2)

58,736 (100) 40,502 (69.0) 5,548 (9.4) 3,142 (5.3) 2,200 (3.7)

116,402 (100) 74,513 (64.0) 8,940 (7.7) 8,173 (7.0) 6,748 (5.8)

555

(4.5) 886

(7.1)

Source: Sung, 1994:50. Reprinted by permission of the Institute of Global Cooperation and Conflicts, University of California. *US$ millon, percentage shares in parentheses

21

Taiwan, Southern China, and the New East Asian Economy Table 1-9 Foreign Capital in China (in US$ billion)

Year Contracted capital

1979-1992 1979-1982 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 (first 6 months) Utilized capital

1979-1992 1979-1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 (first 6 months)

Other foreign investment

Total

Loans

Foreign direct investment

191.100 20.548 3.430 4.791 9.867 11.737 12.136 16.004 11.479 12.085 69.439 58.760

74.697 13.549 1.513 1.916 3.534 8.407 7.817 9.813 5.185 5.099 n.a. n.a.

110.462 6.010 1.732 2.651 5.931 2.834 3.709 5.297 5.600 6.596 n.a. n.a.

5.941 0.989 0.185 0.224 0.402 0.496 0.610 0.894 0.694 0.390 n.a. n.a.

98.830 12.457 1.981 2.705 4.647 7.258 8.452 10.226 10.060 10.290 11.554 19.202 9.400

60.654 10.690 1.065 1.286 2.688 5.014 5.805 6.487 6.286 6.535 6.888 7.911

34.355 1.166 0.636 1.258 1.661 1.874 2.314 3.193 3.393 3.487 4.366 11.007

3.821 0.601 0.280 0.161 0.298 0.370 0.333 0.546 0.381 0.268 0.300 0.284

Source: Economic Statistics Yearbook Oj search Institute, 1994, p. 768.

Southern China and the World Market Southern coastal China has received the lion's share of Taiwanese capital. By the end of 1991, Guangdong and Fujian Provinces received 67.3% of the total registered Taiwanese capital in China. The two provinces hosted 72.1% of the total 2503 registered firms in 1991 (see Table 1-11). Within the two provinces, the Pearl River Delta in Guangdong22 and the QuanzhouZhangzhou-Xiamen Triangle in Fujian23 were the centers of Taiwanese investment (Map 1-1).

22

Making Capitalism in China Table 1-10 Registered Direct Taiwanese Investment in China by Industry (US$ million) 1991-1992 Number of projects Value

Plastic and rubber products Food and beverages Electricity and electrical appliances Textiles

1993 (January to August) Number of projects Value

106

110.792 (26.31%)

1,076

393.636 (15.29%)

47

65.723 (15.61%) 69.405 (16.48%)

722

259.941 (10.10%) 342.929 (13.32%)

77

18

Metal products Chemical products Others

183

Total

501

44 26

32.407 (7.69%) 26.851 (6.38%) 17.563 (4.17%) 98.409 (23.37%) 421.150

1,069 431 704 554

4,018 8,574

146.308 (5.68%) 204.720 (7.95%) 141.955 (5.52%) 1,084.689 (42.14%) 2,574.218

Total Number of projects Value

1,182 769

1,146 449 748 580

4,201 9,075

504.428 (16.84%) 325.664 (10.87%) 412.334 (13.77%) 178.715 (5.97%) 231.571 (7.73%) 159.558 (5.33%) 1,183.098 (39.50%) 2,995.368

Source: 1992 Taiwan-China Economic Statistics Yearbook (liangim jinjgji nianbao), Taipei: Chunghwa Institute for Economic Research, 1994, p.158.

Since the late 1970s, the southern provinces, namely Guangdong, Fujian, and Hainan, have been the laboratory of China's open-door experiment. All five special economic zones (SEZs) are located in the three coastal provinces. Compared to the rest of China, the coastal south has had closer connections with the overseas Chinese. Almost 80% of the Chinese who have migrated overseas came from Guangdong, and the next largest number from Fujian. Many began earning their living abroad through one of the "three knives" (cooking, hair cutting, or construction) but rose to become one of the "three highs" (intellectuals, owners, or white-collar employees). Many of the overseas Chinese have maintained family ties with the region.24 When China opened the door to foreign investors in the late 1970s, a series of special policies was made to give Guangdong and Fujian the flexibility to take advantage of its spatial and sociocultural proximity to the overseas Chinese in East Asia. Consequently, the special policies, the state's investment in the special economic zones and other infrastructures, and the overseas Chinese capital together have constituted the formula of rapid economic growth in southern China.

Taiwan, Southern China, and the New East Asian Economy

23

Table 1-11 Spatial Distribution of Taiwanese Investment in China (1991-1992) Number of establishments December 1992 1991

Area Fujian Province (excluding Xiamen) Xiamen Guangdong Province (excluding Shenzhen) Shenzhen Shanghai Municipality Beijing Municipality Jiangsu Province Zhejiang Province Hainan Province Other Total

323 (12.9%) 275 (11.0%) 829 (33.1%) 379 (15.1%)

78 (3.1%) 30 (1.2%) 56 (2.2%) 56 (2.2%) 49 428 (17.1%) 2,503

346 (12.5%) 300 (10.8%) 891 (32.2%) 422 (15.3%) 96 (3.5%) 38 (1.4%) 674 (24.4%)

2,767

Amount of investment (US$1,000) December 1992 1991 87,318 (11.6%) 92,205 (12.3%) 216,217 (28.8%) 111,682 (14.9%) 87,032 (11.6%) 25,029 (3.3%) 24,696 (3.3%) 14,851 (2.0%) 15,023 (2.0%) 76,901 (10.2%) 750,954

97,440 (9.8%) 112,544 (11.3%) 259,095 (26.0%) 152,629 (15.3%) 104,405 (10.5%) 30,641 (3.1%) 241,192 (24.2%) 997,946

Source: Investment Commission, Taiwan Ministry of Economic Affairs.

Growth in Guangdong and, Fujian Being "one step ahead in China" (Vogel, 1989), the pace and the scale of economic growth in Guangdong is unprecedented. Starting from below the national average before the reform, Guangdong's GDP grew by 12.8% per year between 1981 and 1991, compared to 8.8% per year for China as a whole.25 In 1980, Guangdong's GNP per capita was lower than the national average, but by 1991, it was 64% above it (Yeung and Chu, 1994:6-7). The gross value of industrial and agricultural output grew from US$13.8 billion to US$44.2 billion between 1980 and 1990, averaging a growth rate of 12.5% a year.26 With 5.5% of the nation's population and 1.9% of the nation's area (see Table 1-12), the share of the province in the nation's total GDP grew from 5.1% to 9.0% between 1978 and 1991, and ranked the highest in China since 1989 (see Table 1-13). The pace of industrialization has been even more impressive. Between 1978 and 1991, industrial output grew by more than 20%. From 1989 to 1990, the gross value of industrial output grew by 16.9% per year, against the national average of 5.4%. Among other rapidly growing regions in China, Jiangsu Province grew by 9.9% and Fujian Province, 11.2%.27 Among indus-

24

Making Capitalism in China Table 1-12 Population of Guangdong, the Pearl River Delta, Fujian, and Quanzhou-Zhaiigzhou-Xiamen Triangle (in Millions)

Year

China

Guangdong

1978

962.6 (100.0%) 1,058.5 (100.0%)

50.6 (5.3%) 56.6 (5.3%)

1,158.2 (100.0%)

63.5 (5.5%)

1985

1991

Pearl River River Delta n.a.

7.6 (13.5% of Guangdong's total) 8.4

(13. 2% of Guangdong's total)

Fujian

QuanzhaiZhangzhouXionen

24.5 (2.6%) 27.1 (2.6%)

n.a.

30.4 (2.6%)

11.3 (37.0% of Fujian's total)

n.a.

Source: China Statistics in Brief, 1991, China Statistical Bureau; Guan^donjj Statistics Tearbook, 1986, 1992; Fujian Statistics Yearbook, 1992; Eastern China Statistics Yearbook, 1992.

trial sectors, light industries have been growing the fastest. Light industrial goods such as electric fans, watches, color television sets, and refrigerators accounted for over 65% of Guangdong's total industrial output in 1989.28 Between 1978 and 1985, the average annual growth rate of per capita income in Guangdong was 12.2% in the cities and towns and 14.4% in villages. Between 1985 and 1991, it was 18.8% and 15.0%, respectively, comTable 1-13 Trends in Macroeconomic Indicators of Guangdong Average annual rate of Share of Guangdong increase (%) in nation 1981-1985 1986-1990 1978-1991 1978 1985 1991 Population Area

1.6 —

2.0 —

1.8 —

GDP

12.2

12.5

7.4

16.4 18.1 13.2

Agriculture output Industrial output Light Heavy Export Utilized foreign capital Average annual wages

12.6

5.3 2.2 5.1

5.4 2.2 6.5

5.5 1.9 9.0

7.7

7.1

6.1

6.8

8.0

18.5 20.5 15.1 19.3

4.7

5.5

8.9

6.1

23.2 24.5 20.1 29.0

n.a. n.a. 14.2

n.a. n.a. 10.8

n.a. n.a. 19.0

33.8

17.1

25.4

n.a.

19.8

22.4

6.5

3.3

5.4

1.00

1.21

1.44

Source: Maruya, 1994:59, data collected from Gua.ngd.ung tongji nianjian (Guangdong Statistics Year Book) and Zhonf/jjuo tongji nianjian (China Statistics Year Book), various years.

Taiwan, Southern China, and the New East Asian Economy

25

Table 1-14 Income Per Capita in China, Guangdong, and Fujian (Yuan) Year

China Urban Rural

1978 1985 1991

316 685 1,544

134 398 709

Growth rate of income per capita(%) 1978-1985 11.7 16.9 14.5 10.1 1985-1991

Guangilong Urban Rural

Fujian Urban Rural

2,536

193 495 1,143

340 673 1,736

135 396 446

12.2 18.8

14.4 15.0

10.3 17.1

16.7 2.0

402 901

Source: Fujian Statistics Yearbook, 1992; China Statistics Yearbook, 1992. Urban resident per capita income, Guangdong Statistics Yearbook, 1992. Net per capita income of rural population, Guangdong Statistics Yearbook, 1992.

pared to China's average of 14.5% and 10.1% in the same period (see Table 1-14). In 1989, Guangdong workers earned an annual average renminbi (RMB) 2,678 yuan,29 19% higher than in 1988 and 38% above the national average.30 In 1991, the wage level in Guangdong was 44% above the national average. Guangdong's performance in foreign trade and export-oriented manufacturing has been distinctive. The open-door policies allowed Guangdong to resume its historical role of linking China with the outside world.31 By 1979, Guangdong was already ranked second after Shanghai in export value. In 1989, Guangdong ranked first in trade and in exports, with export values of US$8.03 billion, a 7.3% increase over 1988, surpassing Shanghai by almost 60%.32 Between 1989 and 1990, Guangdong's exports grew even faster at 18.4%, whereas national growth was 11.4% and Shanghai, 6.4% (Sit, 1991:162). As is shown in Table 1-13, by 1991 Guangdong absorbed 22.4% of the nation's total utilized foreign capital.33 While foreign investment slowed down after the Tiananmen massacre on June 4,1989, the province continued to attract new foreign funded projects. Pledged capital in 1989 was US$2.73 billion, accounting for 43% of total contracted investment nationwide.34 Compared to Jiangsu Province, another rapidly growing region in central coastal China, Guangdong's connection with the outside world was even more distinctive (see Table 1 -15).35 Table 1-15 Comparison of Guangdong and liangsu Province in Foreign Capital Utilization and Exports, 1979-1990 (US$ Billions)

Guangdong Jiangsu

Utilization of foreign capital 1990 1979-1990

Exports 1990 1979-1990

2.02 0.44

10.56 2.95

12.35 1.79

51.77 18.96

Percentage of export in GNP 1990 33.0% 11.7%

Source: Wang, 1992:36. Reprinted by permission of Httrtg Seng Economic Monthly,

26

Making Capitalism in China

Most provinces and many cities in China have established offices in the foreign trade centers of Guangdong, such as Shenzhen, Zhuhai, and Guangzhou. These offices were used to build connections with foreign traders and to obtain technology and market information. The rapid economic growth in Guangdong has been concentrated in the Pearl River Delta (see Map 1-2). In 1985, the entire Delta was designated as an open economic zone, and was bestowed considerable economic freedom. With 31% of Guangdong's population and 23% of the province's land, the Delta absorbed 68% of the foreign capital in Guangdong; it exported 74.6% of the total exports from Guangdong between 1978 and 1993 (Jinshian Lin, 1995:7). From 1980 to 1989, the annual growth rate of industrial output value in the Delta was 21.61%. Ninety-five percent of the economic growth of the region came from industry (Xu and Li, 1990:50-51), especially the light industry, which contributed 76% of the total industrial output in 1989 (Liu and Chen, 1991:37). Fujian has been doing relatively well in the reform period. However, compared to Guangdong, Fujian has been less successful in taking advantage of the reform policies (see Table 1-16 and Map 1-3). The geographical proximity and the social connection between Fujian and Taiwan (85% of the Taiwanese are descended from Fujian) have been a mixed blessing for both. Unlike the Guangdong-Hong Kong connection, the political rivalry between the communist regime in China and the nationTable 1-16 Trends in Macroeconomic Indicators of Fujian Average annual rate of Share of Fujian increase (%) in Nation 1981-1985 1986-1990 1978-1991 1978 1985 1991 Population Area Gross domestic product Agricultural output Industrial output Light Heavy Export Utilized foreign capital Average annual wages

1.5 —

2.0 —

1.7 —

2.6 1.3

2.6 1.3

2.6 1.3

17.6

23.4

20.4

1.9

2.1

2.6

13.9

19.5

16.7

2.6

2.7

3.1

16.4 16.2 16.9 26.7

29.5 30.2 26.3 37.3

23.0 23.2 21.6 31.9

1.7 n.a. n.a.

1.7 n.a. n.a.

2.3

3.2

5.3

n.a. n.a. 13.6

11. a.

32.5

n.a.

n.a.

3.8

4.9

n.a.

n.a.

n.a.

n.a.

1.0

1.03

Source; Statistical Yearbook of China- (various years); China- Economic News, Supplement no. 7; Almanac of Fujian^s Economy, 1987.

Taiwan, Southern China, and the New East Asian Economy

27

alists in Taiwan has been a major barrier for the two territories to establish substantial economic connections in the first 10 years of China's reform. The Taiwanese manufacturers were not able to make any decisive move until the late 1980s, after the Taiwanese government lifted the ban on Taiwanese residents' visiting mainland China. Because of the geopolitical concerns and its location as the front line in potential military conflicts with Taiwan, Fujian has not enjoyed substantial investments in infrastructure and industries supported by the central government (Long, 1994:202). Productivity in rural Fujian is also much lower than Guangdong, because of the large area of inhospitable mountains and limited arable land. The per capita income in rural Fujian was 63% of the national average, 39% of rural Guangdong's average. In recent years, foreign investment in Fujian has been increasing, and the province's share of foreign direct investment in China jumped from 3.8% in 1985 to 4.9% in 1991,7.6% in 1992, and 16.5% in 1993; exports increased from 5.3% in 1985 to 13.6% in 1991. However, by 1994, Fujian's share of national gross value of industrial output was still among the lowest in coastal China (see Table 1-14,1-17,1-18).

Hong Kong Connection Hong Kong's entrepreneurs have been pioneers in connecting southern China, especially Guangdong, with the world market. Hong Kong's efficient port and telecommunication systems provide Guangdong with good access to the outside world. Hong Kong entrepreneurs have facilitated Guangdong's export-oriented manufacturing and international trade. Hong Kong's information networks, marketing channels, and financial markets accelerated Guangdong's outward-oriented economy at an unprecedented pace (Kwok and So, 1995). Most of all, as a Hong Kong investor pointed out, Hong Kong entrepreneurs have "changed the mind set" of their cousins in Guangdong by passing on the techniques of survival in the competitive and unpredictable market economy.-36 Before 1950, Hong Kong was the entrepc")t for China and the outlet for most of the Pearl River Delta's agricultural exports. Even after the border between China and Hong Kong was closed, some agricultural goods were still supplied to Hong Kong, and a substantial illegal trade escaped border controls during the Korean War. As Guangdong maintained its contact with the outside world during the prereform period, the connection between Hong Kong and the Delta has never been totally cut off (Vogel, 1989:163). Several microstudies have shown that even during the Maoist period, households in certain parts of Guangdong still had higher standards of living than other villagers because of the remittances they received from their overseas relatives and family members in Hong Kong and Macao (Wooii, 1990:143). In 1984,16 towns in the Pearl River Delta, where most Hong Kong and Macao residents are originally from, received US$66.69 million as remittance (Zheng, 1989:96).

28

Making Capitalism in China Table 1-17 Regional Industrial Output Performance, by Province, 1990 Gross industrial and agricultural output value

Region

Total industrial output value

Total Total Income per Population (1,000,000 Per capita (1,000,000 Per capita capita, 1990 (yuan) (yuan) (yuan) (yuan) (millions) yuan)

Coastal Liaoning 39.5 Beijing 10.8 Tianjin 8.8 Hebei 61.1 84.4 Shandong Shanghai 13.3 Zhejiang 41.4 Jiangsu 67.1 Fujian 30.1 Guangdong 62.8 Intermediate Jilin 24.7 Heilongjiang 35.2 Nei Monggo 21.5 Shanxi 28.8 Henan 85.8 Anhui 56.1 Hubei 54.0 Hunan 60.7 Jiangxi 37.7 Guangxi 42.3 Inland Sichuan 107.0 32.4 Guizhou Yunnan 37.0 Xizang 2.2 Shaanxi 32.9 Gansu 22.4 Qinghai 4.5 Ningxia 4.7 Xinjiang 15.2

188 81 73 48 284 171 177 334 76 250

067 912 480 086 834 091 019 463 018 296

74 145

110 889

42 66 153 104 141 111

025 317 874 127 043 009 68 099 60 566

186 36 55 1

003 369 698 871

61 254

38 157 7 977

4 761 7 584 8 350

787

3 374 12 863

4 4 2 3

275 984 252

985

3 001 3 150 1 954 2 302 1 793 1 856 2 611 1 828 1 806 1 431 1 738 1 122 1 505

850 1 861 1 703 1 772

8 944

1 902

36 457

2 398

160 74 67 12 220 164 143

276 53 190

692 894 994 323 085 275 415 410 148 225

55 236

86 351

26 53 103 67 100

333 839 673 033 820 71 267 42 575 35 343

122 296 21 816

34 526

372 44 258

27 870 5 524 6 475 21 992

4 068 6 934

7 726 201 2 595 12 351 3 464 4 119 1 765 3 029

1 3 2 1 1

990 577

4 1 1 1 1

981 148 372 822 717 689 313 842

2 236 2 453 1 124 1 869 1 208 1 194 1 867 1 174 1 129 835

1 1 1 1

383 628 080 124

1 142 376 933 169 1 345 1 244 1 227 1 377 1 446

903 645 956 865 930 938 1 100 1 024 1 374

880

933 1 248 976 943

798

Source: Statistical Yearbook of China, 1992

The opening of China to the outside world in the late 1970s has intensified the connections between Hong Kong and Guangdong. Since the mid1970s, high land and labor costs in Hong Kong have made it difficult for manufacturers to maintain their cost-based competitiveness in the world market. Guangdong, with land 10 times cheaper and an abundant supply of labor 5-10 times cheaper, received a large amount of Hong Kong's manufacturing investments (sec Table 1-19 for the difference in wage level of unskilled workers and industrial rental among Hong Kong, Shenzhen, and

Table 1-18 Share of National Gross Value of Industrial Output by Provinces (Percentage) Region Coastal Liaoning Beijing Tianjin Hebei Shandong Shanghai Zhejiang Jiangsu Fujian Guangdong Total Intermediate Jilin Heilongjiang Nei Monggo Shanxi Henan Anhui Hubei Hunan Jiangxi Guangxi Total Inland Sichuan Guizhou Yunnan Xizang Shaanxi Gansu Qinghai Ningxia Xinjiang Total

1952

1982

1984

1990

1994

14.0 2.0 6.0 4.0 6.0 19.0 3.0 8.0 1.0 5.0 68.0

8.54 4.10 3.80 4.21 6.59 11.42 4.14 9.02 1.57 4.88 58.27

8.22 4.01 3.58 4.13 6.49 10.50 4.75 9.67 1.65 5.22 58.31

7.00 5.56 2.95 0.53 9.38 7.15 6.24 12.04 2.32 8.29 61.46

5.66 3.13 2.05 2.18 10.29 7.27 7.20 14.18 2.76 11.60 66.32

3.24 5.55 0.56 1.89 2.59 1.85 2.81 2.26 1.69 1.01 23.45

2.58 4.81 1.23 2.39 3.92 2.61 4.89 3.44 1.74 1.58 29.19

2.67 4.50 1.17 2.43 3.81 2.63 5.11 3.26 1.72 1.48 28.78

2.41 3.14 1.15 2.23 4.52 2.92 4.17 3.08 1.85 1.44 26.91

2.01 2.33 0.97 1.35 3.73 2.56 4.15 2.69 1.94 1.53 23.26

4.85 0.79 0.98 0.00 1.12 0.68 0.01 0.03 0.51 8.97

5.40 0.94 1.43 0.02 2.03 1.45 0.25 0.25 0.83 12.60

5.56 1.04 1.49 0.02 2.06 1.39 0.23 0.26 0.85 12.90

5.21 0.95 1.51 0.02 1.50 1.21 0.24 0.05 0.94 11.63

5.35 0.77 1.21 0.00 1.53 1.00 0.15 0.19 0.22 10.42

Source: Data for 1952, 1982, and 1984 from Wu, 1987:74. Based on Statistical Tearbook of China, 1983, 1985; data for 1990 and 1994 from Statistical Tearbook of China, 1992, and China Statistics Monthly, 1994)

30

Making Capitalism in China Table 1-19 Comparison of Wage Level (Unskilled Workers) and Industrial Rental in Hong Kong, Shenzhen, and ASEAN (1989) Monthly wage level (in US$)

Hong Kong Shenzhen Thailand Malaysia Indonesia Philippines

412

75 90 110 60

Monthly industrial rental (HK$/sq ft) 8 (New Kowloon) 0.8-1.5 1 (Chon Buri) 2 (Ipoh) 2 (Bonded Zone) 1 (Cebu)

(5.5)* (1.0) (1.2) (1.5) (0.8) n.a.

Source: Hung Seng Economic Monthly, Hang Seng Bank, March 1990, cited from Maruya, 1992:136. Reprinted by permission. * Compared to the base of 1.0 in Shenzhen

other Southeast Asia countries). By 1989, Hong Kong had become the largest investor in China (see Table 1-20). By the end of 1991, there were about 20,000 Hong Kong enterprises involving in export processing, assembly and manufacturing 37 in Guangdong, hiring 2 to 3 million Chinese workers (Maruya, 1992:135).38 Hong Kong's direct realized investment in China amounted to US$20-30 billion by the end of 1992, and US$47 billion in 1994.39 Of Hong Kong's investment in China, which accounted for 80% of Table 1-20 Hong Kong, Taiwan, United States, and Japan's Contracted Direct Investment in China, 1979-1992 (in US$ millions and percentage share)

National total Hong Kong Taiwan United States Japan

1979-1990

1991

1992

1979-1992

45,244 (100) 26,480 (58.5) 2,000 (4.4) 4,476 (9.9) 3,662 (8.1)

12,422 (100) 7,531 (60.6) 1,392 (11.2)

58,736 (100) 40,502 (69.0) 5,548 (9.4) 3,142 (5.3) 2,200 (3.7)

116,402 (100) 74,513 (64.0) 8,968 (7.7) 8,163 (7.0) 6,748 (5.8)

555

(4.5)

886

(7.1)

Source: Sung, 1994:50. Reprinted by permission of the Institute of Global Cooperation and Conflicts, University of California. Note: According to Margaret Pearson (1991b:70), between 1979 and 1989 the total value of pledged (contracted) foreign direct investment (FDI) in China was US$32.37 billion, the actual (realized) was US$15.61 billion, 48% of the total pledged FDI. If we use 48% as the percentage of the actual FDI in total pledged FDI, the national total of realized FDI in China between 1979 and 1992 was about US$56 billion. For more detailed statistics on China's DPI, see Y. Y. Kueh, 1992.

Taiwan, Southern China, anA the New East Asian Economy

31

Hong Kong's direct outward investment in Asia in the 1980s, 40-50% was concentrated in Guangdong (Maruya, 1992:135). On the other hand, by 1990, 62.2% of foreign direct investment in Guangdong came from Hong Kong (Lau, 1994:134). Such a spatial concentration of Hong Kong's investment is more impressive in specific localities in Guangdong. In 1985, investment from Hong Kong and Macao in Guangzhou, the capital of Guangdong, totaled US$409.4 million, accounting for 88% of the total foreign investment in the city. In Shenzhen SEZ, it was estimated that 80-90% of foreign investment originated from Hong Kong (Smart and Smart, 1991: 222). Since 1985, Hong Kong has replaced the United States as the largest trading partner of China. Hong Kong has also been the most important destination for Guangdong's domestic exports, accounting for 86.6% of Guangdong's direct export market in 1990 (see Table 1-21). The increasing manufacturing investment by Hong Kong enterprises in Guangdong has generated the export of parts and materials from Hong Kong to China for processing and assembly. By 1990, parts and materials accounted for 58.8% of Hong Kong's total exports to China40 (Maruya, 1992:129). Hong Kong's triangular trade has also become increasingly important to Guangdong since the early 1980s. A major portion of Hong Kong's triangular trade involved commodities produced in Guangdong by ventures financed by investors from Hong Kong and Taiwan. Hong Kong's trading agents have been crucial in Guangdong's rapid growth of foreign trade. The trading agents have had vast experience in assessing market signals, dealing with international buyers, maneuvering financing schemes, arranging trade-related services such as insurance and delivery, and so on. With this ready-made infrastructure of international trade in Hong Kong, Guangdong was able to accelerate its exports in a very short period of time. Foreign investors have used Hong Kong as a beachhead to invest in China. With their local knowledge and business networks in China, Hong Table 1-21 Major Markets of Guangdong's Domestic Exports (in US$ millions) Country/Area Hong Kong United States Japan Macau Singapore Germany Italy Holland Thailand United Kingdom

1986

1988

1990

2,954.61 283.58 103.81 133.40 84.00 71.33 81.53 24.03 12.04 33.11

5,724.84 326.41 262.31 142.24 36.81 109.43 27.90 48.47 43.52 63.05

8,543.10 402.97 288.20 166.01 139.74 117.01 58.50 50.27 47.92 46.15

Source: Lau, 1994:132. From Guangdong tongji nianjian (Guanjfdontj 1987-1990.

(86.6%)

Statistics Yearbook),

32

Making Capitalism in China

Kong entrepreneurs have been active in linking China with foreign capital. By the end of 1993, there were 3,544 foreign firms registered in Hong Kong, a 10% growth from 1992 when the new wave of foreign direct investment in China was at its peak.41 Hong Kong also became a center for Chinese-funded companies to raise funds in the international financial markets and to make connections with foreign investors and buyers.42 By 1992, there were 2,000 to 3,000 Chinese enterprises registered in Hong Kong, including state-owned and collective enterprises established by local governments at provincial, municipal, and county levels (Maruya, 1992:139), injecting US$10-20 billion in Hong Kong.43 The Chinese-funded companies in Hong Kong also took advantage of the favorable conditions that the Chinese government provided for foreign investors. By registering in Hong Kong, these companies were qualified as foreign companies and enjoyed tax breaks and tax free imports of materials in China.44 The economic integration between Hong Kong and Guangdong has fostered the flow of people between the two territories. Many Hong Kongbased managers, technology personnel, and professionals, including those from other foreign companies, commuted daily between Shenzhen and Hong Kong. Of the 2,300 specialists not from the People's Republic of China (PRC) working in Shenzhen SEZ in 1986,2,000 were from Hong Kong or Macao. In 1985, there were more than 10 million Hong Kong residents traveling to China; in 1990, there were 16.7 million Hong Kong residents traveling to China (46,000 per day). By 1988, citizens from China were allowed to travel to Hong Kong in tour groups. Two hundred thousand mainland Chinese visited Hong Kong between 1983 and 1988 (Sklair, 1991:211). Ninety percent of the Hong Kong-Guangdong trips were made along the 158-kilometer Kowloon-Canton railway, which takes two and a half hours from Hong Kong to Guangzhou, 40 minutes to the center of Shenzhen. The GuangzhouShenzhen highway, opened in the 1990s, has shortened the trip to one and a half hours. Since the 1980s, hydrofoil, ferry, and freight service to and from Hong Kong directly links Hong Kong to all nearby cities and towns in Guangdong. It takes about one hour by ferry from Central Hong Kong to Shekou, one of the major industrial/commercial districts of Shenzhen SEZ. Ezra Vogel reported that in the early 1980s a reservation and often a several-hour wait were required to make a phone call from Hong Kong to Guangzhou (Vogel, 1989:61). By the late-1980s, telephone calls between Hong Kong and Guangzhou could be dialed directly. These new links have brought Hong Kong and Guangdong far closer than they had been before 1949. The increasingly close social and economic connection between Hong Kong and Guangdong has facilitated the spread of Hong Kong's popular culture to Guangdong. Hong Kong TV programs are watched, Hong Kong pop songs are sung, and posters of Hong Kong movie stars are pinned up everywhere in Guangdong. Guangdong is the bridgehead of Hong Kong's pop culture in China. In the spring of 1995, during my visit to Tianjin, the northern municipality about 150 km south of Beijing, the manager of a

Taiwan, Southern China, and the New East Asian Economy

33

municipal trading company, in his mid-40s, was proudly singing Hong Kong pop songs in Cantonese and Taiwanese pop songs in Taiwanese in a karaoke bar (named The Little Taipei).*5 In the summer of the same year, it was not surprising anymore to see the smiling face of Zhou Huajian, a popular male pop singer in Hong Kong, on the wall of a small Muslim restaurant in Xinjiang Autonomous District in remote Chinese Central Asia 7,000 km away from Guangzhou. Hong Kong-Cantonese culture became the symbol of modernity and worldliness. Hong Kong-Cantonese slang was widely used in China. The most evident example is the local terminology for "taxi": in Cantonese, spoken in Hong Kong, the taxi is called "di-shi," taking a taxi is called "dadi." People in Guangdong adopted the terms when the taxi service was brought in. Now the taxi is called "di-shi" in the Cantonese language everywhere in China, sometimes with a local twist. For example, in Beijing, minivans are often used as taxies. Minivans are called "bread-loaf cars" in China. "Bread loaf is pronounced as "mian-bao" in Mandarin, which is spoken by Beijing's people. So the minivan taxi in Beijing is called "miandi," the bread loaf taxi, with the mixture of Mandarin and Cantonese learned from Guangdong. Cantonese influence is even evident in Kashgar, the westernmost city in Xinjiang, where motor vehicles were not as common and horses (ma in Mandarin) and mules (/») were used for short distance transportation in the city: the rental horse or mule carts are called "ma-di" and «/«-<&." Hong Kong-style business practice became popular as well. The presale scheme as a financing strategy in the real estate industry was widely adopted in many cities in China. By putting the property projects in the market before construction started, the developer could easily raise sufficient funds to start the projects. Although it was highly risky for the buyers, the presale scheme usually worked in the market upturn. Hong Kong business people are careful in choosing the dates for the grand opening of businesses. An auspicious date is believed to ensure prosperous business. In Cantonese, the pronunciation of number eight is very close to that of "prosperity." Therefore the favorite dates for the grand opening of a business are the eighth, the eighteenth, and the twenty-eighth of each month. In other parts of China such as Shanghai, where the pronunciation of number eight has nothing to do with that of "prosperity," businesses still adopt the Hong Kong custom and have their grand openings on those dates. In 1992, Shanghai's real estate market was at its peak. By the end of 1992, there was 591 real estate companies in the city, a six-fold increase in one year. According to Shanghai residents, there were so many new real estate companies established in the city that on the eighth, eighteenth, and twenty-eighth of each month, traffic in Shanghai, which was already bad enough, became a nightmare because of the celebration activities in the streets for the grand opening of these new companies.46 The aggressive Hong Kong businesspcoplc were the best teachers for new Chinese entrepreneurs. The spread of Hong Kong's business culture in Guangdong and the rest of China has also induced technology transfer.

34

Making Capitalism in China

However, such a transfer has been mainly of managerial know-how rather than production technology. Using a learning-by-doing approach, Guangdong entrepreneurs have learned from their Hong Kong partners the way to adapt to the competitive and unstable market economy. A Hong Kong fresh product trader told me that when he started to deal with Chinese producers, he taught them to differentiate high-priced fish from the low-priced ones for the world market, while the old practice was "selling everything by the weight."47 However, the learning process has not always been smooth. A report on the industrial cooperation between Hong Kong and China suggested that Chinese enterprises have finally learned, but at the expense of being taken advantage of in contract-based business operations. The Chinese have learned to protect themselves against risks caused by market fluctuation by including a clause in agreements specifying the amount of compensation due from foreign firms in times of reduced orders. Chinese entrepreneurs have also learned to protect themselves from being cheated in processing and assembly fees by introducing a trial production period, during which Chinese enterprises have the opportunity to test the profitability of the proposed arrangement (Chai, 1983:126).

Cheap Hands and Brains The other side of the story of the booming south was the increasing regional disparity between the coastal and inland regions in China (see Table 1-17 and Table 1-18). Regional disparities have pulled and pushed a great number of inland villagers to the coastal region. It was estimated that by the mid1980s, about 6 million rural residents move from backward regions to more prosperous regions annually. In 1987, about 20% of the labor force in backward villages had departed.48 In 1990, the interprovincial registered migration in China was 10.83 million (Li and Siu, 1994:379). By 1991, it was estimated that there were more than 60 million legal and illegal, inter- and intraregional migrants in China, and close to 100 million by 1994.49 The relaxed regulations on labor mobility and the practice of a contract labor system since 1984 was another main reason for the mass migration in China. Marking a major shift from the "iron bowl" job guarantee in socialist China, the contract labor system involved a fixed-term contract between the employer and employee with no guarantee of a permanent job for the worker.50 There are two types of contract workers; the first is the longer term (from three to five years, sometimes renewable) contract workers who were peasants hired by county/state sector industrial enterprises through contracts with their rural collectives. Skilled workers could be loaned from the parent factories to joint-venture partners elsewhere. These long-term contract workers usually received social insurance coverage (Sklair, 1991:201). The other kind of contract workers are the temporary migrant workers who have a much shorter term contract. These workers go to urban areas looking for jobs and receive temporary residency, which had to be renewed every year, only if they

Taiwan, Southern China, and the New East Asian Economy

35

find a job. If they were fired and could not find another job within 1-3 months, they were subject to being sent back to their home villages. Compared to contract workers, temporary workers had few employment or welfare rights and had a very unstable status in the cities. Loosened household registration system was yet another mechanism that has accelerated cross-regional mobility of labor. In the prereform period, rural householders were employed exclusively by their rural collective units and were forbidden to reside permanently in a town or city. In 1984, the Chinese government began to loosen the strict controls over residential change. Those rural residents who could provide themselves with staples and could prove that they had the resources to establish enterprises were allowed to set up residence in towns. Urban enterprises began to systematically recruit workers from villages. As staples became available in open markets, an increasing number of rural residents moved to the cities legally or illegally (Blecher, 1988a:lll).51 In many cities selling urban residency to villagers has been an important source of revenues for the local governments. The price of an urban residency varied widely, depending on the location of the city. In 1992, a residency in Guangzhou city cost about RMB 10,000 yuan (US$1,200), a year's salary of a clerical worker in a foreign-funded venture.52 By 1995, the price grew to as high as RMB 50,000 yuan.53 The coastal regions (which include nine provinces and three municipalities) have been the destination of the majority of rural migrants. Between 1982 and 1987, the annual population growth rate in the coastal cities was 1.1% while it was only 0.5% in the interior areas. With a land area of 13.5% of the entire country, the coastal region held 41.3% of China's 1.1 billion people (Laquian, 1993:33). Among the nine coastal provinces, Guangdong and Fujian have absorbed the majority of the rural migrants from inland. In 1990, Guangdong alone absorbed 3.69 million interprovincial migrants out of China's total of 10.83 million (Li and Siu, 1994:379).54 By 1992, the total number of migrants to Guangdong from the poor interior provinces such as Sichuan, Guizhou, Yunnan, Jiangxi, Hunan, Hubei, and Gansu could be close to 10 million.55 In Guangzhou alone, there were 1.5 million migrants in 1992-1993, which equaled 32-38% of the city's total permanent population.56 Ten to twenty percent of the inhabitants of cities in the coastal region were not registered in those cities (Laquian, 1993:33). A large part of this massive migration has been driven by foreign investment. In Guangdong and Fujian, there were 6-7 million migrant workers working in ventures funded by investors from Hong Kong and Taiwan.57 Not only the size of the labor pool, which was composed of rural-urban migrants, in southern China must be noted but also the quality of the labor pool. The education level of the migrants proved to be higher than the term monjfliu (blind floating population), as unregistered rural migrants were called in China, might have suggested. Not all rural migrants were unexceptionally low-skilled or unslcilled. According to a survey of 300 rural migrants in Guangzhou, 61% had completed high or middle school and another 19% primary school.58 The 1990 Population Census of Guangdong showed that

36

Making Capitalism in China

while 50% of the rural-ward migrants had only primary education or less, the city-ward migrants from other provinces to Guangdong had much higher education: 15.5% had university, 30.6% had senior-high, and 35% had junior-high education. Of the town-ward migrants, 44.7% had junior-high and 24.2% had senior-high education (Li and Siu, 1994:389).59 Another survey of 150 migrant workers in the Pearl River Delta, conducted between March and May of 1994, reports that in Guangzhou 58.5% of the migrant workers had junior-high and 16.9% had senior-high education; in Dongguan, the second largest city in the Pearl River Delta with the fastest growth rates of foreign-invested manufacturing ventures, 46.5% of the workers had junior-high, and 35.3% had senior-high education (Li, 1995:5). The survey in Guangzhou also found that most of the migrants were single and young, 37% of the total 300 interviewees were aged 16 to 20, and 36% aged 21 to 25 (Wu and Xu, 1990:138-139). My own field work in the Taiwanese- and Hong Kong-funded factories in southern China has confirmed such findings. Among the 30 women operators60 I interviewed, six of them had primary-school and the rest had junior-high school education. Among the six foremen interviewed, one had junior-high and the other five had senior-high education. Because of the oversupply of rural migrant workers, foreign employers were in a higher bargaining position. They could be very selective and hired those who were better educated and easier to train. The surveys presented above also showed that high school graduates from other provinces were concentrated in the areas where export foreign-invested manufacturing factories were predominantly located in Guangdong. For rural migrants, the risks of living and working in the cities were high. A substantial initial investment for travel and living expenses was needed to get a job in the cities. It could easily take 5-6 days, and 5-6 transportation modes, including donkeys, bicycles, boats, trains, buses, and foot, to go from a mountain village in the interior region to the factories in the southern cities. The employers demanded deposits before workers joined the company. Bribes to the personnel manager were needed to get a bed in the companyprovided dormitories. Before a young worker from the mountain villages saw her or his first pay check, she or he would have spent as much as 1,000-2,000 RMB, about 3-6 months' salary of a state factory worker.61 Therefore, most rural families would send their best-equipped and most competitive young people, that is, the best-educated ones, to the cities in order to raise their chances of getting a job in the factories. It was not only rural poverty that pushed young people to migrate in search of industrial jobs. The promise of relatively high cash income, city lights, and the possibility of obtaining urban residency also pulled them to the southern cities. The peasant parents, village elders, and local officials also welcome the chance to send otherwise non-cash-earning young people to industrial work in the south. Some of the women workers sent home remittances and tried to save money for a dowry. However, in most cases their earnings were not sufficient for substantial savings. Outside the factories, on the payday each month, there were vendors selling clothes, stockings, acces-

Taiwan, Southern China, and the New East Asian Economy

37

sories, and so on, which were a major attraction to the country women who had little free time from their demanding jobs nor the courage to go downtown for shopping. There were also vendors selling snacks in the evenings to supplement the modest-quality meals that die factory provided. In some factories the meals were not free and cost each worker 50 yuan per month, which was about 15-20% of their monthly salaries. Besides those who worked as operators in the factories, college graduates and professionals (mostly ex-state employees) from the northern and interior regions also occupied an expanding percentage of the labor market in the south. Impatient with the slow pace of change in the home towns, they were attracted by the opportunity to work for the higher paying and more "challenging" foreign ventures in the south. With the trendy metropolitan culture and the geographical proximity to Hong Kong, Shenzhen has been one of the most attractive destinations for ambitious young people in other parts of China. Finding a job in a foreign-funded company in Shenzhen was considered the second best thing to working and living in North America or Japan. In fact, working in Shenzhen has become the first move for professionals and college graduates who planned to study or work abroad. It was widely believed that Shenzhen provided greater opportunities than other cities in China for the young and ambitious to build connections with foreign institutions. In the era of opening up and rapid economic growth, Guangdong has become the place to be for the adventurous. During my field work in the Pearl River Delta, I have met college graduates, college and high-school teachers, technicians of state-run enterprises from the northern or inland cities such as Xian, Dalian, and the southwest inland city of Kuenming working in the Taiwanese factories as foremen and secretaries. Although holding lower positions in the foreign ventures than they would in the state sector, these young professionals believed that they would have a much brighter future. This interregional brain drain has been a much-noted phenomenon. There has been no shortage of stories about how young people with aspirations have fulfilled their dreams in the south.62 Foreign investors hired highschool or college graduates and professionals as managers, accountants, secretaries, shopfloor foremen, technicians, and clerical staff.63 Young engineers and software programmers were highly in demand by foreign computer and software companies.64 The trade-off for the higher salaries in the foreign ventures was the low job security and fewer fringe benefits, especially housing provision. Part of the job security problem was assumed by the local governments. Since the mid-1980s, the personnel bureaus of several provinces and municipalities have set up employment centers. If a state employee found a job in a foreign firm, she or he could register with the center and move her or his personnel records from the original work unit to the center to keep the position in the state sector. If the contract was not renewed after the term ended, the employee could find another private firm and continue to be registered with the center. If the employee decided to go to another state enterprise or back to the

38

Making Capitalism in China

original unit in the state sector, his or her personnel record was then transferred back accordingly.65 In this case, job security was maintained and the number of years the employee worked for the private sector was still counted in his or her seniority and pension plan provided by the state.66 However, not all provinces or municipalities provided such security for employees of foreign firms. Most of the Chinese staff I met in the Pearl River Delta did not register in such employment centers in their home provinces. The more common strategy, used by the ex-state employee to maintain job security while working for foreign firms, was to take a leave of absence for a period of time and work for a foreign firm while still keeping the housing and other benefits provided by the original work unit.67 In some cases the original work unit required certain compensation fees (some 10-20 yuan per month) if the employee wished to keep his or her position in the unit.68 In other cases, state employees who planned to work for foreign firms had to cut themselves off completely from the original work unit.69 In this case, the husband might shift to a private foreign firm to earn a higher salary while the wife kept the "iron rice bowl" in the state sector, in order to keep the benefits that came only with the job.70 Some young woman state employees worked for foreign-funded ventures for several years until they got married, then would return to the more secure state sector. In joint ventures, the Chinese managers and clerical staff sent by the Chinese partner would keep their positions and personnel records in the original state enterprise for rainy days.71 On the other hand, the land of milk and honey has not been kind to everyone. The Shenzhen job market could not absorb all the inflow of "brain" workers. The records of an employment service center in Shenzhen, known as the "Brain Market," showed that more than 80% of job hunters were college graduates from different provinces. Many of these college graduates have been looking for jobs for more than half a year. Some of them left their first job, which had enabled them to obtain temporary residency in Shenzhen, and were looking for a better second job. But the job market was rather tight and it did not seem to be very easy to do job-hopping. For two job openings, a medium-sized company in Shenzhen in 1990 received several hundred resumes, which equaled die total number of employees in the company.72 It was also reported that many college graduates in Shenzhen ended up taking jobs that were far below their qualifications.73 Shenzhen was not the only city in the south that has seen the tightening labor market; and it was not just college graduates who found it hard to find a job in the south. For those lower-skilled migrants from the countryside, the job condition in the south was even more difficult. I was astonished by the scene of thousands of floating population gathering around Guangzhou's train station: children begging for food and money; groups of peasants occupying buildings' corners around the station and squatting or sleeping on the floor. Without contacts and job prospects in the city, many peasants became beggars in the streets. Terry Cannon (1990) reported that after the New Year's festival in 1989, in Guangzhou alone there were 30,000 rural laborers wait-

Taiwan, Southern China, and the New East Asian Economy

39

ing in a main square for temporary jobs (p. 58). In one of my visits to Guangzhou in 1993, the situation had not improved. The unemployment rates have been increasing slowly but surely. It was estimated that there were 200 million surplus laborers in China's countryside in 1992. According to the official records in 1993, 4.2 million people in Chinese cities and towns were unemployed, increased to 4.7 million by the end of 1994.74 The hidden unemployment and underemployment added another 20 million.75 The oversupply of labor, especially the low-skilled labor, has given the employers many choices. As a Taiwanese investor commented on his experiences in hiring: "[W]hen in Taiwan, I had to take whatever's available. But in China, I can be as picky as I want."76 The new competition in Asia, the new market and labor in China, and the new East Asian transnational investors have created the platform for a new pattern of direct foreign investment. As southern China was ready for the world market with its Hong Kong connection and cheap hands and brains, Taiwan's capital was also ready to move abroad. Among the increasing intraregional economic activities in Asia, Taiwan's trade and direct investment in southern China has been most intriguing. It is intriguing not only because of the rapidly growing economic ties despite the political rivalry, but also the cultural affinity between the capital provider and the capital receiver. What have been the strategies of Taiwanese entrepreneurs for investment in southern China? How have the investors' organizational characteristics affected their formulation of offshore production? Although the geographical proximity and cultural linkages between Taiwan and southern China made it sound natural for the two territories to establish economic linkages, how exactly has "culture" worked in the process of Taiwanese investment in southern China? As the first step toward exploring the questions, the following chapter will begin with the organizational characteristics of Taiwanese investors.

2 Networked Investors from Taiwan

Taiwan's export shoe manufacturers were among the first groups that shifted production from Taiwan to China in the mid-1980s. By 1992, more than 80% of the 800 Taiwanese shoe manufacturers had established their operations in China. The small- and medium-sized fashion shoemakers have adopted very flexible strategies in their rapid expansion across the straits. These strategies were rooted in the network form of production and marketing among producers and marketing agents, which in turn have been supported by a territorially based social network. Therefore, when the networked shoe producers moved across regional boundaries, the issue was not just about establishing local industrial linkages (i.e., purchasing local materials or farming out works to local producers) but also about the social networks with local agents. This chapter uses Taiwan's fashion shoe industry as an example to examine the process of networked investors moving across regional boundaries. The chapter first locates Taiwan's place in the worldwide fashion shoe industry, analyzes the characteristics of Taiwanese shoe industry's interfirm organization, and then moves into Taiwanese shoemakers' investment strategies in China.1

The Trade of Styles Shoe manufacturing has high product diversity and short production runs. Such a character is best grasped by Henry Ford's declaration that he was only prepared to make shoes if he could produce nothing but men's black Oxfords, size 8 (McBain, 1977:2-3). 40

Networked Investors from Taiwan

41

The size of product profolio in the shoe industry varies across different segments. For the more standardized products, such as working, athletic, and "athleisure" shoes, the average volume for each model and style is larger than for leisure and dress shoes. Men's shoes have smaller product variations than women's. Women's fashion shoes, which include leisure and dress shoes, have the greatest product variations, the most frequent changes of design, and the smallest batch for each design.2 Product variation in the fashion shoe industry is marked by two major production seasons: spring/ summer and autumn/winter. Annual production, shipping, marketing, and financing plans are made accordingly. But the natural seasonal cycle is not the only factor that dictates production cycles. Since the mid-1980s, the competition in the worldwide fashion market has become fiercer and mass markets for consumer products have become more personalized and customized. Fashion shoe producers and retailers had to develop more styles to stimulate consumption and minimize risks. Annual production cycles increased from two runs to four, then to six (or even more) runs. The number of product designs at least tripled and the volume of each style shrank by two-thirds. The production run was compressed from 6 months to 3 months or even shorter. Rapid changes in fashion shoe styling provoke rapid changes in materials and production technologies. New ways of treating and tanning leather, new types of synthetic leather and fabrics, and new dyes and components emerge on the market just as frequently as new fashion styles. Material inputs in shoe production include an immense variety of items to cover complex design and comfort features such as flexibility, grip, shock-absorption, sweat absorption, ventilation, elasticity, strength, and so on. Leather or synthetic leather is by far the main materials in terms of value, but many smaller items are purchased at frequent intervals, and their costs account for a significant proportion of the total cost of production. Items such as trimming, threads, ribbons, buckles, linings and enforcements with different types of fabrics, cement for different types of leather, metal components such as shanks and ornaments, labeling and packing materials, lasts, cutting dies, heels, insoles, and soles are all parts of the everyday paraphernalia in shoe manufacturing. A standard order sheet of materials for one style of a women's fashion shoe contains at least 50 items, excluding color/texture variations of the leather.3 Among these materials there are two major kinds of material used in shoe production: leather and other animal hides; and petrochemicals used to make plastics, such as polyvinyl chlorides (PVC) and polyurethane (PU), synthetic leather, and rubber. The supply of animal hides and petrochemical materials for shoe production tend to be unstable, because of the unstable supply of crude oil and livestock in the world market.4 Product designs also need to be tailored to regional preferences in styling and materials and be manufactured in many different sizes. In women's shoes there are at least 12 sizes ranging from size 5 up to size 11 or 12. For each size there arc patterns A, AA, B, BB, E, and so on for different width.

42

Making Capitalism in China

Shoe producers for the world market can be categorized according to the level of automation in production and the price range of the products, as shown in Table 2-I. 5 Highly automated technologies are used to produce high quality leisure and fashion shoes in a larger volume. Most of these shoemakers are based in the OECD countries like Italy and the United Kingdom. The new technology is based on microprocessor-controlled instruments that control functions in any programmable sequence and have several operating advantages over an instrument comprising extensive relay controls or mechanical switches that control electrical current. The improvements with the use of these new instruments are the reduction of machine setup time (therefore greater flexibility in style change), lower unit labor requirements (increased productivity), material savings, and quality consistency (fewer defects). The skill requirement of the machine operator can be reduced as well.6 However, the computer-aided design and manufacturing systems (CAD/CAM) are not efficient for short production runs. Minimum scales of output are required because of the costs involved. A combined CAD/ CAM cutter installation can easily cost in excess of US$1 million (U.S. Department of Labor, 1986). Only the larger firms in the OECD countries who produce high-quality and high-priced shoes in large volume can afford a high level of automation. Most firms, with the exception of the largest, have purchased only limited types of microprocessor-based machinery. On the other hand, the most efficient use of CAD (the control of inTable 2-1 Major Shoe Manufacturers in the World Market High

Price Range Medium

Large shoemakers in OECD countries Level of Medium Large OEM athletic Automation shoemakers in production in South Korea

Low

High

Low

Small, craftlike designer shoemakers in Italy

Small- and medium-sized export fashion shoemakers in Taiwan and Brazil Taiwanese producers for domestic markets

Source: The interviews and data compiled by the author.

Taiwanesefunded export production in China and Vietnam

Networked Investors from Taiwan

43

formation) is to connect CAD with previously discrete manufacturing operations (machines) and coordinate activities in the different spheres of production. The adoption of the revolutionary microprocessor-based automation technology requires transformation of the entire system. The cost effectiveness of automation depends on the degree of integration into the production process, that is, integration of design, product development, and manufacturing. Such integration requires a certain scale of firm. Most of the new technologies in the footwear industry still consist of only one or a few distinct applications of CAD or CAM functions (Hoffman, 1985; Coriat, 1988; Elson, 1988:281). The degree of automation diverges greatly among different branches of the industry. The production of athletic shoes is more automated than that of women's fashion shoes because the former has less frequent style changes and is usually produced in larger batches. Diversity also exists among different segments of production. For example, sole injecting is more automated than upper stitching. For premium quality, high-priced designer shoes, it is not automated machines but superior craftsmanship that determines the added value of the shoes. Shoes are produced in a "making-through" process, that is, one that has a lower degree of division of labor, and closer to comprehensive craftlike production. In the case of fashion shoes in the top-notch market, craftsmanship and comprehensive production processes are critical, and labor intensiveness is not necessarily parallel with low-added value or low-skilled labor. The high quality, handmade shoe is hand-wrapped. Wrapping the upper on the last is the most critical step in leather shoe making. The upper has to be pulled and wrapped on the last in a right angle with an appropriate degree of strength. If the upper piece is over-pulled, it is very difficult to correct because the leather is already stretched; if the upper is not pulled tightly enough, the shape of the entire shoe will change. The lasting machine can be adjusted according to the size of the shoe, but with fixed degrees of strength and pulling angles, it cannot create the subtle differences in the shape of the toe cap in different shoe styles. A well-wrapped shoe takes a precisely cut and sewn upper. Cutting is a skilled operation, both because it requires a great deal of manual dexterity and because errors in cutting can be costly to the manufacturer for wasting materials. Different kinds of hide (pig, sheep, cow, snake, and so on) and different parts of hide with different thicknesses and grain patterns have different degrees of elasticity and strength. Only certain parts of a hide sheet can be used for the vamp. An experienced manager of a shoe company pointed out that it takes an experienced eye to determine which part of each hide sheet can be used for the upper and how to maximize the number of pieces cut from each sheet, while at the same time avoiding scars and cracks on the leather.7 The precision of the cutting pattern is crucial. If the tanned leather is softer and more elastic, then the cutter will leave a smaller margin on the leather piece for sewing and lamination. The need for coordination among each production step induces the task group type of production organization. These task groups are composed of

44

Making Capitalism in China

a small number of craft workers who have a comprehensive understanding of all processes and techniques used in shoe production. They usually do not have a detailed division of labor, and produce small batches of dress shoes in short runs for the upper end of the market. The craftlike production of designer shoes is represented by the Italian shoemaker. According to Ash Amin's (1989) study of the shoemakers in Stella, Italy, the craft-based shoe firms have a long-standing artisan tradition that can be traced back to skills developed in the eighteenth and nineteenth centuries when the area specialized in the production of quality handmade gloves for the Neapolitan and European aristocracy and bourgeoisie. Though this craft tradition came under serious attack from cheaper mass-produced footwear in the postwar period, it has managed to persist and has even enjoyed some revitalization in recent years. In Stella, there are many small firms (fewer than 15 workers)8 in which the employer and his offspring, together with a handful of apprentices, produce medium- to high-quality footwear for specific market niches such as ballet, top-notch casuals, and evening wear (Amin, 1989:247-250).9

Taiwanese Fashion Shoemakers in the World Market Until the mid-1980s, Taiwan, Brazil, and South Korea were the three most important non-OECD shoemakers. The low-entry threshold, lower correlation between scale and returns, and the labor absorbing function attracted many Third World countries to develop the shoe industry in the late 1960s and early 1970s. Yet only South Korea, Taiwan, and Brazil have prospered. By 1987, South Korea, Taiwan, and Brazil accounted for two-thirds of total U.S. footwear imports, the largest footwear market in the world.10 The development of the shoe industry in Taiwan, South Korea, and Brazil has followed very distinctive paths. While Taiwan produced the most diversified products at the middle- and low-end market,11 South Korea has been most successful in large-batch production of middle- to high-quality athletic shoes. Brazil is competitive in leather fashion shoes for the middle-quality market. While Brazilian and Taiwanese shoemakers tend to be small, their South Korean counterparts are mostly large companies. In 1986, more than 30% of Taiwanese shoe factories had less than 50 workers. More than half of all factories hired less than 100 workers. Only 30 factories employed more than 500 workers (see Table 2-2).12 In terms of assets, only 7 of the 896 companies surveyed held assets worth more than US$3 million, 53% held assets worth less than US$0.15 million, and 19% less than US$30,000.13 Establishments with 500 workers or more accounted for about 20% of the value added in the footwear sector in 1976 in Taiwan. In South Korea, establishments of the same size provided 90% of all value added in the footwear industry (Levy, 1991). The difference of the employment size in Taiwanese and South Korean shoe manufacturers is shown in Table 2-2 and Table 2-3. For Taiwan's small- and medium-sized shoe producers, a high degree

Networked Investors from Taiwan

45

Table 2-2 Number of Taiwan's Shoe Manufacturers by Employment Size (1985) Employment size <50

51-100 101-150 151-200 201-300 301-400 401-500 501-600 601-700 701-800 801-900 901-1,000 >1,000 Total

Number of companies

Percentage of total companies

297 220 110 63 101 39 14 12 5 5 2 1 5 874

33.98 25.17 12.58 7.20 11.55 4.46 1.60 1.37 0.57 0.57 0.23 0.11 0.57 100.00

Source: Taiwan Footwear Manufacturer Association and Taiwan Industry Bureau, the Ministiy of Economics, 1986, Report on the Current Situation of the Shoe Industry, Taipei, p. 63.

of automation did not necessarily lead to high profitability, especially when they were restrained by limited capital and short-term return. Manual labor was, in fact, more flexible than machines for small manufacturers involved in short production runs and small batch production. Compared to their South Korean counterparts, Taiwanese shoemakers have also been more diversified. In 1971, plastic sandals constituted 40% of Taiwan's footwear exports. By 1985, the leading export item (iionrubber athletic footwear) accounted for just 27.5% of footwear exports, with the next five items providing an additional 42.4% of the total.14 The remaining 30% of exports comprised dozens of distinct items, none of which accounted for more than 3% of total exports. South Korean shoe producers, both large and small ones, were dependent on one item: nonrubber athletic shoes. In 1985, this type of shoes still accounted for 71.3% of South Korea's shoe exports (Levy, 1991:158-162). Although large brand name athletic shoe companies like Nike have increased die product variation,15 athletic shoe producers have experienced less pressure than fashion shoe producers to diversify product and run short product cycles. As Michael Donaghu and Richard Barff (1990) pointed out, athletic shoes are still massively produced (p. 547). My own survey also shows that athletic shoe factories had a higher level of automation than fashion shoe factories of the same size of employment. Taiwanese shoemakers' involvement in the international shoe production and distribution chains began in the world's fashion centers. Major fashion shows take place in February and March of every year. The new collec-

46

Making Capitalism in China Table 2-3 Number of Shoe Manufacturers in Pusan, South Korea, by Employment Size (1982-1991)

19818

19 82 Employment size <10

11-20 21-50 51-100 101-200 201-300 301-500 501-1,000 1,001-2,000 2,001-5,000 >5,000 Total

Number of companies 8 16 43

42 31 19 14 19 9 4 6 210

Percentage of total companies 3.81 7.62 20.48 20.00 14.76 9.05

6.67 8.57

4.29 1.90 2.86 100.00

Number of companies 39 64 230 144

98 24 27 30 19

6 6 687

199 1 Percentage of total companies 5.68 9.32 33.48 20.96 14.26 3.49

Number of companies

75 106

314 147

4.37

63 33 20 14

2.77 0.87 0.87 100.00

8 10 1 791

3.93

Percentage of total companies 9.48 13.40 39.70 18.58 7.96 4.17 2.53 1.77 1.01 1.26 0.13 100.00

Source: Adapted from Lim, 1994:572.

tions of the spring/summer season are available in the boutiques in fashionleader cities such as New York and Milan. International buyers hunt for high fashions and investigate market response in these cities, then have their own designers devise prototypes and designs. Taiwanese manufacturers carry out the production. Some large Taiwanese manufacturers and trading companies take a more active role in the preproduction stage. They collect information of fashion trends in the fashion-leader cities, either through branch offices or regular visits to Milan and New York. Some hire freelance Italian designers. The prototypes and original designs are then developed into sample shoes by Taiwanese manufacturers.16 International buyers place orders on the samples (with specifications and modifications) that Taiwanese manufacturers and traders provide. Besides these individual marketing activities, sample shoes developed by Taiwanese shoe firms are also displayed in Taiwan's shoe show each June. International importers, department stores, and chain stores (such as JCPenney's, Wai-mart, Payless Shoe Source, and Sears) review the middleand low-market versions of the season's high fashion shoes in the shoe shows. Buyers place orders with Taiwanese trading companies. The latter then work with their partner manufacturers to produce complete sets of samples (with all sizes and colors and material combinations) for each product line and style. After sample shoes are confirmed by the buyer, the manufacturer sends the sample shoe and cardboard patterns to last and cutting die makers and orders soles, inner soles, leather, PU or PVC sheets, lining materials, ornamental accessories, and components from suppliers. Then the final production begins.

Networked Investors from Taiwan

47

The production for the spring/summer shoes begins in October. By the end of the year or the beginning of the following year, the chain stores' warehouses would be full of Taiwanese imitations of Milanese fashions from the previous year, ready to adorn American shoppers' feet in the coming spring. The cycle of fall/winter lines starts in August, the time when the boutiques in Milan present their fall/winter collections for the year. Product development begins in October, and the final production takes place between May and July of the following year. By August, the chain stores would be well-stocked with middle- quality to low-end shoes.17 The involvement of Taiwanese shoe producers in the world market was initiated by the Japanese trading companies,18 parallel with Japan's industrial restructuring in the 1960s. Japan began to develop the petrochemical and shoe industry after World War II, which led to the dominance of Japanese plastic shoes in the U.S. market in the 1950s and early 1960s. In 1969, Japan had 80% of the U.S. shoe market. Rising wages in Japan and increasing exchange rates between the yen and U.S. dollar, as well as the increasing import tax on Japanese shoes in the United States, contributed to a dramatic decline in the Japanese shoe industry after peaking in 1969. In 1970, Japanese shoes occupied only 40% of the U.S. market; in 1971, it was 33%, in 1974,3%, and 1975,1%. In 1962, Taiwanese subcontractors began to make straw-woven uppers of sandals for Japanese manufacturers. This activity was introduced to Taiwan by Japanese trading firms and was based on the Taiwanese straw hatweaving industry. At the same time, Taiwan's petrochemical industry was able to supply plastic soles. By 1963, Taiwan's plastic shoe producers were able to compete with their Japanese counterparts for trade with the United States. Taking advantage of low labor costs and a favorable export taxes in Taiwan and import taxes in the United States, Taiwanese shoe manufacturers managed to sell plastic shoes at a price that was 40% lower than Japanese products. In addition, the expansion of the world market and the development of the machine tool industry and synthetic materials such as PVC and PU in Taiwan also contributed to the competitiveness of Taiwan's export shoes. Taiwan exceeded Japan's market share by taking over 47% of the U.S. market in 1971.19 Taiwan's shoe industry depends heavily on export markets. In 1984, exports accounted for over 90% of shoe production in Taiwan. Shoe exports rose from US$10 million in 1969 to US$2.3 billion in 1985. More than 95% of these exports were destined for advanced industrialized countries, especially the United States. The U.S. market absorbed 83% of total shoe exports from Taiwan in 1970. The percentage dropped to 71% in 1985 after several waves of protectionism in the United States.20 There is also a sociocultural reason for the quick shift of the shoe industry from Japan to Taiwan, and the fast growth of the industry in Taiwan. A Japanese owner of a Taiwan-based trading company pointed out that the shoe industry had never fully developed in Japan because Japanese society pays little respect to crafts that are related to leather and discourages competent

48

Making Capitalism in China

and talented people from entering the trade.21 For the Taiwanese, however, the export shoe had been one of the most popular trades since the 1970s. The expanding export shoe sector offered 20% higher salaries than other sectors. The low entry threshold of the industry also allowed many workers and managers to realize their dreams of becoming independent factory owners. According to a shoe factory manager who used to work for a Japaneseinvested factory in Taiwan, the Japanese had brought to Taiwan modern management skills in shoe manufacturing, especially the design of efficient production procedures.22 Taiwanese shoe manufacturers also imported shoemaking machinery from Japan in the 1960s. While Japanese trading firms brought the trade of plastic shoes to Taiwan, the craft of leather shoe making was introduced by a group of shoemaker masters from Shanghai after the Nationalists' retreat from mainland China to Taiwan in 1949. The traditional system required the apprenticeship of three years and four months. Teenage boys were sent to the masters' semiartisan shops to learn skills such as identifying characteristics of leather; measuring, cutting, and stitching leather pieces; wrapping uppers on the lasts; and so on. As the Japanese shoe industry began to decline in the late 1960s, Japanese shoe manufacturers shifted their production sites to Taiwan. Taiwan's footwear industry grew rapidly from the early 1970s. By 1976, Taiwan became the world's largest exporter of footwear in terms of quantity, and this record held until 1987.23 In 1986, Taiwan sold to the world 850 million pairs of shoes.24 Taiwan's export shoe industry has come a long way. The increasing competitiveness of Taiwan's shoe industry in the world market has been accompanied by constant struggling against the increasing protectionism in the OECD market and frequent restructuring within the industry. In 1977, the United States, followed by other EEC countries, began to impose a quota system on shoes made in Taiwan and signed the Order Marketing Agreement (OMA) with Taiwan. The new protectionist regulation initiated a restructuring of Taiwan's shoe industry. More than 20% of the 500 registered Taiwanese shoe companies, mostly small ones, closed down in one year. On the other hand, larger companies that benefited the most from the quota system grew bigger and stronger during this period, mainly because the quota allocation to individual companies was based on the export quantity in the previous years. The larger volume a company had exported before 1977, the larger quota it received for the following years. Consequently, large companies were allocated larger quotas than small companies, and the new companies established in 1977 or a year before received hardly any quota at all. A black market in quota emerged. The manufacturer that was granted a bigger quota than needed would profit from selling quota to those that did not have enough. On the other hand, the production cost for those that had to buy the quota, in most cases small or newer companies, increased. Thus the quota system created a competitive disadvantage for small companies.25

Networked Investors from Taiwan

49

The quota policy also guaranteed the profitability of large shoemakers. The export quota prohibited the entry of new companies and thus reduced competition among producers. Profit margin increased for those that had enough quota. The Taiwanese shoemakers interviewed for this book referred to that period as the Golden Age for the Taiwanese shoe industry, because one can "sell one pair, get two pairs back," that is, a 100% profit margin. It was a time when foreign buyers would not reject a batch of shoes "even if there were two left-foot shoes in one pair."26 A Taiwanese shoe exporter recollected that people involved in the footwear business were the major clientele of the most luxurious nightclubs and restaurants in Taichung, the major hub of export shoe manufacturing in Taiwan.27 The quick and high returns in the shoe business helped the large shoe industry-based business groups in Taiwan28 to develop during the same period.29 In June 1981, the OMA was abolished and the United States and other markets were opened again. The number of shoe manufacturers mushroomed immediately. Between 1981 and 1986, 883 new companies registered in the Taiwan Shoe Manufacturer Association. The total number of shoe manufacturers in Taiwan reached 1,200 in 1984. Expecting a bigger share in the seemingly expanding export markets, many existing companies also expanded their production capacities. The rapid expansion generated overcapacity and cut-throat competition among Taiwanese shoe producers. The average sale price dropped from US$3.62 per pair in 1981 to $3.58 in 1984. During the same period, labor cost increased 25.3% and the price of the major materials, especially leather and rubber, rose by 26-35%. Profit margins declined by 2-3%. During this period, 273 shoe companies closed down.30 The pressure of restructuring continued to mount in the mid-1980s. Taiwan's export shoes had been overly concentrated in the U.S. market since the late 1960s. Before the quota system was practiced in 1977, the U.S. market absorbed more than 64% of Taiwan's total footwear exports. After 1977, the figure dropped to 51%, before it went back up to 59% in 1984. Overconcentration of the export markets made Taiwan's shoe industry vulnerable to the market fluctuations and policy changes of a single country. The problem can be best illustrated by the so-called Tornado 1984. In 1983, there were signs that the U.S. government was about to impose another round of the quota system on Taiwan's shoe imports. Again, the quota allocation would be determined by the export volume of individual companies in previous years. Thus, Taiwanese shoe companies accepted as many orders as possible in order to boost their export performance before the quota system was imposed. Meanwhile, U.S. buyers and Taiwanese trading companies speculated that there would be a sudden surge in the U.S. athletic shoe market during the 1984 Olympic Games held in Los Angeles. Based on these projections, shipments to the U.S. market from Taiwanese shoemakers increased by 49.7% in the first half of 1984, compared to the same period in the previous year. Export of athletic shoes alone grew 23.3%. But the sale price grew by only 4%, which did not cover the rising labor costs

50

Making Capitalism in China

and the new export tax in Taiwan. In the second half of 1984, the U.S. International Trading Committee decided not to impose the quota system on Taiwan's shoe imports. The Olympic Games in Los Angeles did not boost the demand for Taiwanese athletic shoes, either. The U.S. importers were stuck with a swollen inventory. The large inventory in turn led to a 15% decline in Taiwan's shoe export in the second half of 1984 as compared with the first half of the year.31 The blow was immediately felt by Taiwanese export shoe manufacturers. More than 100 factories closed down within half a year. During the following three years, only 110 new companies were established, while another 180 shut down.32 To prevent the turmoil from happening again, Taiwanese shoe manufacturers and trading firms tried to diversify the export markets to Japan and Europe. Yet, during the worldwide recession in 1984, the exchange rate between the U.S. dollar and major European currencies rose. Since the Taiwan dollar had been following the U.S. dollar in its exchange rates against other currencies, the depreciation of major European currency against the Taiwan dollar made it more difficult for Taiwanese footwear producers to enter the European markets. Consequently, Taiwanese footwear exports relied even more heavily on the U.S. market.33 In 1986, after many small producers dropped out of the market, the overheated competition in Taiwan's export shoe industry cooled down. With the temporary recovery of the world economy, Taiwan's footwear export picked up again. The total value of footwear exports grew 39% from the previous year. Compared to the same period in 1985, the growth rate of shoe exports in the first eight months of 1986 was 45%, the highest among all export sectors in Taiwan. One reason for the recovery of Taiwan's shoe exports was that, in 1986, the exchange rate of Italian lira and Spanish pesetas to the U.S. dollar increased 36% and 23%, respectively, whereas the Taiwanese dollar and the South Korean dollar increased only 12% and 4%. This provided Taiwanese manufacturers with the opportunity to take over part of the U.S. market share from their Italian and Spanish counterparts. At the same time, lowered exchange rates between the Taiwanese dollar and the European and Japanese currencies helped Taiwanese shoemakers to finally enter these markets.34 The recovery of Taiwan's shoe export industry in 1986 did not last for very long. A major economic transformation of Taiwan's economy had been underway. The New Taiwan dollar appreciated more than 30% between 1985 and 1990 against the U.S. dollar.35 Labor costs in Taiwan rose by 84% between 1984 and 1988, while the average wage levels in Southeast Asian countries such as Thailand, Indonesia, Malaysia, and the Philippines remained 4-6 times lower (see Table 1-2). Meanwhile, another worldwide recession started in 1988. The combination of these factors constituted a devastating blow to Taiwan's shoe industry. The short-term solutions, such as taking excessive amount of orders,36 balancing costs and profits to keep the factory running until the next upturn proved not as effective as they did

Networked Investors from Taiwan

51

before. Between 1987 and 1988, there were 347 shutdowns. Seventy-one companies discontinued production.37 In the mid-1980s, in the face of escalating competition in a shrinking market, U.S. retailers began to introduce larger number of styles more quickly to the market in order to push up sales. International trading firms and buying agents adopted a more flexible order placement schedule. The regular seasonal ordering and production cycles yielded to more spontaneous market responses. Taiwanese manufacturers had to produce shoes of higher quality at an even lower price, while at the same time keep up with smaller orders, greater product varieties, and shorter production runs. Diversification of markets has been another strategy to remain competitive. Since "Tornado 1984," Taiwanese shoe companies have been trying to cultivate the European, Japanese, Mideastern, and Eastern European markets. Between 1970 and 1985, the value of shoe exports to the U.S. market declined from 83% of Taiwan's total shoe exports to 70.9%; while the export to European markets increased from 3% to 10.7%, and Japanese from 0.4% to 4.5% of the total.38 Different markets have different tastes for fashion shoes. And the shape of shoe molds varies from region to region because of racial differences in the physical configuration of feet. By entering into the new markets, Taiwanese shoe producers had to further diversify their products to fit the preferences of consumers in different regions. In the early 1980s, when exchange rates against the U.S. dollar increased and wage levels in Taiwan increased rapidly, some Taiwanese shoe manufacturers began to shift production to Thailand, Malaysia, the Philippines, and Indonesia. However, given the financial and managerial constraints of smalland medium-sized firms in overseas operations, the majority of the shoemakers did not move. The stagnated world shoe markets in 1987 and 1988 forced many shoe producers to halt daily operations. At the same time, the Taiwanese stock market began to soar in late 1988. Shoe manufacturers were lured by the soaring return rates of several hundred percent in the stock market and shifted their capital. The sparkling bubbles in the stock market also attracted quality inspectors, middle managers, technicians, foremen, even workers of shoe firms. In mid-1990, the stock market collapsed overnight and all the bubbles disappeared. The end of the stock market bonanza marked Taiwanese shoe manufacturers' decisive move to mainland China. As the world shoe market picked up again in 1990, small- and medium-sized Taiwanese shoemakers took the opportunity and reestablished production plants in China, hoping that they would find the "second spring" in the shoe business. By 1992, more than 80% of 800 Taiwanese export shoe companies had established manufacturing operations in China. How did the Taiwanese shoemakers reestablish their production in China? Before exploring the question, organizational characteristics of Taiwanese shoemakers must be examined at both the firm and the interfirm level. The strategies of Taiwanese shoe companies' overseas investment were directly related to these characteristics.

52

Making Capita;ism in China

Networks of Creative Imitation The competitiveness of Taiwan's export fashion shoe industry unfolds on three fronts at the same time: securing the lowest possible costs and the highest quality in the least amount of time. Taiwanese export fashion shoemakers have been quick to respond to market signals, punctual in making deliveries, and able to operate with short production cycles. These characteristics, in turn, are based on an interfirm organization of production, which I call "networks of creative imitation." The networks of creative imitation are composed of small- to medium-sized independent manufacturers, suppliers, and subcontractors who adopt intermediate-level production technologies and product design and development strategies. Most of all, networks of creative imitation are integrated networks of production and marketing. Effective coordination within the network between production and marketing has been the reason why Taiwanese shoemakers can deliver fast-changing fashion shoes to the world markets at competitive quality and costs. The networks of production in Taiwan's fashion shoe industry is a collection of intertwined linkages between independent producers in different sectors. Vertically, the linkages are established between product development and production, between manufacturers and upstream and downstream suppliers, between subcontractors and manufacturers, and between contract manufacturers and manufacturers. Horizontally, the networks of production entail an elaborated division of labor among specialized producers. Individual manufacturers have concentrated in specific segments of Taiwan's shoe industry. Fashion shoes and athletic shoes are two major segments. Under the fashion segment, there are women's shoes, men's shoes, children's shoes, and casual shoes. Specialty shoes and work shoes are in yet another category, but their production organization is closer to fashion shoes than to athletic shoes. Within each segment, there is further specialization. In the women's fashion shoe sector, some manufacturers specialize in shoes made with a polyurethane sheet while others in shoes made with genuine leather. Among those who specialize in genuine leather shoes, there is a distinction among manufacturers who specialize in shoes made of pig, cow, snake, or sheep hides. Manufacturing snake and sheep leather shoes requires a higher skill level than pig and cow leather shoes. In addition, within the women's fashion shoe sector, the dividing line is drawn between producers of pumps and flats; the former have higher manufacturing capabilities. Specialization is also practiced among material suppliers. PVC and PU factories specialize in certain type of PVC and PU sheets; each has a manageable product profolio. A factory can specialize in dry PU, plain PU, PU with printed patterns, wrinkled leathers, or fabrics. Suppliers of lining materials can specialize in knitted woolen fabric for snow shoes, or paper-based fabrics for women's fashion shoes. Small hand-tool makers and shoe-

Networked Investors from Taiwan

53

making machinery builders concentrate in different kinds of machines and tools. Fashion shoe traders and material importers are also specialized along the lines of women's shoes, men's shoes, casual shoes, specialty shoes, and so on. However, what has made the Taiwanese shoe industry competitive in the world market is not just the mechanical practice of division of labor and specialization. In each area of specialization and labor division, there has been an incremental and accumulative process of innovation. The competitiveness of Taiwan's export shoe industry is mainly based on the strategy of creative imitation. Taiwan's fashion shoe manufacturers adopt the original prototype and reproduce it at the highest and stablest possible quality at the lowest possible cost in the shortest possible time. The creativity is found not just in the product design but also in the production processes and organization. Innovation is not just about the design of shoes but also the design and production of materials and machinery. Taiwan fashion shoe producers have occupied a sizable area between the extremes of original innovation and imitation, of intermediate innovation that required well-established networks of suppliers, capabilities in product development, new production technologies, and intensive managerial coordination. The imitators integrate and transform the concept of the fashion trend into their own "design." The owner of a trading company pointed out that the meaning of "design" in the context of Taiwanese export shoe industry is "to catch the drift" of fashion trends and apply them to the local production environment. For example, when shoes made with bright-colored fabric and floral patterns or leather sandals decorated with bead strings were popular in Europe, the company designed several lines of shoes with locally designed and produced fabrics and bead strings. The floral patterns of the fabrics might not be exactly the same as the ones used in the original design, but the shoes looked very stylish and trendy.39 In the 1970s, most of the Taiwanese export shoemakers were involved in original equipment manufacturing (OEM). In a typical OEM arrangement, foreign buyers provide product design with samples, in some cases key materials and components as well. Local manufacturers process and assemble die product in large quantities according to the buyers' specifications. Manufacturers received processing fees. OEM arrangements are labor intensive and low value-added, involving limited innovation components. Since the 1980s, there has been a transition from original equipment manufacturing to original development manufacturing (ODM) in the industry. Based on the prototype provided by the buyer, Taiwanese manufacturers are responsible for product development and material procurement, in addition to final assembly. They also lay out production engineering to transform a handmade product into one that can be reproduced in large quantity by semiskilled workers along the assembly line. The competitiveness of Taiwan's fashion shoe industry is increasingly dependent on the capabilities of product development and production engineering.

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Making Capitalism in China

Networks of Product Development Product development is undertaken by a team of shoemaker masters in the manufacturing factory. Since the mid-1980s, as competition has become fiercer, fluctuation in the world market greater, and the change of fashion faster, manufacturers farm out sample production to independent shops. These are mostly small shops run by shoemaker masters who used to work for shoe manufacturers. Based on prototypes presented with sample shoes or, in many cases, in photos, experienced masters develop patterns for the shoes. The pattern of the inner sole is developed first, then a wooden last.40 The master traces the pattern of the shoe upper on a piece of brown paper attached to the wooden last. Leather pieces are cut out based on the paper patterns. The key to pattern development is keeping the original shape intact to make it easier to manufacture in large quantities on the assembly line. The second step of product development is finding sources of leather, lining materials, components, and ornamental accessories that resemble the kinds used in the original design, but that are cheaper than the original materials. A pair of designer shoes from Milan can be duplicated in one to two days by an experienced shoemaker master. After the first sample shoe is accepted by the buyer, the manufacturer will go on to produce an entire line of the style, with different color schemes and types of leather, all in size 6. All sample shoes are handmade by shoemaker masters. The whole line of sample shoes will be sent to the buyer for confirmation once again before the mass manufacturing begins. Although the original product design is missing, it does require innovation to transform 50 pairs of handmade Italian designer shoes, which are sold for US$150.00 per pair in the boutiques on Fifth Avenue in New York, into 30,000 similar-looking pairs, at US$39.99 per pair, on the shoe racks of a department store, or even US$19.99, in a discount chain store. In fact, exact duplication of an original design is very expensive, if it means using the same type of materials and production processes. Taiwanese manufacturers' strength is found in exploring cheaper production methods and materials to duplicate products of the high-end market. Since more than 50% of the cost in leather shoe production comes from materials, saving on materials is crucial in bringing down the overall costs. For example, the upper of the high-priced shoe is usually made of a whole piece of leather, which produces a large amount of leather debris. The upper of the low-priced shoe is made with smaller pieces of leather stitched together. Thus material waste is minimized. Sometimes patches of different colored-leather are used in a pair of shoes, and the mosaic pattern becomes the design concept.41 In another example, the heels of some high-quality high heels are made with thick leather. The horizontal lines on the heels demonstrate the quality. Heels of cheap shoes are wrapped with pieces of plastic materials. To make them look like leather-wrapped heels, horizontal lines are printed on the plastic heels.

Networked Investors from Taiwan

55

Methods of reducing production costs can be also found in production processes. For the high-quality loafer, for example, the upper and the sole are hand-stitched. The stitching threads are visible and they indicate high quality. One can also find these stitching threads on the loafer sold in discount stores. The difference is that the low-priced loafer has the upper and the sole affixed together by cement. The machine-produced stitches are on the bottom of the loafer, not between the sole and the upper. Therefore they are decorative but not functional, just to make the loafer look handmade and classy. The production of the ornament also involves creative imitation. Metal or plastic ornaments on the fashion shoe can be the most important part of the design. To imitate exactly the design of the metal or plastic ornaments on the original shoe is expensive because it requires a very precise molding of these pieces. It is cheaper if the patterns are made by automatic embroidery machines. Military-style metals were popular with European fashion designers in the late 80s. But metals with complex patterns are expensive to reproduce. Taiwanese shoemakers use automatic embroidery machines (by farming out the embroidery job to a subcontractor) to embroider the pat tern of military metals on a piece of thick fabric with gold-colored threads. The embroidered pattern is then attached to the upper. Besides materials, another major cost comes from the last and the cutting die. There are several ways of cutting costs on lasts and cutting dies. For example, an order may come with one style but different material requirements, such as 3,400 pairs made with genuine leather and 4,300 with PVC. Separate sets of cutting dies will be needed in this case, because the elasticity of different materials varies. For more elastic leather, the cutting die is smaller. For less elastic PVC, the cutting die should be larger so each cut piece will have enough margin for stitching. A set of cutting dies costs about US$1,500. The minimum size of an order is 5,000 pairs to cover the cost of a new set of cutting dies. It is too expensive to prepare separate sets of cutting dies for one style. Instead shoemakers will prepare only one set of cutting dies and use fabric lining to adjust the elasticity of the materials. The last is critical to the quality of the shoe. The preciseness of the arch at the bottom, the curve in the front, the width of the waist, and the height of the heel are determined by the shape of the last. Economies of scale for producing lasts are higher than for cutting dies. The cost of one set of lasts is about US$6,000-7,000. To cover the cost of making a new set of lasts (that is, one style in all sizes), the minimum size of an order has to be 10,000 pairs.42 If the order is smaller than 10,000 pairs (which is often the case to Taiwanese fashion shoe producers), then the shoemaker will use lasts made for previous orders. But the use of this strategy is limited. For those who produce for the U.S. market, in which production runs are short, a set of lasts can be used for only a year. For the European market, a set of lasts can be used and reused for about two years. Most of the lasts are made with aluminum and outdated lasts can be recycled. But cutting dies can not be reused as frequently as lasts because cutting patterns vary to a greater degree.43

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Making Capitalism in China.

Networks of Suppliers: Materials ana Machinery Creative imitation in Taiwan's fashion shoe industry is also found in the midand upstream supplying industries, especially in the petrochemical industry.44 Major efforts have been devoted to develop various lands of synthetic material such as, polyvinyl chlorides and polyurethane for the upper and the sole of the shoe. The appearance of polyurethane can be made to closely imitate genuine leather, even down to simulated animal skin cells printed on it. According to Wan-wen Chu (1994), the production of polyvinyl chlorides started earlier than any other segments in Taiwan's midstream petrochemical industry, and it has been the fastest growing sector. Compared to other sectors in Taiwan's midstream petrochemical industry, such as polystyrene (PS); ABS, a rigid plastic for electronic appliances; high-density polyethylene (HDPE); low-density polyethylene (LDPE), for plastic bags; and polypropylene (PP), for other household products, the polyvinyl chlorides industry has established the most comprehensive forward and backward industrial linkages. Production of polyvinyl chlorides and polyurethane has been the backbone of Taiwan's shoe industry. Taiwan's first factory for synthetic leather production was established in 1969, and the industry grew along with the export-oriented manufacturing of shoes, handbags, and leather garments in the 1970s and 1980s. Export shoe manufacturers have been the largest customer for Taiwan's synthetic material industry, consuming 60% of the total production of synthetic materials produced in Taiwan in 1988. Synthetic material production requires larger scale economies than shoe production. In 1989, there were 17 producers of synthetic materials in Taiwan. Among them, Formosa Plastic Company has been the leader, operating at a production capacity 3 to 10 times greater than others (Liu, 1990:166-181). Polyvinyl chloride and polyurethane suppliers have to keep up with fashion trends and be able to take initiatives in product development as well. They provide the customers with product catalogs but keep a small inventory. Each order for polyvinyl chloride and polyurethane sheets from shoe manufacturers comes with specifications regarding the color, texture, and pattern requested by the buyer, and usually has to be custom-made. Polyurethane suppliers produce on an order-by-order basis, and work with the manufacturer to meet the requirements of the buyer. Shoemakers have also been the largest customer for the leather-tanning industry in Taiwan. Almost all rawhide for shoe production is imported from the United States, Japan, and Korea. Most of the chemical products need for tanning are also imported.45 Compared to the synthetic-leather industry, the technology level of Taiwan's leather-tanning industry has not been as advanced, and the leather tanners' capability to respond to the requests of shoe manufacturers is less developed. Such a constraint partly explains the concentration of Taiwan's shoemakers in shoes made of synthetic materials, whereas South Korea and Brazil are stronger in leather shoes.

Networked Investors from Taiwan

57

The machine-tool industry has been another critical element in the supplier network of Taiwan's shoe industry. Taiwan's machine-tool builders find their niche in the intermediate technology. The intermediate technology is characterized by mechanical devices with a certain degree of electronically controlled operations. These machines have different degree of automation and thus different requirements of labor inputs and skills. They may not adjust to different sizes and styles in the same way that a microprocessor-based machine does. They also require a more skillful operator. Nevertheless, the semiautomated machine helps improve quality consistency and labor productivity in certain sections of shoe production. For example, there are different types of machinery available to fold and cement edges of uppers. One is the thermocementing edge folder, which automatically cements on the edge as it folded. The operator moves the upper piece with both hands and controls the switch with his or her feet. Another kind of edge folder can automatically emboss the inner side to lock the reinforcing band. This type of folder requires the operator to move and adjust each piece of upper on the machine. Although manual operation is still needed, these semiautomatic devices help to apply cement evenly, keep the upper clean when it is being cemented and folded, and also save on labor time. In punching and eyelet insertion, manufacturers have the choice between highly automated eyeletting and insertion machines and semiautomatic hydraulic foot-operated eyeletting machines. In roughing the bottom of the upper, numerically controlled upper roughing machine, which operates on a wider range of shoe types, holds the lasted upper in the correct position and ensures the roughing is done within the margin area of the bottom. There is also a hand-guided scouring machine. Between the two extremes there is a semiautomatic machine that utilizes templates to ensure the roughing is done within the margin area of the bottom. But the semiautomatic roughing machine cannot be adjusted to different types of shoes as easily. In the lasting section, the forepart pulling and lasting machine with microprocessor controls can be programmed to adjust to different sizes and to position the upper automatically. No manual adjustments are needed, and precise lasting is assured. Next to it is a semiautomated lasting machine. The operator manually straightens and positions the upper and uses a foot to switch on and off the electronically controlled claws to wrap the upper on the last. A hydraulic last-slipping machine slips the finished upper from the last. In the sole-attaching section, the microprocessor-based sole-laying press can automatically determine the contour of the shoe's bottom and adjust for heel height. A hydraulic sole-attaching machine is less flexible in adjusting to different contours and sizes. It also requires a higher manual skill to secure precise adhesion of the shoe's sole to the upper. The vacuum vulcanizing machine is another case in point. Vacuum vulcanizing machines are used to solidify the final shape of the shoes after the lasts arc pulled out. Cyclic chain conveyers and chain dry conveyers are used to stabilize the glue as the cemented upper moves on the conveyer. These machines are not affected by product design changes, and their performance mainly

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Making Capitalism in China

depends on mechanical designs rather than electronics. Experienced shopfloor foremen will work with engineers from the machinery builder to come up with solutions to the bugs in the work of machines. On other occasions, a greater improvement can be made through mechanical breakthroughs. The design and production of the shoe making machine in Taiwan can also be a combination of imitation and creation. Shoemakers start with the original shoe making machine made in Great Britain (e.g., the cutting machine) or Italy (e.g., the lasting machine) and take advantage of tax breaks for imported machine tools for export products. Then the machine tool builder who works closely with the shoemaker will reproduce the machine with locally available equipments and components. The experienced engineers in the machine building company work together with technicians in the shoe factory to adjust the machine to the local situation. For example, durability, that is, being able to run long hours, was important for Taiwanese shoemakers because most Taiwanese factories operate two shifts a day. The Italian shoe making machines, however, are usually designed to run for one shift a day. An adjustment is needed to allow the machine to run for longer hours.46 The numerically controlled lathe industry in Taiwan has also followed the same strategy of focusing on the intermediate technology, or, in Staffan Jacobsson's (1985) term, low-performance strategy. It means that the computerized numeral control (CNC) lathe producers focus on users who do not require high-cutting capability or high precision and who are extremely price-sensitive. Typical users can be small subcontractors, first-time users of CNC lathes, schools, and some metalworking plants. These CNC lathes are of lower performance quality and are cheaper to build because they use motors with a lower horsepower and less rigid casting. The strategy is also less demanding in terms of design skills because of the nature of the product as well as the fact that these firms can duplicate other firms' models. Duplication implies lower R&D costs. Given the standardized nature of the product, independent distributors can be used as well (Jacobsson, 1985:360-61). According to Yeo Lin (1991), based on incremental innovation and imitation, by 1989 Taiwan's CNC machine tool producers were able to occupy 45% of the domestic market, and exported 75% of their products in quantity. The major competitive edge of Taiwanese CNC machines is price. While the cost of a Japanese CNC lathe averages about US$100,000, a top-of-theline product made in Taiwan is only half of the price (p. 11). There are also small labor-saving devices used for detail works, such as the buckle hook attaching machine, vamp lace stapling machine, buckle stapling machine, stationary penuamtic nailing machine, vamp pattern stapling machine, as well as various types of eyeletting machines for different types of shoes and eyelets. Many of these devices have patents. These small-scale and inexpensive machines are useful for small firms that need better quality consistency and labor-saving devices, yet are highly sensitive to production costs. The locally produced shoe-making machines and tools are affordable for the small producer. While the Japanese-made numerically controlled stitch-

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59

ing machine is beyond the financial capacity of Taiwanese shoemakers, the semiautomated, hand-guided stitching machine made in Taiwan costs only one-third to one-quarter of the Japanese product. But what has made the domestic machine builders important to the shoe industry is not only the price difference but also the immediate aftersale services they have provided. A shoe production line covers a wide range of machines. If any of the machines break down, the entire production line will be suspended. Production interruptions in turn lead to delayed deliveries and heavy fines. There has been a network of maintenance services provided by the machine builders and repair shops in Taiwan. The network is a major mechanism that provides immediate maintenance service and prevents serious machine failures. Started as an import-substitution industry, shoe-making machinery has become an important export item. Taiwan's shoe-making machinery industry was created to meet the demand of the local shoe manufacturers in the 1970s. Since the 1980s, while Taiwanese shoemakers felt the pressures from other Asian shoe producers, Taiwan's shoe-making machinery builders were enjoying the expanding market in China, Malaysia, Indonesia, the Philippines, and Vietnam. The expanding export market for the shoe-making machines has helped Taiwan's machine tool industry to upgrade. By the late 1980s, Taiwan had become the largest shoe-making machinery builder in Asia, enjoying 80% of the shoe-making machinery market in the region. Between 1988 and 1990, the total export of Taiwan's shoe-making machinery grew from US$77 million to US$115 million (China Economic News Service, 1992).

Networks of Subcontractors As a way to enhance flexibility in producing small orders at low costs, Taiwan's shoe manufacturers often farm outworks to subcontractors, such as sample production, cutting and stitching, heel wrapping, synthetic sheet lamenting, and ornament component production. Most materials and components are provided by the manufacturers. Subcontracting is coordinated by manufacturers. In some cases, when a manufacturing company receives more orders than it can handle, it will farm out the entire order to another manufacturer. Gary Gereffi (1994) calls this type of production arrangement contract manufacturing to differentiate it from subcontracting. While subcontractors only handle parts of the labor process such as cutting or stitching, contract manufacturers are used to handle the entire labor process of lower priced orders. In this case, the Taiwanese shoe manufacturer becomes a middle man and charges a commission from the contract manufacturer. Starting up as a contract manufacturer or a subcontractor has been the first step for those who plan to establish their own factories. With an even lower entry threshold than a full fledged manufacturing establishment, subcontracting or contract manufacturing requires smaller initial capital and relies heavily on connections with the trading company and the established manufacturer. After working in the shoe industry for 5 to 10 years, managers or technicians of a factory will have accumulated sufficient social capital to

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establish independent operations. According to Gwo-Shyong Shieh's (1992) study of Taiwan's subcontracting networks, such shifts from being an employee to an employer is prevalent in all major export sectors in Taiwan, and is supported by the ideology of "better the head of a chicken than the tail of an ox."47

The Work of the Network: Trading Companies The linkage between Taiwan's export manufacturers and the world market has been built mainly through trading companies. In 1983, there were 36,000 trading companies in Taiwan (Chen, 1994:117). By 1986, the number had jumped to 65,000, which was about half of the total number of manufacturing companies in Taiwan (Liu, 1991:28). In the export shoe industry, as the number of export shoe manufacturers and the total volume of shoe exports increased, the number of independent Taiwanese shoe export traders also increased and dominated Taiwan's shoe exports. Sales through local trading companies have been the most important marketing channel for most Taiwanese export shoe producers. In 1985, more than 80% of 844 Taiwanese shoe manufacturers reported that domestic trading companies handled more than 50% of their exports (see Table 2-4). Another survey in 1988 suggested that 72% of Taiwanese shoe factories sold more than half of their products through domestic trading companies; 19% sold more than half of their products through foreign buying offices in Taiwan. Only 7% of all surveyed com-

Table 2-4 Channels of Export of Taiwanese Footwear Manufacturers (1985) Export channel Direct exports by factory Accounted for less than 20% of total exports Accounted for more than 20% of total exports Accounted for more than 50% of total exports Total number of factories Domestic trading firm as intermediary Accounted for less than 20% of total exports Accounted for more than 20% of total exports Accounted for more than 50% of total exports Total number of factories Foreign buying office or trading firm as intermediary Accounted for less than 20% of total exports Accounted for more than 20% of total exports Accounted for more than 50% of total exports Total number of factories

Number of factories

Percentage

131 41 59 231

57 18 25

79 56 611 746

11

182 65 148 395

7 82

46 16 38

Source: Taiwan Footwear Manufacturer Association and 'I'aiwan Industry Bureau, the Ministry of Economics, 1986, Report on the (Atrrent Situation of the Shoe Industry, Taipei, p. 90.

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panies sold directly to foreign buyers (Taiwan Shoe Manufacturer Association, 1989). Local trading companies have played an important role in coordinating the highly decentralized production network, and are involved in various dimensions in marketing. Based on their social networks within the industry and their local knowledge of specialized manufacturers, trading companies have facilitated individual manufacturers' achieving economies of scope through the networks and obtaining supports on product development and quality control. On the marketing front, they function as more than an intermediary. The trading company also actively shares business risks with manufacturers and provides information for innovation such as on fashion trends, new equipment, and new materials available in the world market. The majority of Taiwanese trading companies are small, with an average of seven employees (Liu, 1991:28). This characteristic is distinctive when Taiwanese trading companies are compared to their counterparts in South Korea (see Table 2-5). As shown in Table 2-5, in Taiwan the number of export traders grew from 2,777 in 1973 to 20,597 in 1984. In that time, the average value of industrial exports per trader remained constant at US$1,400,000. The number of export traders in South Korea grew more slowly than in Taiwan, from 1,200 in 1973 to 5,300 in 1984. In that time, the average value of industrial exports per trader rose from US$2,400,000 to US$5,200,000. The structure of industrial exports from South Korea in general was also reflected in the South Korean footwear industry. Compared to Taiwan's shoe exports, South Korean shoe exports are concentrated in the hands of fewer exporters (Levy, 199L157).48 In the beginning of Taiwan's shoe exportation to the United States in the 1970s, U.S. trading companies or importers bought shoes from Taiwanese manufacturers through domestic trading companies and sold them to U.S. wholesalers with an average 40% markup. The U.S. wholesalers then distrib-

Table 2-5 Export Trading Companies in South Korea and Taiwan, 1973-1984 South Korea Average value of exports (in US Number of $1,000) exporters 1973 1975 1978 1980 1982 1984

1,200 1,900 n.a. 2,300 3,500 5,300

2,400 2,500 n.a. 7,000 5,800 5,200

Taiwan Average value of exports (in US Number of $1,000) exporters 2,777 4,430 8,899 13,320 14,117 20,597

1,400 1,000 1,300 1,300 1,500 1,400

Source'. Levy, 1991:157. Reprinted with kind permission of Rlscvier Science—NL.

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uted the shoes to domestic retailers. After a few years' experiences in dealing with Taiwanese companies, the U.S. chain stores and department stores bypassed U.S. wholesalers and began to place orders directly with Taiwanese trading companies. Since the 1980s, as competition in the world market has become fiercer and U.S. and European department stores have accumulated more experience with Taiwan's manufacturing system, the stores began to trim their procurement system by setting up buying offices in Taiwan to deal directly with local manufacturers. Some large Taiwanese shoe manufacturers also built up their own marketing/trading departments to deal directly with foreign buyers. The role of local trading companies seems to be diminishing. However, in the women's fashion shoe sector, foreign buyers still depend on trading companies to coordinate production locally. The women's fashion shoe industry changes product designs more often, has much greater product varieties, requires more complex arrangements among manufacturers, suppliers, and subcontractors, and has a greater potential for quality inconsistency because of the high level of manual work involved. Foreign buyers still need Taiwanese trading firms to coordinate numerous producers in the networks and to undertake the tedious work of quality inspection in individual factories.

Quality Control and Punctual Delivery From a foreign buyer's point of view, one major reason to use local traders as intermediaries in purchasing is to ensure product quality and punctual delivery. This is especially true considering that most buyers are on the other side of the globe, 6,000 miles away from actual production operations. The involvement of trading companies in the production process may begin as early as product development. There is at least one shoemaker master in a trading company of 8 to 10 employees. The master is responsible for generating basic measurements on the basis of the sample provided by a foreign buyer. When a foreign buyer places an order to a trading company, the requirements of the order are often rather abstract, indicating loose specifications such as "make it tighter in the waist" or "do not make the leather surface too shiny." The trading company has to translate these requirements from English into Chinese, as well as from the abstract requirements into specific technical languages. They also make technical suggestions to the partner manufacturer to meet the buyer's specifications, such as "adjust the front part of the last," or "apply a certain type of finishing or moisturizer on the leather." Manufacturers first produce sample shoes for the buyer to approve before mass production starts. To speed up the process, some buyers allow the trading companies to approve the sample shoe. In product development, trading companies also share the work with partner manufacturers to search for materials and components specified by buyers. During production, a trading company will send quality inspectors to the partner factory to oversee the production process. Almost all of the trading company's quality inspectors have had experience in manufacturing. They

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are often entrusted by foreign buyers to carry out quality inspection. Manufacturers need to obtain an inspector's approval before they ship the product to foreign buyers. Therefore, if a batch is rejected, both the trading company and the manufacturer take the responsibility for the loss.49 Trading companies' quality inspectors pay daily visits to partner factories or live in the dormitory of major partner factories. They work with production managers and technicians of the partner factory to ensure that each step of production, from cutting, stitching, and assembling to final packaging, is uninterrupted. Their previous experience in manufacturing provide them with sufficient technical knowledge to undertake troubleshooting on the shopfloor. When there is a rush delivery, quality inspectors stay on the shopfloor to ensure that the order is completed on time. As the variety in shoe styles becomes greater and the style more complicated (i.e., more materials and components involved, more steps of stitching, and so on), demands for quality inspection increase. In some cases, quality inspectors have to deal with the suppliers of the partner manufacturer to gain better control over the quality and delivery of materials and components. The verb in Chinese that quality inspectors use most frequently with regard to quality control is ding, which means to scrutinize with great intensity, literally to nail down with one's eyes. A Taiwanese quality inspector pointed out that quality inspectors' capacity to communicate and work with local manufacturers and their willingness to "stay in dirty factories all day long" has been the main reason why foreign buyers still depend on Taiwanese traders. He emphasized that "working from the bottom up is the Taiwanese way of doing business."50 Since the majority of Taiwanese export shoe factories moved to China in the late 1980s, foreign purchasing representatives have been even less willing to go from factory to factory along the bumpy roads in rural China to inspect shoe production, nor are they able to stand the dull evenings spent in factory dorms located in the midst of rice fields. On the top of all these is the linguistic barrier between local manufacturers and foreign purchasing representatives, which has made communication on the shopfloor very difficult and the intermediary of Taiwanese trading companies necessary. Quality inspectors also have to follow daily production progress and ensure timely delivery of the order. The delivery deadlines are followed religiously in export manufacturing. A late delivery usually leads to a two-month delay in payment, and the buyer has the right to deduct a penalty totaling 5-10% of the payment. A delayed payment is a severe penalty for small manufacturers who have limited operating capital. Trading companies usually have to share the loss resulting from delayed delivery. They will not receive the 5-10% commission from the manufacturer until the latter receives payment from the buyer. Trading companies are crucial in coordinating production and delivery.51 Manufacturers practice just-in-time purchasing, production, and delivery. They produce shoes in accordance with orders, with minimum inventories, and have little control over their production plans and schedules because

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most orders in the fashion shoe business are rush orders. There is always anxiety over timing issues. Since most of the production shifted to China, there have been greater problems with the delivery and shipping of materials. To minimize losses resulting from delayed delivery, trading companies have to negotiate constantly with the buyers while supervising the production at the same time.52

Product Development The division of labor between traders and manufacturers is not very evident, since trading companies are also involved in the production process. Not only are they responsible for the quality of the finished product, trading companies also function as the center of information gathering. Small factory owners play multiple roles within the factories. The vague division of labor within the factory has tied them to various tasks, including general management, financing, accounting, personnel, and dealing with trading companies. Small factory owners have had little energy or time left to cultivate market information.53 In addition, because they do not possess the linguistic and cultural skills necessary for a successful negotiation with foreign buyers, most shoemakers choose to deal with foreign buyers through the intermediary of the trading company. On the other hand, frequent contacts with foreign buyers and different manufacturers have exposed trading companies to new trends in fashion design, market signals, technology, and materials. Some Taiwanese trading companies have set up branch offices or affiliated firms in the United States or Europe to gather fashion information and explore new markets. Larger trading companies periodically hire designers from Europe to develop new styles. Although they (like everyone else) still followed the fashion trends led by New York and Milan, trading companies have gone one step further in taking the initiative to develop new styles to enhance their competitiveness.54 Trading companies are also important in introducing new production techniques and materials. The introduction of the so-called "Brazilian technique" serves as a good example. Brazilian shoemakers have had a special technique of treating leather. They applied several layers of a type of waterbased wax and a finishing called "Antico" to the leather shoes, then polished the leather repeatedly until the shoes showed fine grains of leather with slight differentiation in color shades, thus giving the shoes a natural leather look. This kind of "natural and authentic-looking" shoe has been very popular in the U.S. market and sold at a higher price. A Taiwanese export company brought several Brazilian technicians to Taiwan to teach Taiwanese manufacturers this technique. Soon many shoemakers mastered the technique and were able to produce the type of shoes at a lower price.55 Scale and Scope Economies If economies of scope are defined as cost reduction that occurs when related products run through the same institutional facilities, and economics of scale

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as cost savings realized through the production of large volumes of a small number of products, then theoretically there is a trade-off between economies of scope and economies of scale (Fruin, 1992:45). Yet, in the case of the Taiwanese fashion shoe industry, both scale and scope economies can be achieved through a hierarchy of specialization and networks of production among independent producers. Indeed, no precise measurement is used in this study to compare the level of scale and scope economies achieved through the network to that achieved through other forms of production organization. However, it seems safe to propose that, given the small enterprise-based structure of Taiwan's export sector, the network form of production organization in the fashion shoe industry has achieved a level of scale and scope economies that will not be as easily achieved within individual firms. The question is not whether scope economies outweigh scale economies. Rather, it is how to achieve both economies when orders tend to be small and changes in product design frequent. This situation is close to Fruin's (1992) analysis of the Japanese enterprise system, in which economies of scope are scale economies based on plant-specific economies. In the Japanese case, the system is coordinated by effective management in manufacturing and supplying firms at different levels. In Taiwan's fashion shoe industry, local trading companies coordinate interfirm networks to achieve both economies. Trading companies have built well-entrenched networks with local manufacturers. A typical shoe trading company usually has 12 to 15 partner manufacturers. To offset the increase in production costs associated with small production runs and limited demand for each order, trading companies coordinate and allocate orders in accordance with the specialty of individual factories (e.g., does the factory specialize in PU or genuine leather shoes? If it is the latter, does the factory specialize in shoes made of pig, cow, snake, or sheep leather? Pumps or flats? Is the factory focused on the U.S. or European market?) to maximize interfirm economies of scale. For example, some factories specialize in the U.S. market, whereas others the Japanese or European market. Each market has its own special demands. According to the manufacturers interviewed, U.S. women have narrower feet than European and Japanese women, and the last used to make shoes sold in the U.S. markets are narrower in the waist (the middle) than those used for the shoes sold in Europe and Japan. By focusing on one specific regional market, factories will prepare only one type of lasts and therefore maximize the use of the lasts.56 A long-term relationship between trading companies and their partner factories provide the trader with further detailed information about partner factories. For example, trading companies usually have a clear idea about the type of lasts and cutting dies available at its partner manufacturers. If a set of used lasts and cutting dies can be reused to produce a new batch, most manufacturers can absorb orders as small as several hundred to one thousand pairs, and the unit price will be lower. If an order requires both women's and children's shoes of the same style but of very different sizes (therefore different sets of lasts and cutting dies), a trading company may place the order for women's shoes in one factory

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and children's shoes in another, so that each factory can concentrate on a segment of the order and save the cost of extra sets of lasts and cutting dies. The trading company also coordinates collective material purchasing among the factories working on the same style to bring down the cost. Trading companies may also sell to several buyers one line of shoes made with different colored leather or fabrics but use the same set of lasts and cutting dies in order to meet the economies of scale. Cost saving is not the only result of trading companies' coordination among specialized factories. Trading companies also perform as an information hub on the managerial and financial condition of manufacturing factories, especially their partner factories. Trading companies have to be apprised of the size and the number of orders each partner factory has received from other trading companies. Such information helps trading companies to estimate if the factory has reached the upper ceiling of its production capacity. Trading companies also need to be well informed of the managerial capability of partner factories to foresee if the factory will be able to deliver a rush order on time. The information can be very detailed. For example, if the rumor that the most competent manager of a partner factory is planning to start his own factory is true, the trading company's manager may consider shifting orders to the new factory. The trading company also needs to know if the factory owner has good enough credit to handle a long-term check from the trading company. Managers must also know if the factory has the necessary support from its suppliers to ensure punctual deliveries of materials, and thus punctual deliveries of final products. According to the manager of a trading company, even gossip about the owner of a partner factory having a mistress can be a valuable piece of information. Because having a mistress may affect the small company's financial situation, it therefore can affect the creditability of the factory owner.57 Updated information about specialties and conditions in individual factories helps trading companies to allocate orders to factories that will deliver the order with the highest quality in the least amount of time.

Risk Sharing According to international trading rules, foreign buyers should deposit in a bank a letter of credit (L/C) for the entire payment owed to the manufacturer immediately after the order is placed to the manufacturer. The manufacturer then orders materials after receiving the L/C. But the actual practice in the Taiwanese export shoe industry has been that the buyer does not deposit the L/C until two weeks prior to the delivery date. The manufacturer has to order materials and start production before the L/C is received. If the market reaction to a style is not as good as the buyer has predicted, he or she might cancel an order even after production has started, without taking any legal responsibility. Cancellation of orders happens more often during market downturns. A factory owner told me that he had at least three to four orders canceled a year, and each canceled order ran a US$ 100,000-$200,000

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loss, amounting to 7-14% of the factory's annual sales.58 In another case, a small company went bankrupt because of a single order cancellation, and the owner is now working for an trading company as a quality inspector.59 The increasingly rigorous competition in the world market has also made foreign buyers become tougher with manufacturers on delivery time and quality. Any delay or defect can legitimize rejection of an entire order.60 Generally speaking, trading companies do not run risks as high as manufacturers. This is because trading companies' profits are derived mainly from commissions, and companies have little fixed investment. Trading companies do not have to share the loss from order cancellations or rejections. Manufacturers have to pay the 5% commission fee one month after the order is delivered, no matter when the buyers' payment arrives. However, because most orders are placed through trading companies, and the commission paid to the trading company comes from the payment from the buyer, the trading company has to help the factory to minimize loss, either by searching for another buyer or by negotiating further with the original buyer. On the other hand, to minimize its own risk, when the chances of being rejected or penalized are high (e.g., a rush order), a trading company may place one order with two different factories without informing the factories about the double order placement. Then the trading company accepts the product from the manufacturer who completes the order first and cancels the order from the other manufacturer, using the excuse of poor quality or late delivery. In short, the key of network coordination in Taiwan's fashion shoe industry is trading companies' management of information at both macro and micro levels. Trading companies' connections with international markets become crucial in keeping domestic shoemakers informed of rapidly changing fashion trends and new technologies. This is particularly important in this case because small and medium-sized Taiwanese shoe manufacturers have limited organizational capacities to collect such information themselves. Meanwhile, trading companies have sufficient and updated local knowledge of financial, managerial, and technical conditions of individual manufacturers. This knowledge helps them accelerate production processes in a highly segmented production system. Based on such microlevel information, trading companies can also place orders skillfully with specialized manufacturers to achieve economies of scope through the network. The mechanism is particularly important for the fashion shoe industry because most orders consist of small volumes and a large number of styles. As a result, Taiwan's fashion shoe industry is able to compete in the world market in time, quality, and price.

Networks Move to China As Taiwanese shoe makers move to China, their competitiveness has been sustained through a division of labor between Taiwanese firms and their operations in China. A 1993 survey of 140 Taiwanese investing firms shows that the mother company in Taiwan controlled product development and

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design, marketing, information collection, and high value-added production; whereas the operation in China focused on manufacturing of lower valueadded products (Kao et al., 1995:168) (see Table 2-6). The survey suggests that after shifting part of production activities to China, 69.1% of the firms surveyed still maintained a substantial portion of the production in Taiwan, especially the segments that required greater technology and capital inputs; 40.5% have upgraded their production technologies in Taiwan while moving low value-added production to China. In the electronics equipment sector, 82.6% of the investing firms kept their "roots" in Taiwan. Intensive involvement of Taiwanese firms' in manufacturing after their shift to China made them different from Hong Kong firms in the investment Table 2-6 Division of Labor between Parent Firms in Taiwan and Their Operations in China Percentage of respondents Production (1) Parts and semifinished products produced in Taiwan, final products in China (2) Parts and semifinished products produced in China, final products in Taiwan (3) Final products produced in both Taiwan and China, the higher value-added produced in Taiwan (4) Final products produced in both Taiwan and China, the higher value-added produced in China (5) Final products produced in both Taiwan and China, but the production is completly unrelated Marketing (1) Orders received in Taiwan, products produced in and exported from China (2) Orders received in China, products produced in and exported from China (3) Orders received in Taiwan, semifinished products or parts produced in China, final products made in Taiwan Division of labor ( 1 ) Information collection (2) Product development (3) Product design and testing (4) Research and development (5) Production (6) Marketing and sales

Taiwan

China (percentage)

91.8 83.6 83.2 85.5 39.3 80.5

22.7 20.9 29.9 24.5 67.5 34.5

25.8 29.9 67.0 7.2 33.0

92.1 27.8 16.7 Other 10.0 8.2 2.8 1.8 3.4

15.5

Source: Kao ct al., 1995:168. Reprinted by permission. This is the result of a multiple-choice questionnaire. Therefore, the total adds up to more than 100%.

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patterns (see Table 1-10 for the sectors in which Taiwanese manufacturing investors were mostly involved). By the early 1990s, 80% of Hong Kong's manufacturing capacity had moved to China; and there was a clear division of labor between China-based manufacturing and Hong Kong-based manufacturing-related services (Chen, 1994:197). Taiwan's well-developed production networks and capabilities in producing certain types of capital goods have contributed to a more elaborate form of division of labor between Taiwanese firms and their Chinese partners. While both production sites handled production of parts, components, semifinished or final products, those that required more intensive labor inputs were produced in China, while the high value-added manufacturing remained in Taiwan. Although the majority of downstream manufacturers have moved their production to China, they still imported machinery, equipment, petrochemical materials, high value-added components and parts and other capital commodities from upstream suppliers in Taiwan. The 1993 survey (Kao et al., 1995:165) shows that Taiwanese investing firms in China imported 60.1% of the materials and 76.9% of the machinery from Taiwan, while only 19.6% of the materials and 5.5% of the machinery were purchased locally. Other sources of materials and machinery accounted for 20.3% and 17.6% respectively. The question of material procurement and division of labor between Taiwanese investing firms and their Chinese partners leads to the issue of establishing domestic production linkages. As suggested by writers on the Third World MNCs, the smaller transnational investors, such as Taiwanese investors, are under greater pressure to purchase locally. They are constrained by limited organizational and capital resources, and therefore more inclined to establish production linkages with local industries (Wells, 1983). However, as the survey presented above suggests, Taiwanese investors in China have imported most of the inputs from Taiwan or other countries. In addition, for those local Chinese suppliers who have managed to establish production linkages with Taiwanese manufacturers, a significant portion of them are Taiwanese funded and managed. Taiwanese shoe manufacturers in southern China purchased only simple materials such as packing paper and shoe boxes from local Chinese suppliers. There were cases in which Taiwanese manufacturers established horizontal linkages and farmed out low-priced orders to local Chinese shops; or Taiwanese trading companies placed orders directly with local Chinese producers.61 Nevertheless, the pace of building domestic purchasing and production linkages has not been keeping up with the rapid growth of Taiwanese factories in the region. Most Taiwanese shoe manufacturers interviewed have retained the high value-added activities in Taiwan, especially product development, procurement of major materials (e.g., leather, polyvinyl chloride, polyurethane) and equipment, and marketing. Other components such as soles, inner soles, cutting dies, and lining foams were provided by Taiwanese suppliers who had also moved to southern China to follow their customers.62 Local material supplies for shoe production in southern China have not been sufficient. Leather, polyvinyl chloride, and polyurethane, and shoe-

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making machinery were either unavailable or not used in the export-oriented production. The Chinese suppliers were mostly large state enterprises. Taiwanese manufacturers often complained that local Chinese suppliers were unable to keep up with the demand in delivery punctuality and quality stability in the export business. Local makers of polyvinyl chloride and polyurethane sheets were not able to follow the fashion changes in patterns, textures, and color schemes, and they were not flexible enough to handle a large number of small-sized orders.63 All factors considered, the time it took to ship materials from Taiwan to southern China became tolerable. Taiwanese shoemakers also imported shoe-making machinery from Taiwan. Some subcontractors and suppliers have followed their customers and moved from Taiwan to southern China. The cultural and linguistic familiarity and the geographical proximity between Taiwan and China have made it easier for manufacturers and their suppliers to move together. The urgency for Taiwanese manufacturers to link up with Chinese local industries was therefore further reduced.64 In Dongguan, one of the towns in the Pearl River Delta where I conducted my field work, the first Taiwanese shoe factory was built in 1987. By 1990, there were more than 400 Taiwanese shoe companies in town.65 Taiwanese shoe manufacturers, suppliers (of soles, insoles, packaging materials, cutting dies, shanks, glue, decoration components, nails, simple tools, rubber rings, paints, tanneries), printing services (for packaging boxes, price tags, and so on), machinery maintenance shops, as well as subcontractors of automated stitching and embroidery, have reestablished the network of production in southern China. For Taiwanese investors, doing business with other Taiwanese firms in China also made it easier to practice price transfer and to expatriate profits outside China. Transactions can be done either in Taiwan or in Hong Kong, to bypass the Chinese government's scrutiny.66 Other jobs that used to be farmed out to subcontractors in Taiwan, such as heel wrapping, adornments assembly, upper cutting, and upper stitching, were undertaken in-house in southern China. The short-term investment plans have made most Taiwanese manufacturers hesitant to cultivate local subcontractors who required substantial technological and managerial assistance. The decreasing flexibility of in-house production was largely made up for by the abundant supply of cheap and unprotected low-skilled labor. Taiwanese shoemakers therefore had the options of recruiting temporary workers on a job-by-job basis or longer-term workers who can be hired and fired easily. The issue of labor will be discussed in detail in the following chapter. As a result, Taiwanese investors in China have reestablished the production networks across the regional boundary in two ways: shipping major materials the short distance across the straits, and building "local" supplier networks with other Taiwanese suppliers in southern China.67 When asked about the possibilities of establishing industrial linkages with local Chinese industries, Taiwanese managers were usually hesitant.68 In Dongguan, a Taiwanese community of shoe businesses was formed. Taiwanese cuisine restaurants and Taiwanese-style karaoke singing bars were built alongside of an

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increasing number of Taiwanese shoe manufacturers and suppliers. Taiwanese managers met in these bars to sing Taiwanese songs and exchange business information. The strong ties among Taiwanese investors overseas were an extension of the territorial- and temporal-based social networks built among Taiwanese shoe manufacturers and marketing agents. The social networks have existed and have been working long before the Taiwanese companies moved to southern China. Such social networks also provide another explanation of the limited industrial linkages established between Taiwanese investors and local Chinese industries.

Social Networks Small Taiwanese trading companies' close working relationships with Taiwan's shoe manufacturers and foreign buyers have contributed to the establishment of information networks and effective coordination. Yet interfirm coordination is not simply production planning and arrangements between or external to individual firms in a purely technical sense. Nor can trading companies build the networks all by themselves. Coordination is an interactive rather than an independent operation. Trading companies are not isolated individual agents. They are an integral part of interfirm social networks built on interpersonal relationships among actors in the network. Physical boundaries between firms may be clearly defined in terms of ownership, but long-term interpersonal relationships among factory owners, managers, owners and quality inspectors of trading companies, suppliers, and subcontractors can be more intertwined. Such interpersonal relations remained largely intact after companies moved their production from Taiwan to southern China. Social networks and information flows in the industry are enhanced through job-hopping and high enterprise mortality and fertility in the industry. Forms and intensity of linkages among these individuals change constantly. A factory owner can be an ex-employee of a trading company and may have a long-term friendship with the managers of the trading company; a quality inspector in a trading company may have been a factory owner before his factory went bankrupt, and therefore is well known by many suppliers and subcontractors. These interpersonal relationships beyond boundaries of firms constitute the basis for effective coordination and information flows between firms. In addition to the personal relationships among individuals, mutual investment schemes and sales of merchandise on credit between suppliers and manufacturers have been two institutionalized mechanisms that contribute to network coordination in Taiwan's shoe industry. The effectiveness of trading companies' coordination is the result of longterm relationships among individuals in the industry, which is not limited by the boundaries of companies. Indeed, long-term relationships are not always smooth, and they do not necessarily guarantee cooperation among firms. Cut-

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throat competition between firms in the networks has never ceased to be fierce. However, such social networks serve as one of the most valuable sources of background information about the individuals with whom one has to deal—be they competitors or partners. On the other hand, effective coordination and cooperation do not simply rely on abstract and sometimes arbitrary interpersonal relationships. There are also built-in institutional mechanisms, which may or may not be installed with a clear intention to ensure a more consistent working of the networks. These mechanisms have contributed to the formation and operation, therefore the exclusiveness, of interpersonal networks in Taiwan's shoe industry.

Job-Hopping and, Chicken Heads As a result of high enterprise fertility and mortality, there have been frequent personnel flows among firms in Taiwan's export shoe industry. When a factory goes bankrupt, the owner may work for another factory as a manager or for a trading company as a quality inspector; experienced quality inspectors or factory managers often start independent subcontracting operations after they have accumulated sufficient economic and social capital in the industry. Further, weak bindings between employers and employees in most smalland medium-sized firms have led to frequent job-hopping in the industry.69 In a small- to medium-sized firm, a group of senior managers compose the bandi of the firm. Bandi are in the inner circle of the company and form an important support group around the boss. They share the work of daily operations on the shopfloor as well as in the administrative office. Bandi members have expertise in a variety of fields, such as production management, product development, manufacturing technologies, personnel management, financing, or marketing. Some may also possess strong personal connections with trading companies. Some bandi members are family members of the boss, but many simply have developed a patronage relationship with the boss after working for the company for a long time.70 Given the important role that bandi members play in a company, the boss is usually very concerned with the danger of losing these most competent and experienced bandi to other companies. Bosses often use bonus systems and seniorlevel profit-sharing schemes to keep their bandi intact. On the other hand, these competent bandi—experienced technicians and managers—are the most desirable personnel for other firms. Firms will "dig the base of another's wall," that is, attract bandi of other companies with lucrative salaries and benefits. Understandably, such competition for competent managers and technicians has generated tension among firms. Since manufacturers have shifted production to China, there has been an increasing demand for experienced managers in the offshore factories and trading companies. The "digging base" phenomenon has become more intense. In the summer of 1992, a trading company's quality inspector told me that in the last couple of years, when he met with his friends in the shoe business after the New Year, there has always been a business card exchange

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among these old friends. Because Chinese New Year marks the end of the old busines year and the beginning of a new one, most people receive their end-of-year bonus and change jobs after the Chinese New Year holiday. The business card exchange during the reunion means that many people were going with new companies and had new titles after each New Year.71 Changing jobs is also a way to expand one's experiences in different sectors of the industry. Quality inspectors in trading companies and managers and technicians in manufacturing firms constantly change jobs between firms of the same kind or between trading and manufacturing firms. As mentioned before, it has been a prerequisite for quality inspectors of trading companies to have experiences in manufacturing. Managers with experience in the export business are also highly in demand by manufacturing firms. Job-hopping may seem damaging to individual firms. Yet constant flows of personnel between firms have unexpectedly resulted in closer interpersonal relationships and tighter social circles in the industry as a whole. Such interpersonal relationships extend beyond the boundaries of individual firms; this extension in turn facilitates coordination among firms. The inspector of a trading company with which a manufacturing firm is dealing may be an exemployee of the manufacturer; the technician of a manufacturing factory may be an old colleague of the sole supplier to the factory. Indeed, not all previous relationships are pleasant or smooth, nor will personal relationships necessarily have any immediate impact on substantial matters such as price negotiation or priority shelving in material deliveries. Yet, as one shoe factory manager put it, "if I am dealing with someone I have known from before, I will at least have a better idea about this person's history and personality, and such information always helps me to determine my attitude and strategies in dealing with the person."72 In another case, a factory owner found out about the price that a partner trading company had offered to his competitor through a purchasing manager of the trading company, with whom he had previously worked in another trading company. The information about the price helped him to prepare his bid for the order.73 Job-hopping also facilitates flows of information regarding new technologies and fashion trends, new marketing channels, or simply gossip about other firms. In the case of the "Brazilian technique," when the technique was first introduced to Taiwanese shoemakers, it was kept a business secret. But the new technique spread quickly after it was introduced to a few selected manufacturers. The production process was not very difficult and the key material, Antico, became commercially available soon after the technique was brought to Taiwan. Most of all, according to a factory manager, interpersonal relationships in the industry are too dense to keep any secrets. Because the level of technology in shoe production is usually not too high or too exclusive, a technician from one firm pioneering a new technology can easily bring the technology to another firm. High fertility and mortality of small firms is another key factor that has contributed to flows of personnel among firms in Taiwan's export sector. In a sociological study of Taiwan's subcontracting system, Shieh (1992) sug-

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gested that the ideology of "everyone can be a boss if one works hard enough" and the mentality that "it is better to be a chicken head than an ox's tail" explains the high growth rates of small- and medium-sized enterprises. The Taiwanese export fashion shoe industry represents a good example of this "chicken head" phenomenon. The entry threshold of the industry is low. Starting capital can be as low as US$500,000. Many experienced managers in trading companies and manufacturing firms first accumulate sufficient monetary capital and social capital (i.e., organize their own bandi and partners) and identify promising sources of orders from previous business contacts. Then they spin off and start their own companies as independent assemblers or subcontractors, specializing in stitching uppers or inner soles, or absorbing small orders that larger manufacturers would not take. However, the industry's high fertility is accompanied by high mortality, because of a highly fluctuating international market and the vulnerable financial conditions of the small enterprises. Failed factory owners then work for other manufacturers or trading companies as managers or quality inspectors. More than half of the Taiwanese factory managers and quality inspectors interviewed in southern China and Taiwan used to have their own businesses.74 They all had stories to tell about their experiences with trading companies, customers, material suppliers when they were the boss of the factory. High enterprise mortality has resulted in the formation of a pool of manager-entrepreneurs with experience in various areas of the trade. Their areas of expertise include production management, marketing, finance, quality control, export-import regulation and procedure, machinery maintenance, and troubleshooting on the shopfloor. A pool of experienced managerentrepreneurs and their extensive personal connections in the industry have further facilitated the interaction between different segments of the industry. The following case study of a factory and its partner trading company illustrates the way interpersonal networks are developed in Taiwan's fashion shoe industry. The 800-worker shoe company, Dali, had two owners, Wang and Chen. Wang used to work for a shoe trading company as a quality inspector. Then he moved to a large shoe factory to be a sales manager for seven years. Wang's experience in the trading company and the manufacturing firm helped him to build connections with foreign buyers and other trading companies. However, after working for the family-based factory for seven years, he thought that his further advancement in the factory was constrained because he was not part of the family. The other partner of Dali, Chen, used to work in a family-based sole factory established by his father. There had been serious tension among the three brothers who ran the family firm together. Chen decided to start an independent shoe-manufacturing company outside the family business. Chen had known Wang for a long time because Chen's family's sole factor}' was a long-time supplier of the factory for which Wang used to work. As Chen was planning to establish a new firm, Wang was also ready to make a major career move. Wang's experience and connections in shoe manufacturing and

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marketing could compensate for what Chen lacked. The partnership between Wang and Chen was thus formed. Wang and Chen first talked to a trading company, Wenji, to secure Wenji's commitment to provide a sufficient amount of orders. The new firm, Dali Shoe Company, was established in 1986. Wang and Chen each owned half of Dali. The trading company, Wenji, was also a new company. The owner of Wenji, Ono, is a Japanese who had worked as a purchasing representative in a U.S.-funded shoe trading company, Metro, in Taiwan for more than 10 years. Ono had two partners in the new trading company. One was a U.S. colleague who headed the marketing department in Metro in the United States; the other was a Taiwanese woman who used to work for one of Metro's partner Taiwanese manufacturing companies. Thus, the newly established Wenji Trading Company had its own marketing and information-gathering channels in the United States and a manufacturing base in Taiwan. Ono met Wang when Ono was working for Metro and Wang was working for the manufacturing company that was the partner firm of the Metro Trading Company. The new trading company, Wenji, needed a reliable manufacturing partner that was committed to Wenji and that was willing to give Wenji the delivery priority in the peak season when production schedules are tight. The newly established Dali Shoe Company was an ideal partner. As a new firm itself, Dali was desperately in need of a stable source of orders. As a result, 90% of Dali's orders came from Wenji Trading Company when Dali first started. In 1989, Dali moved from Taiwan to Dongguan in southern China and the relationship between Dali and Wenji continued. However, to avoid being overly dependent on Wenji and thus losing its bargaining leverage with Wenji, Dali began to compete for orders from other trading companies. By capitalizing on the interpersonal connections that Wang accumulated in the past, and by improving the capability of producing complicated styles of shoes after moving to China, Dali managed to reduce the orders from Wenji from 90% to 60% of the total by 1991.75

Sales on Credit and Mutual Investment Sales of merchandise on credit is a common practice in Taiwan's export manufacturing industry. Manufacturers purchase materials and components on credit and pay for them only after they are paid by buyers for their finished products. Consequently, material suppliers share losses with manufacturers if an order is canceled or a payment delayed. Suppliers are not supposed to issue the invoice to manufacturers until at least one month after the merchandise is delivered. Then the manufacturer sends a pay voucher to the supplier three to four weeks after the invoice is issued. A check that can be cashed within a week is considered as good as cash, and the manufacturer can receive a 3 to 5% discount. Suppliers have to wait for at least two months to receive the payment after the materials are delivered. Meanwhile, a major negotiation effort is required to ensure that the payment can be collected in two months.76 In many cases, suppliers have to wait for another three months

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before they can cash the check. If an order is canceled or a batch rejected, the supplier has to wait for as long as half a year, if ever, before the check can be cashed. As competition becomes intense and markets more unpredictable, order cancellations and delayed payments are more likely to happen. Suppliers are bound by this risk-sharing mechanism with manufacturers. The practice of sales on credit is not supported by any legally valid contract. Instead, this risk-sharing scheme is based on the creditability of manufacturers and a highly trusting relationship and cooperation between suppliers and manufacturers. If a manufacturer loses his or her creditability with suppliers, he or she will not be able to get materials from the suppliers on credit. Then he or she has to use another manufacturer's account to obtain materials. Such an arrangement of credit borrowing inevitably slows down the production process and will damage the creditability of the manufacturer. Mutual investment has been another common practice to build the foundation for cooperation between suppliers and manufacturers. For suppliers, investing in key partner manufacturing firms ensures more stable sources for orders and timely payments. It also opens an information channel regarding the financial conditions of the partner manufacturer firm. For manufacturers, investing in supplier firms helps to ensure the priority of material deliveries. The relationship between shoe manufacturers and leather tanneries is a case in point. Leather supplies are usually very unstable, especially during the rush season. Manufacturers will try to hold some shares of a tannery to have a priority leather supply and the privilege of purchasing on longer-term credit. Mutual investment is much less popular between trading companies and manufacturers. For a trading company, the benefit of holding shares in a partner manufacturing firm is that the trading company can represent the interests of the manufacturer when negotiating with buyers and can make decisions on the spot without having to consult partner manufacturers. Therefore, negotiation with buyers can be faster and more direct. Trading companies' investment in manufacturing firms can also enhance the manufacturer's trust in the trading company to represent the former's best interests, and the manufacturer gives production priority to the orders placed by the partner trading company. However, disadvantages of trading companies' financial involvement in partner manufacturers usually outweigh these advantages. The way for small, specialized firms to increase sales and to achieve economies of scale is to build connections with as many customers and firms as possible, while at the same time maintaining a distance with specific companies. It is not just a straightforward strategy of making friends and building social connections. Rather, the key to establishing a network is to keep a subtle balance between intimacy and distance with different partners. The trading company's inspection of partner factories requires a certain distance and independence between the two parties, and trading companies' financial involvement in partner manufacturing firms will inevitably diminish the former's objectivity in performing quality inspections.77 Consequently, the trading company may lose buyers' trust in its capability of carrying out the job properly.78

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There are some other culturally informed business practices that have facilitated the establishment of a trusting relationship among actors in networks. For instance, it is popular to establish a "brotherhood" among suppliers, manufacturers, contractors, and subcontractors, as a way of securing support. How and to what extent "brothers" enhance that institutional mechanism in network operations is to be further investigated. Compared with Japanese trading companies that are also deeply involved in production organization and risk sharing (Yoshino and Lifson, 1986; Sheard, 1989), Taiwanese trading firms seem to have similar functions but a looser institutional base. For an industry characterized by time, quality, and cost-based competition, and based on a network form of production and marketing organization, there are two critical factors for the networks to work effectively. One is the coordinating agents, in the case of the Taiwanese fasion shoe industry, the trading companies that can communicate with international buyers and integrate activities among local individual producers. The other is the strong social networks and interpersonal ties underlying the enterprise network. These long-term interpersonal ties have facilitated the flow of information among firms and trusting relationships among individuals. Such a trusting relationship, in turn, is enhanced by the institutional mechanisms of mutual investment and sales on credit. Since Taiwanese shoemakers moved to China, the pace of establishing industrial linkages between Taiwanese investors and local Chinese enterprises has been slow due to the ineffective local Chinese supplier system and the well-maintained Taiwanese enterprise and social networks across the regional boundary. However, this does not prevent Taiwanese investors from exploring other local resources. The following chapters will discuss how Taiwanese investors have made local connections in China on two fronts. One is the exploration of local human resources, that is, taking advantage of highly trainable Chinese managers and workers; the other, local social resources, that is, building interpersonal relationships with the powerful and resourceful local Chinese bureaucrats.

3 Chinese Workers and Taiwanese Competitiveness

The increasing regional disparities in China and the consequent massive migration from the interior has brought an oversupply of workers to the coastal south. Because of the abundant supply of migrant workers with diversified qualifications, Taiwanese investors were able to employ a strategy of "people sea" to expand the production capacity rapidly in southern China. Such a strategy was combined with exploitation of unorganized and unprotected migrant workers. In some factories, Chinese workers did enjoy better benefits, working conditions, and skill training when the investor had a more stable source of orders and a longer term investment plan. However, in most cases the Taiwanese competitiveness in the world shoe markets was still based on a labor practice of free hiring and firing, low wages, and very intensive work.

Taiwanese Investment Strategies As a strategy for tapping the abundant supply of cheap and unprotected migrant workers in southern China and to maintain competitiveness on both price and quality fronts, most Taiwanese shoe producers expanded their inhouse production capacities rapidly with minimum fixed capital investment. They managed to increase productivity with a more elaborate division of labor on the shopfloor. At the same time, labor exploitation was evident in the practice of hiring and firing, overtime, and pay rates. But for those firms that had more stable sources of orders and longer term investment plans, there was greater concern for workers' benefits and training. 78

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Expansion of In-house Production In the early 1990s, the average wages earned by semiskilled and unskilled workers in China were one-eighth to one-tenth of the wages earned by their Taiwanese counterparts. The change in the structure of production costs for Taiwanese shoe manufacturers after moving operations to China was evident. The average labor cost of a pair of women's fashion shoes accounted for 30-40% of the total production cost in Taiwan, materials for 40-50%, and overhead for the rest. In China, the labor cost dropped to 8-12% per pair.1 However, the inexperienced Chinese workers made it necessary to double the number of operators on each assembly line in order to ensure the minimum productivity per unit time. For instance, in an insole factory in Taiwan, every 12-meter-long conveyor line had 10 workers working on it; whereas in China the conveyor line was 20 meters long and there were 24 workers on it. In lamination factories, each lamination machine was tended to by two to three workers in Taiwan, but by five in China. In shoe-manufacturing factories in Taiwan, each assembly line had no more than 40 workers, whereas in China, the number of workers on each assembly line could be as many as 80 to 100. With Chinese wages at one-tenth the Taiwanese level and productivity 50% lower per worker, the overall labor cost was still five times lower than it was in Taiwan.2 Consequently, most Taiwanese factories have at least doubled the size of factories, in terms of number of employees, after moving to China. The expansion of production capacities was not just for making up for the lower productivity of Chinese operators. Many of the Taiwanese factory owners interviewed in China believed that shifting production to China could be the opportunity of a lifetime to "make it," that is, to grow from a small producer of one or two lines to a medium-to-large size firm and to create a "second spring" of the business. Cheap labor and land costs in China encouraged such aspirations. On the other hand, the uncertain political environment of the late 1980s and early 1990s in China and the lack of experience in operating in southern China discouraged Taiwanese shoemakers from making any substantial fixed capital investment. Many of them have adopted the strategy of making the most out of the situation in the shortest possible time.3 The two seemingly conflicting goals of growing bigger and minimizing fixed capital investment have generated the strategy of rapid expansion of production capacity funded by as much local capital as possible, while at the same time reducing the level of automation by employing large numbers of lowskilled and unprotected migrant workers. There has been limited comprehensive data on the average expansion rates of Taiwanese shoe factories in southern China. My two visits in JulyAugust 1991 and March-May 1992 showed that most of the factories I visited had at least doubled in size between the two visits, usually from one or two production lines to three or four. One large factory with 13 production lines in 1992 had only 6 the year before. The increase in the number of production lines did not necessarily mean an increase in conveyers and other

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machinery. For large factories, the increase in production lines meant doubling up the number of workers on each line and having two shifts a day per line. The new opportunities in China also inspired some experienced Taiwanese factory managers to start up their own businesses. A new wave of spin-offs began. The overall production capacity of the industry as a whole, according to the owner of a trading firm, had at least doubled within two years.4 However, there was a ceiling on how much a fashion shoe-manufacturing establishment can expand. For those fashion shoe manufacturers who produced in small batches, three or four lines was the maximum for a plant under a team of five to eight managers. When business expanded, the manufacturers usually chose to set up another establishment with an independent management system instead of expanding the existing establishment. But for those who produced simple-styled and low-priced PVC fashion shoes and athletic shoes in large quantities, they tended to expand production under the same roof. The general manager of a large shoe-manufacturing factory told me that, during the pre-Chinese New Year rush season in 1991, the company hired over 1,000 new workers for the stitching department in six weeks to replace about 100 experienced workers who had gone home for the New Year's holidays. He called this a "people sea" strategy.5 The "people sea" strategy might work in a factory that produced simple-styled shoes where the stitching pattern was not complicated and new hands could easily take over the job. In another factory that produced complicated fashion shoes in batches, however, the manager had deep doubts about whether the factory could expand so quickly without facing problems in management and quality control.6 In the second half of 1991, the U.S. government threatened to impose import restrictions and high import taxes on shoes made in China. The announcement had a great impact on Taiwanese shoemakers because most of the export shoes from China were manufactured in Taiwanese-invested factories. Many Taiwanese factories in China halted their expansion plans and most new plant construction work was halted. Some U.S. buyers and export firms forced their partner factories to shift to other production sites. One of the largest Taiwanese shoe firms in China set up auxiliaries in Indonesia. The threat by the United States lasted for five months. In coalition with U.S. consumer groups, the Taiwan Shoe Manufacturer Association lobbied hard in Washington, D.C., and the U.S. government finally withdrew its plans of import restriction. All expansion plans of Taiwanese shoe factories in southern China resumed immediately. However, the export shoe market began to shrink after a short period of growth in early 1992. Meanwhile, as mentioned before, the total production capacity of the Taiwanese shoe industry in China was doubled. Competition among the Taiwanese shoe manufacturers became even more rigorous. Parallel with the strategy of rapid expansion is a more elaborate division of labor within a firm. While individual Taiwanese shoe workers were given multiple steps of work, each Chinese worker took on a more simplified and

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segmented task. For example, the job for one operator on the assembly line in China could be as simple as putting two pieces of a decoration side by side for the next operator to staple the pieces together. A new employee without any manufacturing experience could be put to work on basic tasks within hours. As for stitching, it took longer to master the skill and it was not as easy to get a sufficient supply of experienced stitchers. Yet the strategy of a more elaborate division of labor was still useful. Stitching of the upper, the lining, and the heel parts were divided among different groups of stitchers so that they could more easily master the skill of stitching specific parts of the shoes. The stitching patterns changed constantly but each stitcher's specialty area remained the same. An abundant supply of cheap labor was essential to achieve rapid expansion with minimum fixed capital investment and a more elaborate division of labor. Some Taiwanese manufacturers suggested, however, that a substantial portion of the production costs saved by the low labor costs was offset by increased overhead to maintain the company headquarters in Taiwan and the production plants in China and increased material shipping expenses. Therefore, it was not just the cheap labor cost, but also an abundant supply of workers that made China attractive.7

Quality Upgrading and Worker Training In the fashion shoe industry automation has been slow and handwork is still a significant part of the production process. The fast pace of style changes and the relatively low value added make it uneconomical to automate. In addition, intensive handwork in shoe production is not always associated with low-end products. In certain steps of high-quality shoe production such as vamp lasting, craftlike handwork is still irreplaceable by machines. The abundant supply of cheap labor in China has not only contributed to the reduction of production costs and rapid expansion for Taiwanese shoe manufacturers but also allowed the manufacturers to upgrade product quality while maintaining minimal labor costs. In the women's fashion shoe sector, one way of upgrading is to shift from simple-styled PVC or PU shoes to leather shoes of a more complicated style. Production of leather shoes requires more handwork and quality control than PVC/PU shoes because of the inconsistent quality of natural materials (see chapter 2 for the details). For example, the automatic leather cutting machine is good only for synthetic leather, not genuine leather. Animal hides vary in texture, softness, thickness, and elasticity, and they usually have scars on the surface. It takes human inspection and operation to choose proper pieces for different parts of the shoe. In addition, different textures of hide will affect the color shades of the tanned and diced leather. The color difference exists not only in different sheets of leather but also in different parts of a sheet. An upper is made with more than one piece of leather, and the colors of these pieces have to be matched with one another before they are stitched into an upper. After an upper is stitched it has to be matched with

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the color shade of the other upper of the same pair before the uppers are sent to the lasting department. As a result, a large number of workers are needed for the color-matching task. One factory owner found that a style with a mosaic pattern was a way to raise the unit price while keeping production costs to a minimum. The upper of the mosaic-style shoe combined five or six small pieces of leather of different colors. The use of small pieces of leather reduced material costs, while the extra work of manual cutting, stitching, and cumbersome color matching of the leather pieces had only limited impact on overall labor costs. Another example was the use of fabric cording around the upper. A manager of a shoe factory explained that the cording made the shoe look "classy" and therefore raised its unit price while the extra labor cost is limited.8 The substantially lower wage level in southern China made it possible to produce complicated-styled leather shoes. The production costs associated with increased manual work for more complicated-styled shoes were minimal. On the other hand, the cost of material has become more critical in the cost structure. For the higher value-added leather casual shoes and men's dress shoes, the shoemakers had a different strategy of tapping the abundant supply of cheap labor. Manufacturers who have enjoyed long-term OEM contracts with brand name international buyers tended to have longer term investment plans and have been more systematic in training local Chinese workers.9 The characteristics of the labor pool in southern China, along with the diversified qualifications and the trainability of the workers, have made this strategy possible. The following case shows how some Taiwanese shoemakers have taken advantage of such a labor force in China to upgrade their products. Zhenzhen10 shoe company, which moved from Taiwan to Shenzhen in 1988, had won a long-term OEM contract from the Bass Company with innovative manufacturing technologies in stitching and lasting. Vamp lasting is one of the most critical steps of leather shoe production. Hand lasting by experienced workers gives the shoe a subtle shape and smooth curve that is difficult to create by using a lasting machine. The upper of high-quality loafers is composed of two leather pieces hand stitched together. Hand stitching ensures a stronger adhesion, and the bits of threads that appear on the upper suggest high quality. In craftlike production of high-quality leather shoes, hand lasting and hand stitching are done by the experienced shoemaker masters. The traditional method of hand stitching is a technique that depends greatly on the stitcher's experience and hand coordination to keep the leather pieces in the appropriate positions. Technicians and managers of Zhenzhen invented a method that allowed less experienced workers to perform high-quality hand stitching. They used a special type of last made of soft plastic material for the workers to affix the two major pieces of leather with small nails before stitching. With the help of the soft last, stitchers had better control of the leather pieces while stitching. This method also gives the vamp a more distinctive edge that could not be created easily with the traditional stitching method. Most of the stitchers were women with one to

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two years' job experience, not much longer than those in the factories that produced lower-quality shoes. Zhenzhen has also trained a large group of male workers in hand lasting. Most of them had more than two years' experience. Aided with a more detailed division of labor, the new method has helped the Chinese workers master the technique of lasting more quickly.11 Although Zhenzhen has been producing shoes for the high-end market with intensive handwork, the size of the company was much bigger than the craftlike production operations found in Italy. Zhenzhen grew from two lines and 900 employees in 1988 to six lines and 2,900 employees in 1992. It distinguished itself by integrating craft and assembly-line production for the higher end market. Although the company did not possess its own brand name and marketing channels, Zhenzhen has enjoyed higher unit prices for its shoes (US$10.00-15.00 per pair, compared to the average of US$5.006.00 per pair for Taiwanese leather shoes in 1992). The working and living conditions at the factory were better than any of the Taiwanese-funded factories I have visited in southern China. The wage levels were about 15-20% higher than average. The long-term investment plans and training of local Chinese managers resulted in an extremely small Taiwanese manager/Chinese employee ratio in Zhenzhen: the company had 2,900 Chinese employees with 6 Taiwanese managers, compared to other Taiwanese factories with less than 1,000 employees and more than 10 Taiwanese managers.

Labor Exploitation Taiwanese shoe manufacturers' rapid expansion of in-house production capacity in the highly fluctuating world market was sustained by a series of exploitative labor practices.12 While there is a higher degree of compliance with the labor laws in large municipalities or the Special Economic Zones, it was easier to avoid official inspection of labor conditions in small towns, where most small Taiwanese firms were concentrated. The local government's eagerness to accommodate foreign investors has also loosened the implementation of the labor laws in small towns. In addition, the majority of the workers in the Taiwanese-funded factories were migrant workers, the least protected labor in China. Some investors pointed out that Taiwanese sole proprietorship companies appeared to be less constrained by labor regulations than the ones involved in joint ventures with Chinese partners.13 In the joint ventures, Chinese workers signed a one-year contract with the employer. In sole proprietorship factories, operators signed an "agreement." Examples of temporary workers' contracts and agreements can be found in Appendix D. Labor laws, the contract designed by the factory, and the actual practice were three different matters. The contract was usually more ambiguous than the labor law in the areas of hiring and firing, pay rates, and working hours. The actual practice, in turn, had many twists and obvious violations of the contract. As a Taiwanese shoe manufacturer in Dongguan in the Pearl River Delta put it, "China is like a sponge full of water, you just have to squeeze it hard until you get the last drop."14

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Recruitment of Low-Skilled Workers One common practice of hiring low-skilled workers was to put up an announcement at the gate of the factory. In southern coastal towns where foreign-invested factories were concentrated, there were always newly arrived immigrants hanging around outside the factories looking for jobs. They sat or squatted by the roads or under the bridges. There were also workers drifting from one factory to another, hoping to find a factory that paid higher wages and provided better food and accommodations. A factory would easily receive 300-400 applicants in a week after the recruiting announcement was posted at the gate. If the announcement was posted in the town center, the number of applicants could double.15 Employers could also use the information networks among migrant workers. Many of the migrant workers came to the coastal south together with friends from the same hometowns in the inland region. They would stick together when they first arrived in the city and maintain contact with each other after they found jobs in different places, thus establishing a network of information flows. When a factory was recruiting new hands, the workers of the factory would bring in their friends.16 Employers tended to be very picky in hiring because of the excessive supply of low-skilled workers. They preferred single women between 16-20 years old with primary to junior-high education. Applicants had to pass written and operation tests, then be interviewed individually. Priorities were given to workers with higher education levels and experiences in other foreign factories.17 Those who got the jobs would report to the company the same day the results of the test were posted at the factory gate, and then start working the following day. Although local governments prohibited hiring workers from other provinces, most Taiwanese managers preferred nonlocal workers. Workers from other provinces were not protected by the local government, and their lack of local social connections and urban experiences made them more compliant with the demands of management. Most of all, the lack of permanent urban residency confined the migrant workers' mobility. Migrant workers were less likely to take risks that would cause joblessness and loss of urban residency. A Taiwanese manager commented that workers from the inland region were "easier to manage." They had no place to go during the holidays and they were so eager to make money quickly that they would not complain about overtime. New migrants "did not know how to get to downtown by bus and they all wanted to save as much money as possible." Therefore they "stayed in the factory all year round, even during the holidays."18 My interviews with the workers in a factory confirmed these comments. In a factory near Guangzhou city, most of the young woman operators I talked to have never been to downtown Guangzhou, a 30 minute-bus ride from the factory. There was also an implicit division of labor between local and migrant workers from inland regions. Workers from inland regions were often assigned to the hardest jobs, such as moving heavy materials in the warehouse, be-

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cause they "do not complain as much."19 Local Cantonese workers tended to negotiate with management for easier jobs. One of the largest Taiwanese shoe companies in the Pearl River Delta had a very efficient way of recruiting inland workers. The company had two establishments in the Delta, one of which was on an island located at the confluence of the Pearl River and the South China Sea, about 30 minutes' drive from the center of Guangzhou. The factory was a joint venture with a military unit of Guangzhou and it produced large quantities of simple-style synthetic leather fashion shoes. The factory had a stable source of orders from a large U.S. buyer. Between 1988 and 1991, the factory expanded from one to 14 production lines. By 1992, the factory had 4,000 employees. When export orders began averaging 2-3 million pairs per month, the Taiwanese general manager of the factory emphasized that the factory required a stable labor supply. The factory did not want to hire workers with any prior urban experiences or industrial experiences in other export factories. The manager insisted on hiring "noncontaminated" workers from inland villages. Having a military unit as partner and a good relationship with the local public security bureau helped the factory bypass the official restriction on hiring nonlocal workers. The factory's Chinese manager in charge of personnel recruitment was also a current colonel in the Peoples' Liberation Army. Because of the policy of regular transfer of military personnel from one military zone to another, most Chinese military officers have accumulated widespread personal connections in many provinces. Retired or current military personnel have been involved in local labor recruitment corporations. The Chinese personnel manager of the factory could recruit workers through his personal connections with old comrades. When the factory needed new hands, usually in large numbers, the Chinese personnel manager would call up friends in labor recruitment corporations in some towns or villages in Hunan or Sichuan Provinces to ask them to announce the factory's recruitment drives. Then the Taiwanese general manager of the factory, accompanied by this Chinese personnel manager, would go to these remote towns and villages to interview the applicants.20 The factory could get as many as 700-800 work ers in two days. Local recruiting agents were responsible for arranging transportation for new workers from villages in Hunan or Sichuan to the factory in Guangzhou. The Taiwanese general manager of the factory told me that there has been an increasing number of youngsters in the inland regions taking on nonfarm jobs and leaving the villages, therefore their recruitment campaigns had to penetrate deeper into the mountainous regions.21 Successful applicants had to pay the local recruitment agent 100 yuan for the collective sponsorship he or she provided. New workers also had to pay the company 100 yuan as a deposit. They would not get the 100 yuan back if they left the factory before the one-year contract was over, regardless of whether they left voluntarily or not. Another hiring practice was the employment of casual workers. When there was a rush order and a shortage of hands in the factories, the management would bring in 10-20 young workers and have them work on the sim-

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plest tasks, such as trimming the edges of shoes or making simple decoration pieces. Usually, this type of work would last for a day or two and the workers would be dismissed after the job was done. In this case, the factories did not have to provide them with dormitory rooms. Some of these workers were ex-employees of other factories and were looking for new jobs, but the job hunting could last for months. They were willing to accept any jobs offered by the factories. During my stay in a factory in the Pearl River Delta, whenever the factory managers walked outside of the factory, young girls who were waiting would approach them and ask for jobs. One of the duties of the guards at the factory gate was to keep these job seekers off the factory property. A Taiwanese factory manager told me that when his factory was first established in 1988, there were rural migrants sleeping outside the factory for several days, hoping to get a job in the factory. Worker Dismissal China's labor law stated that an employer cannot dismiss female workers because of pregnancy. Pregnant workers should be given 105-120 days of maternity leave. Yet, in the written contract, the maternity leave was not mentioned at all (see Appendix C); and in practice, female workers were dismissed immediately when found to be pregnant. Married female workers were not welcome in the factory and many married workers from the countryside had to disguise their marital status in order to get a job in the factory. Taiwanese shoe factories preferred young, single female operators. A manager commented that "married women workers are too problematic."22 Married women workers required periodic maternity leave and during the pregnancy period it might be too dangerous to have them work overtime or work on night shifts. Since some of the assembly work did not required high skills, it was not a major loss to the factory to replace an "old" operator with a fresh one who could be trained in two weeks to assemble parts and be paid with lower wages. A manager told me that the ideal workers were those who have had 6-18 months of manvifacturing experience. Their wage levels were not too high and they were skillful enough for the job.23 Further, according to the contract, the employer should notify the worker 10 days in advance before formally dismissing the worker. But during my stay in a factory, two male workers were laid off immediately after their involvement in a fight; before they left, they were paid only for the number of days that they had worked in that month. They were told to move out of the factory dormitory on the same day as they were fired. A local Chinese staff member of the factory told me that such a practice was not unusual either in this factory or another Taiwanese shoe factory she worked for before.24 The factory bylaws covered behavior codes and penalties for violation of both shopfloor and dormitory rules set by the management. The penalty for a one-day absence from work was a reduction of three days' pay; for a twoday absence, immediate dismissal. Interruption of work such as receiving phone calls during working hours was forbidden. An emergency interrup-

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tion should not exceed 15 minutes. No "chatting, eating snacks, walking around on the shopfloor" were allowed. There were also moral-based rules such as "no erotic printed materials or alien outfits in the factory." The penalties for breaking the factories rules were mostly in monetary terms. Every violation of the rules had a price. In 1992, the average monthly wage of an operator was 250^00 yuan. The penalty for wasting materials, 20-30 yuan; for chatting or eating at work, 10 yuan; for absence from the dormitory after midnight, 30-60 yuan; for boiling water or cooking with electrical equipment in the dormitory rooms, 50 yuan; for dropping a grain of rice on the dining table, 10 yuan; for swapping rooms or beds with other operators without permission from the management, 20 yuan; for spitting on the ground, 10 yuan; for bringing in people from outside the factory to the dormitory room, 50 yuan.25 Labor disciplines and factory bylaws imposed by the management also served to legitimize discharging workers for petty infractions, especially during the slow seasons. An ex-shoe factor}' worker I interviewed in Xiamen Special Economic Zone told me that she had been laid off by the shoe company for her "disobedience" to the manager: the assembly line that she worked on in the factory was shut down because there were not enough orders to keep all three production lines operating. Operators were sent to clean up the warehouse and to do other odd jobs in the factories. The day she was fired she was helping the stitching department to bring materials from the warehouse under the order of a manager. Another manager asked her to work on something else. She did not respond to the order immediately and was accused of being disobedient and was discharged. She emphasized that although the Taiwanese managers had always been stern with the workers and the workers were often shouted at, petty infractions like this had seldom led to a dismissal, especially when there were many orders in the factory waiting to be delivered.26

Pay Rates and Risk Sharing The standard pay rate set by the government was that a worker's real wage levels in joint ventures should be 20% higher than his or her counterpart's in a state enterprise in the same area. But there was no minimum wage. The labor law set working hours for 8 hours a day, 6 days a week, with overtime not exceeding 12 hours a week. The pay rate for overtime should not be less than 150% of the regular rates. The pay rate for holiday overtime should be no less than 200% of the regular rates. Workers should be paid for working on Sundays and national holidays (Lin, 1992:200). The sample labor contract, as shown in Appendix D, states that overtime should be paid but the rates are not specified. In practice, most of the workers were paid by piecerate, and it was clearly stated in the contract that there was no overtime payment for piece-rate work. The so-called piece-rate-based salary was, in fact, a combination of three parts: the basic salary, which was calculated on a monthly basis, accounted

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for about 10-15% of the total salary; 80-90% of the salary was calculated at piece-rates; and the bonus, about 10-15% of the total, was given to workers with no absentee/late records for the month. Such a wage system has cut holiday payments by at least 75%. The percentage of the basic salary in the total pay varied from one factory to another; it also varied with different types of work. On the assembly line, the percentage of basic salary was higher because the productivity per unit time was easier to control; in the stitching section, where workers operate the stitching machine individually, the percentage of piece-rate payment in the total wage "was much higher. In some factories, there were no basic salaries at all. In some factories, the basic salary was about half of the total pay. New workers were paid on a piece-rate basis because their productivity was lower. The piece-rate system was also a device to make workers involuntarily share the business risk. In the low seasons when there were not enough orders to keep all the workers working for 13 hours a day, workers were paid basic salaries only. In case of disruption of production caused by delayed material delivery or power failure, which happened frequently in some areas, the time that workers lost was not compensated. Furthermore, if one shipment was rejected by the buyer for quality problems, workers had to fix the rejected shoes with little or no pay, because, as claimed by a managers, "one should pay for one's own mistakes."27 However, a rejected batch was not always the responsibility of the workers; it could also be the responsibility of the buyer. The fashion shoe market has been so unpredictable that once a buyer has placed an order for a certain style, she or he might find the decision disproved by the market response. The buyer then would be more picky with the batch and prone to find some quality problems as the excuse to reject the batch. The responsibility could also be the trading company's. When a trading company receives a rush order from a buyer, the trading company might place the same order with two manufacturers without informing them that they were competing with one another. The trading company would accept the delivery from the factory that finished first and find an excuse to reject the other factory's delivery. Moreover, management of the factory could be responsible for a rejected batch. In the rush season, the conveyor was often switched to high gear and the assembly-line operators had to keep up with the faster moving conveyor. The quality of their work inevitably declined and the chances for rejection increased. The floating piece-rate system also forced workers to share business risks. The pay rates per piece of work fluctuated with the unit price of each order. Although the tasks were the same as for a high-priced order, the workers would be paid less per unit for lower priced orders. Workers were constantly reminded by management that the piece-rate system meant the harder one worked, the more one earned. But in some cases, the monthly payment ceiling for workers on different jobs was already preset by management after a careful calculation of the maximum that could be produced in a month by one worker. The piece-rate would be determined accordingly. Workers

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were motivated to work harder, but the overall labor cost was controlled by management. Pay rates were also manipulated to ensure minimum productivity of individual workers. The so-called piece-rate system had been adopted by Taiwanese management in both Taiwan and China, but was practiced in different ways. In the shoe factories in Taiwan, there was no minimum quantity requirement per hour or per day, and the basic working day was 8 hours. In the Taiwanese-funded factories in China, there was a much more rigid minimum quantity requirement. Chinese workers had to work 10 hours minimum a day. In a 10-hour work day there was a minimum quantity requirement. If the worker did not meet the requirement in 10 hours then he or she had to keep working until the requirement was met. The worker would not receive pay for the extra hours needed to meet the minimum requirement. Additional work hours beyond the required 10 basic hours were paid as overtime. Overtime was paid by the hour, at a 1 yuan (US$0.125) per hour rate.28 If a worker worked for 13 hours a day he or she would be paid 3 yuan for the overtime. If a worker managed to produce an equivalent amount of 13 hours' minimum quantity in 10 hours, she or he would be paid 3 more yuan as overtime without actually working for 13 hours. Many workers managed to exceed the minimum quantity requirement, but that did not mean they could avoid the overtime in the evening. Overtime was compulsory, and was included in the labor contract. The minimum quantity requirement and the longer basic working hours ensured productivity, while at the same time keeping the labor cost low. A Taiwanese manager commented that such a system was not applicable in Taiwan, because Taiwanese workers were too "cunning" and would not accept any imposition of quantity requirement.29

Working Hours Taiwanese shoe manufacturers imposed excessive overtime on workers as a way to meet drastic surges in orders and demands for punctual delivery. Usually the maximum working hours per day were not mentioned in the labor contract. Workers in the export shoe factory worked 13 hours a day (from 7:30A.M.tol2:OOp.M.;l:OOp.M.to6:OOp.M.;and7:OOp.M.tolO:30p.M.), and seven days a week. In most export shoe factories, workers had one or two days off every month. During the rush season, it was not uncommon to have one or two months go by without a single day off.30 Overtime could be a central subject of shopfloor politics. Although it was common to work overtime in the evenings, workers always held certain hope that they could have some evenings off. But the overtime work in the evening was usually at short notice. Workers would not know if they had to work in the evening until the end of the afternoon session. The manager did not want to notify the workers if they had to work in the evening in advance because it would "affect the spirits of workers."31 An operator in a shoe factory told me that workers still found implicit hints of whether they had to work in the evening.

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On the assembly line in the shoe factory, each cement applier had a bowl of cement. A fill of cement in the bowl lasted for about two hours. Since cement dries easily, the line manager had to make sure that a fill be used up before workers retired for the day. Therefore, if there was no overtime in the evening, the manager would tell the cement applier not to make another fill when it was close to the end of the afternoon session. If evening overtime was planned, the manager would let cement appliers make another fill even when it was close to the end of the afternoon, because the cement that was left could be used in the evening. The command about cement fillings therefore became a sign of evening overtime.32 In addition to excessive overtime, irregular working hours were also prevalent. Production schedules were frequently affected by irregular material delivery from Taiwan to China, due to shipping delays and cumbersome customs procedures, or by the interruption of rush orders. During my stay in an inner-sole factory near Guangzhou, a delay of material delivery caused a stoppage of operation one morning. Workers were ordered by the management to go back to the dormitory and get more sleep. At one o'clock in the afternoon, the materials arrived and workers were called back. The workers started working in the afternoon and did not stop until the next morning. They got the next morning off, then started working again in the afternoon. During the rush season it was not uncommon to have workers labor more than 24 hours without sleep.33 Another example of irregular working hours is evident in the packaging and shipping department. In the export business, the anxiety concerning delivery dates is very high. Failure to meet a delivery date costs the manufacturer a substantial penalty fee or cancellation of orders. The container trucks were the main transportation between factories in rural Guangdong and Hong Kong customs, where the finished products were shipped out. The schedule of container trucks was highly unpredictable because of poor road conditions and congested traffic. Workers in the final packaging and shipping department had to be ready whenever the trucks arrived to start piling up the boxes of shoes in the containers. To avoid traffic, the trucks often arrived late at night. Workers in the packaging and shipping department had to work at night to accommodate the truck drivers. Workers in the stitching department and assembly line also had to stay up. They had to work all night to fix the shoes that did not pass the scrutiny of the trading company quality inspector in the last minute. During my stay in a factory in the Pearl River Delta, final packaging and shipping would go on until dawn. Those who worked all night got the next day off. Thinking of my own problem with jet lag, I asked the workers if they could fall asleep easily with such an irregular working schedule. A young girl laughed and replied: "Problems of falling asleep? The only problem we have is not having enough sleep. We can fall asleep any time of the day if we are allowed to."34 Some workers even preferred to work all night once in a while so as to have the next day off. Workers had to work overtime during most of the regular holidays and rarely had

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any free time for themselves. Working all night was almost the only way to earn a day off. Many Taiwanese managers interviewed emphasized that Taiwanese workers were brighter than their Chinese counterparts and were more willing to take initiative. Among Chinese workers, the Cantonese were considered brighter than their counterparts from the inland regions. However, most Taiwanese managers admitted that Chinese workers were "easier to manage" than Taiwanese workers. Chinese workers, especially those from the inland regions, were more compliant and willing to work overtime without complaints. A manager claimed that he could shout at his Chinese workers and use "military-like management" without worrying too much about worker reaction. He emphasized that if he treated his Taiwanese workers the same way, they would "protest immediately." Plus, Taiwanese workers were "too spoiled and were not willing to work overtime, and they demanded too many holidays."35 For the Taiwanese managers, the compliant attitude of Chinese workers and their willingness to work long hours and overtime also made up for the lower productivity. The fewer disputes between workers and management and fewer interruptions of production had also made production schedules more predictable.

4 Culture and Labor Discipline

Taiwanese shoemakers' strategies for rapid expansion by increasing in-house production and elaborated division of labor in southern China created the demand for more intensive managerial inputs. In addition to the low-skilled operators, Taiwanese manufacturers also recruited high-school graduates who, with 2-4 years' experience in the export shoe industry, were able to undertake managerial tasks on the shopfloor. Local Chinese college graduates and ex-state employees also proved to be indispensable in handling custom procedures, accounting, and administrative work. The linguistic and cultural affinity between Taiwanese investors and Chinese employees has facilitated the transfer of production and managerial know-how, as well as the capitalistic ideology of efficiency and diligence necessary for export production. In the meantime, Taiwanese management adopted a disciplinary scheme based on paternalism, military-like training, and regionalism to enforce Chinese workers' compliance.

Managing Shoe Manufacturing Intensive Management in a Labor-Intensive Industry The fashion shoe industry was one of the first major industries that shifted operations from Taiwan to China. Among the 2,505 investing enterprises registered in 1991 with the Ministry of Economic Affairs in Taiwan, 306 were shoe manufacturers. (The garment industry had 106 registered enterprises and the electronics industry 242.) The abundant supply of cheap labor was 92

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one of the major reasons for the rapid shift of production for the laborintensive shoe industry. However, the shoe industry is more than labor intensive. To compete in the world market with low costs, high product diversification, and quick delivery, Taiwanese shoemakers have relied heavily on intensive managerial input in the production process as well. On the shop floor in the fashion shoe factory, fast-changing product design and high product diversity mean constant changes of production engineering and job assignments in different departments. For each order, there is a special set of cutting dies and lasts, sometimes more than one set if a style has more than one material composition.1 Matching each order with the correct size and style of cutting dies and lasts is a tedious but critical job. Usually there is more than one style of shoe moving on the conveyer, each with its own set of lasts, soles, uppers, ornaments, linings, and other components. There are also special requests by the buyer for each order executed on the production line. These requests can be as tedious as the way the finished shoes should be wrapped before they are put in the shoe boxes: the edge of the wrapping paper should be folded twice and only cover the vamp of the shoes; or the label on the inner sole should be placed 35mm from the bottom of the sole. In addition, as mentioned in chapter 3, Taiwanese shoemakers' strategies for rapid expansion and elaborated division of labor in southern China have induced a greater demand for training new workers and coordinating among disintegrated production sections. All these involve heavy management. Material procurement and inventory control is another major managerial task. Given the complex material and component compositions and an unstable material supply in the industry,2 coordination between the component preparation and final assembly has been critical for ensuring smooth operations and punctual deliveries. In the export industry, scheduling and coordination between departments (e.g., between cutting and stitching, between stitching and assembly) to meet the production schedule is particularly crucial because of the strict delivery deadlines and the heavy fines imposed by the importer for late deliveries. On the other hand, large product varieties and limited automation create greater problems in quality inconsistency, and therefore higher demand on quality inspection in each step of the production. Consequently, intensive managerial input, especially in intra- and interdepartmental coordination, scheduling and job allocation, and quality control, is as important as the labor input in the fashion shoe manufacturing. Intensive management is also required at the administrative level. A large number of small orders has increased the complexity and frequency of material procurement, final product shipping, and wage calculation.3 Since the Taiwanese fashion shoemakers moved production to China, the demand for intensive management has increased. First of all, procurement and shipping of major materials, such as shoe-making machines, PU, and PVC, has been problematic because most of the materials and components were imported from Taiwan.4 Delays were more likely to occur when materials had to be shipped across the straits. As a result, administrative work

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increased, production schedules became even tighter, and managers faced more pressure to make deadlines. Moreover, while the production was moved to China, the headquarters of the shoe companies, which had the functions of marketing and product development, remained in Taiwan. As discussed earlier, product development capabilities have been the competitive edge of Taiwan's fashion shoe industry. Sample shoes were handmade by the most experienced shoemaker masters; and they were tried, tested, adjusted, and confirmed by the buyers for several runs. However, more problems emerged on the shopfloor during the final production. Unlike the samples that were skillfully handmade by the masters, shoes on the assembly lines were handled by operators with limited experience under tremendous time pressure. As the conveyer moved along, operators were required to complete an operation in a few seconds, thus increasing the likelihood of serious mistakes such as uneven or loose wrapping of the upper onto the lasts, unbalanced sole laying, loose shank attachment, and askew shank or heel placement. Such a gap between the craftlike sample production and final assembly line production required on-the-spot troubleshooting by technicians and shopfloor managers. The geographical separation of product development in Taiwan and final production in China has made it much more difficult to coordinate the two sections. Therefore, the responsibility of shopfloor managers at the offshore production sites increased. As the demand for intensive management on the shopfloor increased, the supply of Taiwanese managers in overseas production sites began to decline. During the expansion period of Taiwan's export shoe industry in the 1970s, the 20-40% higher wages and the promising future in the shoe business attracted many ambitious young people in Taiwan. Most of the current Taiwanese shoe managers began to accumulate their experiences in shoe manufacturing in those years. They started out as operators in their late teens with a juniorhigh-school education. At age 18, they left the workforce for two years of obligatory military service. After they finished the military service, some resumed the same trade but at a higher position because of their previous experience and new skills, such as machine maintenance, learned in the military. Since the late 1980s, Taiwanese shoe factories began to shift production to Thailand, the Philippines, and Indonesia. Experienced manager/technicians were in high demand at these overseas sites. However, export shoe manufacturing lost its attraction to young people in Taiwan. The shoe industry was considered a sunset industry with an uncertain future; the profit margins declined drastically within 15 years5 and the rewards did not correspond to the increasing intensity of the work. Diligent and ambitious young people were attracted by rapidly expanding sectors such as computer-related electronics and services. The number of new workers joining the shoe business dwindled. Moreover, since the late 1980s, working in the shoe industry means staying in some semirural areas in "communist" China, putting up with higher pressure at work, and seeing families in Taiwan only once every three months. Shoe companies offered doubled salaries and quick promotion to those who were

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willing to work in China, yet the pool of qualified Taiwanese managers and technicians shrank rapidly. Younger and less-qualified Taiwanese managers were promoted quickly to senior management positions and were sent to China to supervise production operations in the new factories. Under such circumstances, the educated and highly trainable young managers and college graduates in southern China became an ideal alternative for Taiwanese investors.

Chinese Managers on the Front Line In a typical fashion shoe factory of three or four production lines, there was one Taiwanese general administrative manager, one Taiwanese manager for each assembly line, and one for each section of the stitching and cutting department. Most of the shopfloor coordination was carried out by local Chinese foremen and coordinators at the lowest level of management. The low-level Chinese managers were directly accountable for the daily operation of the factory. Table 4-1 shows the organization of a typical Taiwanese export fashion shoe factory operating three production lines in southern China. In each assembly line, there were about 75 to 80 workers, divided into three sections: the first section was organized around the wrapping of the upper, the second the adhesion of the sole and the upper, and the third the final finishing work. Under each Taiwanese line manager there was a Chinese coordinator, who assisted the line manager, and one foreman for each section. In each assembly line, in addition to one chief coordinator and three foremen, there were four quality supervisors, two material and component coordinators, and one material/tool distributor. The major task of the coordinators and the foremen was to implement the production schedule set out by toplevel management. They had to coordinate the material supply and assign jobs to each section and the groups under each section. Each assembly line had a parallel stitching line at the stitching department. Each stitching line had 130 workers, 26 managers and foremen at different levels, one Taiwanese technician-manager, one Chinese coordinator, six foremen, seven material/component coordinators, seven quality supervisors, and five material/ component distributors. These coordinators, quality supervisors, and component distributors were not in high management positions, but they all shared the responsibility of coordinating the highly segmented work in different units of the factory. In the stitching department, there were another two teams of 20-22 workers each working on insole binding and sole assembly. Each team had a foreman. Coordinators were mostly male workers who had more than three years experience in shoe manufacturing and who had worked their way up from operators to low-level managers in the foreign-funded export factories. Poremen were usually female workers who had more than two years experience in shoe manufacturing. Most of them were promoted within the same factory. The average monthly salary of chief coordinators was US$140-170.

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Making Capitalism in China Table 4-1 Organization of a Shoe Company with Three Production Lines Taiwanese owner(s) (general manager or president) 1 Taiwanese administrative manager

Cutting department

Stitching department

Assembly

1 Taiwanese department manager 1 Chinese coordinator to assist the manager

1 Taiwanese manager on each line Each stitching line has:

1 Taiwanese manager on each line Each assembly line has:

1 Chinese coordinator 6 Chinese foremen 7 Chinese material coordinators 5 Chinese warehouse coordinators 7 Chinese quality inspectors

1 Chinese coordinator 1 Chinese foreman each in upper wrapping, sole/upper adhesion, and finishing section 4 Chinese quality inspectors 2 Chinese material coordinators 1 Chinese tool coordinator 75-80 operators

2 Chinese material coordinators

16 operators (8 male and 8 female) tending 8 cutting machines

130 stitchers and handworkers (including an insole binding group, with 1 Chinese foreman and 22 operators; and a sole assembly group, with 1 Chinese foreman and 22 operators)

$/ £j} ft VTWl C Vt T

Warehouse

1 Chinese department coordinator 2 Chinese foremen

10 operators and movers

Foremen earned US$100-110 per month, depending on the amount of overtime hours. Quality inspectors and material coordinators were paid US$70-80 per month. That was about one-eighth to one-tenth the wages earned by their Taiwanese counterparts. The Chinese first-line managers were not just cheap, they were also well educated and highly trainable. Most of them had a high-school education.

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Among the six foremen I interviewed, one had a junior-high education and the other five a senior-high education.6 When "squeezing the sponge until the last drop"7 was the Taiwanese manufacturers' strategy for coping with the uncertainty in the world market, one way of "squeezing the sponge" was to intensify the work as much as possible. The production target was set to the maximum capacity of machinery and workers. The Chinese first-line managers had the responsibility for achieving these high targets. During my stay in the shoe factories, I was most impressed by the responsibility that the local Chinese first-line managers undertook. They worked longer hours than operators did, with extra work such as fixing sample shoes, which required more skillful handwork. During the overtime hours at night, when most Taiwanese managers were in the dorm watching TV, playing games, gambling, or relaxing in a nearby karaoke bar, the Chinese managers were running around the assembly lines to see if the specifications of the orders were followed correctly and helping with the final quality inspection before the finished products were packaged and loaded on the trucks. As noted earlier, to avoid the traffic between factories in the Pearl River Delta and export ports in Shenzhen and Hong Kong, most loading and delivering was done after midnight; in the factories, at three or four o'clock in the morning, as Taiwanese managers were sound asleep, I often heard noises of trucks coming and going, mixed with the voices of those Chinese managers giving orders to their workers. A group of competent low-level managers could relieve top-level managers from the most tedious shopfloor supervision and coordination work. However, most Chinese workers did not have sufficient experience in manufacturing, and it still took time and effort for Taiwanese investors to train the Chinese employees with managerial skills and to familiarize them with export-manufacturing procedures and the fast pace of export production. The shared language of Taiwanese and Chinese, Mandarin, has made it easier for Taiwanese managers to communicate directly with their local employees. They could effectively give orders and teach processing skills to their Chinese operators and allocate responsibilities to the first-line Chinese managers.8 In my interviews, many Taiwanese investors and high-level managers emphasized that one of the main reasons for their rapid expansion of production in China, compared to their operations in other Southeast Asian regions, was the much shorter time required for local manager training because of the shared language.9 Large Taiwanese companies that had established shoe factories in different sites throughout Southeast Asia would recruit Chinese managers and train them in China, then send them overseas to the Southeast Asian factories.10 When moving up the ladder from operators to managers, the local Chinese in the Taiwanese-funded factories seemed to be convinced that it pays to work hard. Managers identified more with the system that had accepted them after years of working as operators in the factories.11 Various devices helped to establish such an identity: separate dining and dorm rooms for operators and managers, different-colored identification badges that showed

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the hierarchical positions of operators and managers, and so on. The ideology of capitalist production, like the moral implications of hard work and the value of efficiency, was also a part of their education in the Taiwanese ventures. The Chinese low-level managers, in turn, helped to enforce the hierarchical management structure and to pass this ideology onto the Chinese operators. During my visits to the factories, I often saw groups of operators standing at attention in the courtyard of the factory building while being reprimanded by the Chinese coordinator for the poor job they did and their lack of devotion to the factory. On one occasion when a delivery was rejected by the buyer, the Taiwanese manager of the production line berated the Chinese coordinator. The coordinator then gathered the workers of the department and lectured them. The Chinese coordinator blamed the workers for being selfish and unappreciative of the Taiwanese boss, who had established the factory to help them leave the hopeless countryside and come to the city. Therefore workers should not "create troubles" for the boss and should share the boss's burden by devoting themselves to the factory. She emphasized the "common fate" of workers and the boss: if the boss made a profit, workers would profit, too; if workers did not work hard enough to produce good quality shoes, the factory would not get any more orders from the buyers, and the workers would all lose their jobs. Her speech also showed her possession of basic knowledge in export manufacturing. Usually the shoes for the Japanese market had a higher unit price and higher quality requirements than those for the U.S. market, so she added, "How can you people expect our Japanese customers to accept shoes of such low quality? You people should feel ashamed of yourselves!"12 Although many of the Chinese staff and first-line managers I met in the Taiwanese factories had some complaints about the working conditions in the factories, they all seemed to agree that the Taiwanese style of management was more "efficient" than the Chinese style in the state enterprises. A Chinese administrative assistant in a Taiwanese shoe material supply company complained to me about the heavy workload and excessive overtime in the company; often she could not leave work until eleven o'clock or midnight. Then she pointed out, " . . . but one can really learn efficient management in a Taiwanese company. Did you notice that we have only four people in this office? We can handle the amount of work that would require at least twice as many people in a state factory."13 Another Chinese shopfloor manager in a shoe-manufacturing factory suggested that the major problem of state-owned factories in China, compared to Taiwanese factories, was that the state factory could not dismiss workers and had to pay for all the benefits and housing, " . . . that's why the state-owned enterprises lost their competitiveness."14 On another occasion, a Chinese assembly-line coordinator tried to convince me that southern China is "as modernized as Taiwan" because "Chinese workers in the factory did not have time for lunch either," just as he was told by his Taiwanese boss about the diligent Taiwanese workers.15

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Factory Daughters and Capitalist Soldiers Women occupied more than 80% of the operator positions and lowest level manager slots in the Taiwanese-funded shoe factories in southern China. Coming from rural villages or small towns in other provinces, most of the woman workers were in their mid-teens or early twenties, with little previous industrial experience. The opportunity to work in a foreign-funded factory in the South was seen as the opportunity of a lifetime by these young women. It was not only rural poverty that pushed these young women to migrate and to search for industrial jobs; they were also lured by the promise of relatively high cash income, city lights, and the possibility of obtaining urban residence status in the South. Their peasant parents, village elders, and local officials also welcomed the chance to send otherwise noncash-earning and jobless daughters to industrial work in the South. Some of the woman workers sent home remittances and tried to save money for a dowry.16 Factory Is My Home Taiwanese managers have manipulated the family metaphor and paternalism17 in their disciplining of the young woman workers. The ideal image of the family was often invoked by the managers when they talked about labormanagement relationships. Inside the factories slogans such as "Factory Is My Home" were seen frequently.18 Such a familylike factory was demonstrated in the way that the owner acted as the family head. Since most of the workers were female, it was also frequently implied that the male owners and managers were like their fathers and elder brothers who deserved the respect and compliance of the daughters and younger sisters.19 The owner dispensed fringe benefits as favors, not as entitlements to the workers. A good example of this was the provision of free accommodations in factory dormitories. Considering the rural migrant workers' lack of experience with factory employment and industrial work, residence in dormitories adjacent to the factories allowed management to uphold discipline, eliminate absenteeism, and ensure punctuality. During my stay in the factories, the loud electrical bells in the dormitory to wake up workers in the morning and after the one-hour lunch break often reminded me of military camp. Moreover, just as parents demand propriety from their daughters, the owner appoints himself as the custodian of his young workers' morality. Workers living in the dormitories were subject to numerous rules and regulations. Workers, both single and married, were segregated by sex in the dormitory and visitors of the opposite sex were prohibited. The rule was more rigidly imposed in the women's dormitory. Lights were turned off and doors closed at fixed hours at night. Radio playing was allowed only at certain hours. Gambling and sexual relationships among workers were forbidden. Each room had a supervisor in charge of the execution of these regulations. Workers had to report to the supervisor before 11:00 P.M. and were not allowed to

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stay overnight outside the factory. At any time of the day, workers were forbidden to leave the factory without permission from management. Such a highly regimented life reflected the moralistic and protective attitude adopted by management. Yet as the number of workers rapidly increased with factory expansion, provision of factory dormitories became a problem. Many workers had to rent rooms in surrounding farm houses. A Taiwanese manager considered the trend of living outside the factory as the beginning of moral deterioration.20 Discipline was seen as part of "family education." The workers, as part of the "family," were expected to have the sense of obligation to the owner as the family head, and the authority of the owner was to be respected. When scolded by the owner or the managers, workers were not allowed to talk back. However, these "fathers" and "elder brothers" were rather reluctant to resume their role when women workers became pregnant. Pregnant workers were dismissed immediately, disregarding the family solidarity and the labor law. It is not very clear if workers in the factory were convinced by the analogy of the family in their relationship with management. But young women workers did adopt the idea of family themselves and developed a sisterhood for mutual support. Worker organization was forbidden in the factory, especially in sole proprietorship factories. But there was informal mutual help among workers. A group of six or seven women, usually from the same province, would establish a ranking system based on their ages and call each other "sister." When one of the sisters left the factory to join another one, other sisters would follow. The relationship between Chinese female clerical staff and Taiwanese male owners and high-ranking managers reflected a different form of gender politics. At the ages of 22-28, the Chinese female clerical staff in the Taiwanese-funded shoe factories usually had a high-school education, and some of them had a college degree. They worked in the administrative office as accountants or secretaries, and had more direct contact with the owner and other Taiwanese managers. In the Taiwanese small- to medium-sized firms, the division of labor within the firm was vague and the owner often had multiple functions, including general management, marketing, personnel, financing, and even purchasing. It was crucial for the owner to have a competent assistant who could play the role of housekeeper for the company. Women's social role as caretakers often put them in such a position in the company. It was not unusual for male Taiwanese factory owners and managers to take advantage of their authority and make demands on the female clerks that went beyond their job descriptions. Female administrative assistants were forced to go to social events with their bosses after work. A young woman who was working for a Taiwanese shoe-manufacturing firm told me that she was often treated as one of the bar giris when she was forced to accompany her boss and the clients to the bars, especially when the men got drunk. 21 In another factory, I was told that the secretary had to do "almost everything" for the boss, including "washing the boss's hair." The secretary was fired by the boss when

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she began to date a man; the reason given for her dismissal was that "she will not be able to concentrate on her work if she has a boyfriend."22 Sexual harassment of various kinds and degrees was not news in the factories. A young female college graduate, who was working for a Taiwanese shoe supply company, told me that a Taiwanese manager of a trading company said to her: "You Chinese women are very cheap, especially those from the north."23 Almost all the Chinese female staff I met in the Taiwanese factory in the Delta had stories to tell on the subject, including woman workers and staff getting pregnant by the Taiwanese boss or managers.24 The family metaphor and paternalistic management was reinforced by the hierarchical structure of factory organization. Taiwanese owners and managers instituted authority by maintaining a social distance between themselves and the workers. A hierarchical management structure was erected to inculcate the workers with obedience and respect, which was further reinforced by the social gap between Taiwanese and Chinese personnel. Taiwanese personnel occupied the upper level positions in the hierarchy (see Table 41); the Taiwanese owner, usually under the title of general manager or president, was assisted by an administrative manager, who was sometimes a coowner of the factory. Major decisions on production planning, finance, marketing, purchasing, and personnel were made by this core of power. Under them, there was a group of Taiwanese shopfloor managers in charge of the cutting, stitching, and assembly departments. They were responsible for the implementation of the production plan, department personnel management, and equipment maintenance. Each Taiwanese department manager had a Chinese coordinator under him or her; under each Chinese coordinator there were several Chinese foremen in charge of different work groups in the department. Within each work group there were several low-level material coordinators and quality inspectors to assist the foremen. Operators were at the bottom of the hierarchical structure. The spatial design of a factory I visited reflects the power relationship clearly: operators were placed in straight lines along the conveyers on the ground floor; nothing on the floor could escape the eyes of the supervisors watching from the large office windows on the second floor. At die operator level, only those jobs that required greater physical strength, such as operating wrapping or cutting machines, were sometimes undertaken by male workers. Most foremen, material coordinators, and quality inspectors were women. Coordinators—the highest level position attainable by Chinese employees in the Taiwanese sole proprietorship factories—were both men and women who had moved up the ladder after working for three to four years as operators and foremen. Commands passed from department managers to Chinese department coordinators, then to Chinese foremen, and finally to operators at the bottom. Major operational decisions, such as adjusting the production schedules of certain departments or dealing with certain personnel problems, were decided at daily operation meetings that were attended only by the Taiwanese managers. Decisions then were conveyed to the departments and implemented by line coordinators and foremen. This was also the channel for

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voicing grievance. Workers had to follow the hierarchy and communicated only to their immediate superior. The multilayered reporting system made the owner on the top seem even more powerful, therefore making it easier for management to command respect and obedience. The hierarchical structure was further enhanced by the arrangement of daily life in the dining halls and dormitories of the factory complex. Taiwanese owners and managers had meals in a separate dining room. A special cook prepared meals of much higher quality for them. They usually had six to eight different dishes of meat, fish, and vegetables in a meal for eight to ten people. The Chinese staff ate with Chinese workers, but at separate tables and their food was served at the table. Food for the operators consisted of one vegetable preparation and one mixture of meat and vegetables, all prepared in very large quantities. To get the food, each operator would carry a large bowl to the dining hall and wait in line for kitchen workers to fill the bowl with rice and the vegetables and meat. The food was ladled out of a large aluminum container 40 inches in diameter and was not very appetizing, even for these country girls. For such meals, they had to pay 60 yuan per month and it was compulsory to join the factory meal plan. Some operators in a factory told me that the food tasted so bad that they would rather buy instant noodles or snacks sold outside the factory. Cooking in dormitory rooms was forbidden for safety reasons. The dormitory for the Taiwanese owner and managers was also separate from the operators' dormitory. The spatial arrangement of the dining room and dormitory in a factory I visited reflected explicitly the dominance of male managers. The small dining room of the Taiwanese managers was on the top level of the factory building with a balcony overlooking the operators' dormitory and dining hall across a courtyard. In the summer, the workers' dining hall was very hot and some workers would bring their bowls to the courtyard and squat in groups as they ate. The women workers' washing area, where they did the laundry and washed their hair in outdoor sinks, was also in the courtyard. After dinner, Taiwanese managers would gather and chat on the balcony, the highest spot of the factory complex, and watch workers eat and wash in the courtyard. From the balcony, the male managers could also see workers hanging their laundry in the corridor of the dormitory building across the courtyard. From time to time, the managers would shout at some workers across the courtyard that they should not sit in the corridor with their legs open or spit on the ground. A Taiwanese male manager told me that these young girls were so "shameless" that they would change clothes in the room with their windows wide open.25 The hierarchical and paternalistic mode of management in many of the factories was further enforced by what the Taiwanese managers called the "military-like management." As Aihwa Ong (1987) suggested in her work on female Malaysian factory workers, the transition from peasants to industrial workers entails two basic changes, that is: first, "a shift from a flexible work situation to the hierarchical structure of industrial production"; and second, "a transition from autonomy in the work process to the oppressive

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compulsion of labor discipline" (p. 151). Again, the male authority and the hierarchical relations within Chinese families helped to reinforce the command and consent schemes imposed on young women to transform them into factory daughters and capitalist soldiers.

Military-like Training Almost all the Taiwanese managers I interviewed stressed the importance of "military-like" management. The obligatory two-year military service in Taiwan had well prepared these Taiwanese male managers with military-style training techniques. They adopted the techniques to discipline their workers in China. Workers had to line up when walking from the factories to the dining halls; no chatting was allowed in the dining hall. Each time workers left the factory building they were subjected to a body check to see if they had stolen anything from the factory. When they talked to Taiwanese managers, they had to stand up straight, with palms by the sides of the thighs. A worker who had his hands in his pockets when he asked a manager to sign a sick leave permit was severely scolded by the manager for his lack of respect. An extreme case of military-like management was in the large factory of 4,000 workers mentioned in chapter 3, the joint venture with a military unit in Guangzhou; the factory buildings were renovated warehouses and dormitories of a military base on an island outside Guangzhou; and as noted earlier the personnel manager of the factory was a current colonel in the People's Liberation Army. The training of new workers began with standing still for hours, marching in the factory yard, sitting straight and listening to lectures by the personnel manager. The content of the lecture was heavily loaded with moral teachings: being honest, obedient, loyal, and devoted to the factory. As the lecture ended, workers stood up and cried out loudly: "Yes, sir!" just the way soldiers salute their officers. In fact, the Taiwanese owner and managers in the factory acted very much like military officers. Guards at the factory entrance would straighten up, salute them, and greet them by crying loudly: "Good day, sir!" The word they used for "sir" was the same word used exclusively by soldiers greeting officers in the military—"zhang-guun." Painted on the ground throughout the entire factory complex were two bright yellow lines spaced 30 centimeters apart. Workers had to march between the lines as they moved between factories and dining halls. A person who stepped on the lines or set a foot beyond the lines would be fined. One goal of discipline training was to have workers comply with commands without hesitance or question, "just like soldiers receiving commands from their officers." A woman worker told me that their manager's famous line was: "You do what you are told to do ... there is no need for explanation in this factory"; and "a reasonable command is good for training; an unreasonable command is good for character building."26 These were exactly the same slogans that were widely used in Taiwan's military. Consequently, questions of whether workers worked on day or night shifts, whether

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they worked overtime, and who worked on what and for how long were all decided by the management and were part of the workers' training, or "character building." Harsh scolding and shouting at workers were frequently seen and heard. The workers I talked to confirmed that beating of disobedient workers was not unusual. As presented earlier, an ex-shoe factory worker whom I interviewed in the Special Economic Zone in Xiamen was laid off by the shoe company for her "disobedience" to the manager. There have been several publicized incidents of Taiwanese managers beating up Chinese workers so badly that local public security office had to intervene (Lu, 1994a; Ming, 1994).27 Although most Taiwanese managers agreed that women workers are "easier to manage," there were still quite a few slowdowns, protests, and strikes in Taiwanese factories caused by the beatings of Chinese workers by Taiwanese managers or unfair dismissals of workers. A woman operator told me that in a factory where her brother worked, the owner had been delaying wage payments for months and that the workers had organized a strike to force the owner to pay them on time.28

Regionalism and Shopfloor Politics Regionalism, defined as antagonistic relations between different territorially based groups of people, has had a long history in China. Regionalism encourages ties between people from a common place of origin, while at the same time it provokes distrust of people from other places. The strongest regional affinity lies at the lowest level of the region of origin in the hierarchy of places (province, municipality, county or city, and village). People from the same village have stronger bonding than those from the same province. Migrant workers moved to the city in groups and tried to stick together once they arrived. In the new city, job information and temporary accommodations were usually provided by relatives and friends from the same region (lao-xiang). Lao-xiang formed the basis of mutual support for the migrant workers in the city. In the case of the two workers in a Taiwanese-funded factory I visited who were dismissed for being involved in a fight and ordered to leave the factory immediately, mentioned earlier, they went directly to their lao-xiang in the factory for help. Their lao-xiang helped them to store their belongings and loaned them money. A few days later, the dismissed workers' lao-xiang in the factory told me that they had found jobs in another shoe factory. The female workers' sisterhood, mentioned earlier in this chapter, was also organized on the basis of lao-xiang, although it was not an exclusive criterion for sisterhood organization. Regionalism could work both ways. In the factory, shopfloor foremen had the authority to implement factory rules and to determine penalties and rewards on the basis of workers' performance and behavior. A Taiwanese manager told me that the Chinese foremen tended to give special favors to their lao-xiang operators. Therefore, they had to have more than one Chi-

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nese manager/foreman involved in the performance evaluation of workers.29 Regionalism also provoked distrust of those from other places. Taiwanese factory owners capitalized on it and deliberately recruited workers from many different provinces as a way to prevent workers from organizing.30 In 1992, a Taiwanese factory owner told me that workers have become increasingly difficult to control and there have been more slowdowns than when they first came to China in the mid-to-late 1980s.31 Many factories have adopted a policy to disperse workers from the same provinces to different departments and production lines. Cultural connections between Taiwanese investors and Chinese employees did not preclude the possibility of conflicts based on differences in status and social background. Taiwanese tended to view their Chinese employees and colleagues as rustic. The lack of experience of the Chinese employees in export business was often laughed at and complained about by their Taiwanese colleagues. Taiwanese firms depended on first-line Chinese managers and staff in the daily operation of the factory, but the Chinese staff rarely got involved in the inner circle of the company. For example, a Taiwanese-funded shoe material supply company had two accountants, one Chinese and one Taiwanese. The Chinese accountant prepared official financial reports to file with the tax bureau, while the real finances of the company were tracked by the Taiwanese accountant.32 In the Taiwanese-funded factories in southern China, the majority of workers were from other provinces and spoke various dialects. The official language in China and Taiwan, Mandarin, was used between Taiwanese management and Chinese workers. In the meantime, the Taiwanese managers spoke Hokkian, a Taiwanese dialect (originating from southern Fujian), among themselves. The different dialects created social distance between die Taiwanese managers and their local workers. When Taiwanese managers did not wish their conversations to be overheard, they would speak in Hokkian. When they talked to Chinese workers, they spoke in Mandarin. Hokkian became the symbol of authority and status, as well as the borderline between insiders and outsiders within the factories. A Chinese coordinator from Fujian Province, who spoke the same dialect as his Taiwanese boss, appeared to enjoy the privilege of speaking to his boss in Hokkian, excluding his Chinese coworkers from the conversation. During my fieldwork in the Pearl River Delta, the language I chose to use—Mandarin or Hokkian—produced totally different levels of trust by the Taiwanese investors and managers. The moment I started speaking Hokkian, the wall between me and the interviewees was dismantled by the minute.33 Very rarely would Taiwanese managers socialize with their Chinese colleagues. The karaoke bar visits were exclusively for Taiwanese staff. Being Taiwanese or Chinese, regardless of position in the factory, appeared to be a decisive factor of status in the factory. A Chinese administrative staff member complained that the Taiwanese administrative staff person in the factory, although holding the same position as other Chinese staff members, had

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appointed herself as the chief of the administrative staff and gave orders to the Chinese staff.34 As mentioned before, the gap between Chinese staff and Taiwanese staff was also evident in dining and boarding arrangements. Another example further demonstrates the deep line between Taiwanese and Chinese in the Taiwanese-owned factories: usually factory managers were very accommodating to the quality inspectors from their partner trading company because the quality inspectors had the authority to accept or reject a delivery. Quality inspectors of trading companies were constantly treated with banquets and entertainment in the karaoke bar. However, the Chinese quality inspectors hired by Taiwanese trading companies seldom received such "respect" from their Taiwanese partner factories. A Taiwanese factory manager told me that he did not care much about the Chinese quality inspector because these Chinese quality inspectors "did not know how to inspect shoes" and "their boss in the trading company did not trust their judgement anyway." He commented, "... the Chinese inspectors only inspected the shoes that we showed to them and they did not know that a real inspector should go down to the shopfloor to inspect on the assembly line."35 There was a high turnover and marginalization of the Chinese staff. Although there was no clear causal relationship between the two phenomena, a mutual reinforcement of the two did exist. A Taiwanese manager said that although the turnover rate of Chinese staff was high, he did not worry about the possibility by the ex-employees leaking business secrets. The Chinese employees never had the chance to learn about the utmost secrets of the company anyway. Yet, in some cases, if the Taiwanese investor had a longterm investment plan in China, the Chinese staff and lower level managers were much better treated and trained and a patronage relationship was likely to develop.36 To maintain competitiveness in the world market in price, time, and quality, Taiwanese shoe manufacturers have relied heavily on intensive managerial input in production processes. The first-line managers in southern China have played an important role on the shopfloor. The shared language and culture between the Taiwanese employers and their Chinese employees have facilitated a more effective transfer of managerial skills and the capitalist ideology of efficiency. As a Taiwanese investor pointed out, the most evident impact of the overseas Chinese investors in China has been "the change of mind sets" of local Chinese employees and partners.37 In the joint ventures, the ambitious and entrepreneurial Chinese young people familiarize themselves with the working of the market as well as the profit-oriented production through their daily contact with the Taiwanese investors and managers. The training of local Chinese managers has been so successful that some larger Taiwanese companies have used China as the recruitment and training center for Chinese managers to be sent to other Southeast Asian production sites. However, this does not mean that there has been an absence of shopfloor politics in the factories. Far from it. As described in this chapter, traditional paternalism, combined with a rigid disciplinary scheme based on Taiwanese

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military culture, was imposed on the factory daughters. Male dominance was intensified in the hierarchical factory organization. The Chinese state has imposed a further constraint: on labor organizing: the temporary work permit and household registration system allowed migrants to stay in the city only if they held a job in the city. The risk involved in protesting was not just losing the job but also losing urban residency. In addition, obsessed with the prospects of economic growth brought to the locality by Taiwanese investors, most local Chinese officials were hesitant to enforce the labor law in foreign ventures. What is uncertain is how much longer the Taiwanese investors can maintain their advantageous positions in China. Since 1992, the wage levels in southern coastal China have increased rapidly.38 Labor conditions in foreigninvested ventures have also received greater attention from the Chinese government. The Chinese state department passed the draft of the labor law in January 1994, effective in January 1995 (Leng, 1994; Lo, 1994). In the same month, Guangdong passed new regulations stipulating fire prevention, ventilation, and other safety standards in the work place. The Ministry of Labor and the All China Federation of Trade Unions also took actions, such as conducting inspection tours of foreign-invested enterprises in the South to examine labor practices and other conditions (Stevenson-Yang, 1994). The pressure to improve the labor practice in foreign ventures was mounting.

5 Autonomy in Local China

Southern China, with its outward-oriented economy and the abundant supply of labor with diversified qualifications, has been attractive to investors from abroad. However, this recipe would not have brought the rapid and concentrated growth without the help of a pool of active business-minded people in the region. In southern China, such people are the local government officials, especially those at subprovincial levels. Local Chinese officials were directly or indirectly involved in accumulation, acting as entrepreneurs. They have also been the main channel for overseas investors to establish linkages with local economies. The emergence of these bureaucratic entrepreneurs would not have taken place without an accommodating institutional environment. Since the early 1980s, China's economic structure has been decentralized. The increasing economic autonomy of local authorities has provided the institutional seedbed for the synergy of rapid economic growth in China, especially in the coastal south. China's new economic decentralization policies have not led to a fullfledged privatization or market economy. Rather, the economic decentralization has resulted in the increasing autonomy of local governments and the bureaucrats' direct involvement in local accumulation (Naughton, 1987; Solinger, 1987; Zweig, 1989; Granick, 1990; Oi, 1991; Lee, 1992; Shirk, 1993; Wang, 1994). The Chinese central government has delegated greater economic power to local officials to win wide political support of the reform at the local level and to increase revenue. 1 It was also a way for the central government to shift the increasingly unbearable financial burden to the local government. Under the new policies, local governments can retain and allo108

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cate a major portion of the revenue generated in the localities. Their authority to supervise or operate foreign trade, joint ventures, and local enterprises has also increased. Municipal and county governments can issue import-export licenses, set up independent customs, grant industrial and residential land leases under certain sizes, and negotiate investment conditions with foreign investors. Many state-owned enterprises have been transformed into collective enterprises, which are owned and run by local governments at different levels. The close linkage between expenditure and revenue motivated local bureaucrats to be more entrepreneurial and to run business "according to the market rules."2 Compared to other provinces in China, Guangdong and Fujian have enjoyed the highest level of local autonomy under the decentralization policies (Zhu, 1992). Historically, the coastal south has been on the periphery to the landlocked political and cultural centers in northern China. For the northerners, the South was the destination of political exiles and the home of pirates. Even when some southern seaports became commercially successful, the Chinese emperors in the northern capital cities rarely paid sufficient attention beyond the Yantzi River. The lack of attention by the emperor had been a mixed blessing; the southern Chinese have enjoyed greater autonomy than the northerners. The South's long tradition in foreign trade also opened up the region to the outside world earlier than other regions of China. The southerners migrated out by sea to explore opportunities in other parts of Asia and the New World; they were also the first ones to be exposed to new ideas from abroad. There has been no shortage of adventurous spirits in the history of the South. Since the current reform began, Guangdong and Fujian have been granted greater freedom than other provinces because of their peripheral location and their strong social ties with overseas Chinese capital. A series of special policies enabled Guangdong and Fujian the flexibility to take advantage of their spatial and sociocultural proximity to the outside world. The special policies and the local officials who were eager to accommodate foreign capital in turn have encouraged Taiwanese investors to establish production operations in southern China.

Cooking and Eating in Separate Kitchens The central theme of the central-local relationship, be it in a socialist or a nonsocialist country, is fiscal politics: how the revenue shall be shared and the expenditure split. The restructured central-local relations in China since 1978 are characterized by the fiscal sovereignty and responsibility of the local government.3 New Revenue-Sharing Schemes Before the reform, 80-90% of the national budget revenue in China came from taxes and profits of state enterprises, especially those in the industrial

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sector (Naughton, 1992:16; Wong, 1992:197). The enterprise hierarchy was independent from the administrative hierarchy. Under the vertical enterprise system, enterprises at the local level remitted profits directly to supervisory ministries or enterprises at the national level. Local governments could not tap on the profits of enterprises located in their jurisdictions. More than 80% of the local expenditures were redistributed by the central government for specific uses. Under the new revenue-sharing regime in the 1980s, a horizontal linkage was established between the profits of the enterprise and local government revenues. State-owned enterprises at all administrative levels paid taxes instead of remitting profits to the central government. Local governments had the authority to set the profit-retention rates of the enterprises. While the rates for both income and industrial-commercial taxes were standardized nationwide, local governments had substantial power to change them. The tax-relief granting authority was delegated to levels as low as the county. The retained profits were one of the main sources of extrabudgetary funds for the local government. Extrabudgetary funds are funds in the public sector that are not subject to central budgetary control, such as funds controlled by the enterprises and various charges and fees collected by local governments. As the central government implemented a policy known as zhigei zhengci bugeiqian ("the top gives the policy—therefore the authority, but not the funds"), this became political capital to be manipulated, providing the local government with the legitimacy to collect extrabudgetary funds through fees and surcharges. For example, when the central government announce a policy for improving education, the local governments levy special education surcharges on enterprises. Since the mid-1980s, provinces and municipalities have entered into contractual agreements (e.g., profit remittance contracts—baojyan) with the central government. Instead of paying certain percentages of budgetary revenues, local governments have paid a lump sum to the central government every year, and kept the remaining funds for the localities. The new systems allowed extrabudgetary funds to expand rapidly in the 1980s.4 In 1953, extrabudgetary funds in China were equivalent to 4% of the total state budget. In 1977, on the eve of the current economic reform, it was 35.6%. As the fiscal authority was further decentralized, the extrabudgetary funds was equivalent to 60% of the state budget in 1981, 80% in 1985 (Song and Du, 1990:343), and 95% in 1989 (Wang and Hu, 1994:40). In many provinces extrabudgetary revenues have surpassed budgetary revenues (Wang, 1994: 99). From 1978 to 1990, the Chinese local governments' share of the total national revenue grew from less than 20% to 80%, one of the highest in the world (Wang and Hu, 1994:40). The more the local surplus goes to the central government through the budgetary system, the less will be left for local governments. Therefore, the local governments were willing to grant relief to local enterprises on the taxes that were the central government's share of the revenue. Local tax author!-

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ties would grant temporary tax reductions or exemptions to enterprises in financial difficulties. In the meantime, the welfare of workers of the enterprises became dependent on the goodwill of local officials (Wong, 1988: 102-05). The abuse of the tax-relief granting authority by local governments to help enterprises avoid taxes has generated serious leakages of national tax income.5 Local governments have also expanded tax breaks and extended tax holidays beyond the limits allowed by the central government to attract foreign investors (Yuan, 1994:20). It was estimated that by 1993, 50% of the taxes due from the state enterprises were evaded. In the case of collective enterprises and private enterprises, the figures were 60% and 80%, respectively (Lin, 1993b:9). The local governments expanded their own revenue base by imposing charges on local enterprises. Charges and fees are part of extrabudgetary funds. A nationwide survey conducted in 1990 found that there were more than 50,000 varieties of charges in local China, from which local authorities collected more than RMB 20 billion yuan a year (Wang, 1994:97). Profit retention contracts between the local governments and the enterprises were violated from time to time. Local officials demanded enterprises to contribute funds for local infrastructure construction or welfare expenditures. Many enterprises, including both local and foreign-funded ones, reported that demands by local governments for extra fees and donations had increased overall production costs (Fu, 1991:8). Since 1993, the central government has issued policies to control the charges and fees imposed by local governments on enterprises, but with limited results. By 1994, a property developer in Guangzhou had to pay 62 types of fees and taxes for a project, which included 12 payments for national taxes and 50 local charges by the agencies of land use and management, housing management, water and power, industrial and commercial development, finance, tax, public security, justice, education, vegetable production, waste management, environmental protection, construction, city planning, economic planning, municipal administrative management, and so on. A project required approval from more than 110 governmental agencies.6 A city planner in Shangdong province told me that since 1995 the new fees on "contemporary/unlicensed buildings" in the city, which was initiated by the construction department, have doubled the annual revenue of the department.7 Similar situations were found in other cities and regions.8 Guangdong and Fujian have enjoyed the most generous fiscal policies. The two provinces were the first to establish the profit remittance contract with Beijing. Guangdong's financial obligation to Beijing remained fixed at RMB 1 billion yuan per year, even when the province's revenues grew from 3.43 billion yuan in 1979 to 10.78 billion yuan in 1988 (Wong, 1992:208)9 At the same time, the central government was supposed to maintain its allocation of investment funds to Guangdong for transportation and communication construction (Ho and Huenemarm, 1984:48).1() Similarly, the fiscal obligation of Fujian was also fixed in lump-sum transfers: the province remitted 150 million yuan in 1980 but received a subsidy

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of 150 million in 1981. As a comparison, for the fiscal arrangement applied to the wealthy local governments on which the central government depended for a significant share of its revenues—the municipalities of Shanghai, Beijing, and Tianjin—Shanghai remitted 85% and 90% of its collections in 1979 and 1980, respectively; Beijing and Tianjin remitted 63.5% and 68.8%, respectively, in 1980. Due to the importance of these remittances to the central budget, the revenue-sharing ratios were set annually, rather than fixed for a period of time (Wong, 1992:208)."

Access to Capital Under the new fiscal system, the central government has relaxed the control of credits. The provincial and subprovincial bank branches have had the authority to approve loans, which in turn gave more freedom to local decision makers in initiating investment projects. The Chinese bank branches at various administrative levels belong to two parallel systems. One is tiao-tiao, the vertical hierarchy of a specific sector. There are six major specialty banks in China under the control of People's Bank of China, namely, People's Construction Bank, Agriculture Development Bank, Industry and Commerce Bank, Bank of Communication, Bank of China, and the Import and Export Credit Bank. In 1990, the six banks had more than 120,000 branches in provinces, cities, and towns nationwide. In addition to local bank branches, there are also 60,000 credit unions in the villages and towns, employing more than 500,000 people (Qian, 1994: 144). Another system is kuai-kua-i, the horizontal linkages between banks and the government of the jurisdiction where the bank is located. In the new system, according to the principle of "integrating the vertical and the horizontal administrative systems, with the latter dominating" (tiaokwaijiehe, yi kuai weizhu), local officials can exert substantial influence over bank lending. The interest rates were as low as 0.65%—0.81%,12 the loan period ranged from 3 months to 5 years, and the size of the loan varied. Although there were regulations on interest rates, loan periods, and the maximum size of loans, there was flexibility depending on decision makers in the bank and the government (Shi et al., 1994:362). Interpersonal relations (jjuanxi) among the applicant enterprise, the town leadership, and the local bank branch was important in negotiating for loans (Liu et al., 1994:236). Local banks usually followed the direction of the local government in granting loans because the heads of the local government were directly involved in credit allocation plans of the local banks.13 The local bank needed the support of the local government to access a higher loan quota from the bank's central office. The local government heads also had the influence over the personnel appointment of the bank. Most importantly, the local government controlled housing, social services, and other support facilities for bank staff. 14 The local government can therefore assign loans to specific enterprises and to grant extension of loans (Qian, 1994:148; Wong, 1988).15 A survey of local banking operation showed that the main reason for problematic lend-

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ing was the unlimited demand for loans by local administrative heads (Fu, 1991:8). The dynamics between the banks and the local government have not remained static. Credits were tightened since the central government imposed the austerity policy in the second half of 1993. Local governments and their enterprises had to compete rigorously for the shrinking financial resources. Local expenditures and lending practices were constrained. Interpersonal con nections became even more important to obtain loans. During my fieldwork in a small town in Jiangsu Province in the spring of 1995,1 was at a banquet with the deputy governor, the deputy party secretary of the township, and the director of the local branch of the Construction Bank. The bank was one of the major funders for infrastructure in town and provided emergency loans for the township enterprises. The economic performance of the town depended heavily on the bank loans. At the dining table, the director of the bank branch, rather than the deputy party secretary, was given the seat of the highest honor. During the banquet, the director of the bank was also the center of attention, receiving nonstop compliments and toasts by the hosts and the rests of the guests. A township government official commented afterward that since most of the township enterprises in the area were heavily in debt, the local bank branches had the power to decide the economic future of the towns.16 Again, a bolder experiment with the financial system was implemented in Guangdong. As early as 1981, the Guangdong branch of the People's Bank gained the autonomy to allocate certain amount of capital and to issue shortand medium-term loans (Cheung, 1994:26). The establishment of the province's own financial institution, the share-holding Guangdong Development Bank, was approved and incorporated in 1988. In 1988, Guangdong was also allowed to develop a stock and security market, set up foreign exchange adjustment centers, and handle foreign exchange account business. The province can also formulate its own plans for foreign borrowing and issuing bonds abroad, subject to central approval (Cheung, 1994:35-39). As the austerity measures continued in 1994, the municipality of Guangzhou began to raise funds from international financial markets, either through the foreign partners of joint ventures in Guangzhou, or through the municipal government-owned Guangzhou International Trust and Investment Corporation and Yuexiu Enterprise (Hong Kong) (Lu, 1994b). Between June and November 1994, the six foreign banks in Guangzhou have provided US$380 million to local enterprises (Lu, 1994c). In addition to borrowing from abroad, Guangdong also attracted capital from other provinces in China. During the austerity years, when other inland provinces were suffering from shrinking credits, many cities and counties in the Pearl River Delta were still making expansion plans. Their budget for the expansion plans were usually two-to-five times higher than what was allowed in the central government's development plans. As the central government demanded a cool down of the overheated economy in 1993, the mayor of Dortgguan City, one of the fastest growing cities in the Pearl River

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Delta, claimed that the 33% industrial and agricultural growth in Dongguan in 1992 was not "hot" enough. The mayor's famous line was: "how can the Pearl River Delta catch up with the East Asian Four Dragons if we take cautious steps?" (Lu, 1993). The ambition of Guangdong local government was partly supported by the strategy of offering high interest rates. The interest rates were 18-20% in Guangdong (especially the fastest growing areas of the Delta), which were 8-10% higher than other regions such as Sichuan or Hunan province (Tan, 1994).17 This measure of "water flows to low lands, people move to high places, and money goes to profits" has greatly enhanced Guangdong's access to capital.18 Together with the growing level of funds from savings accounts available for bank loans and increasing direct and indirect foreign investment, Guangdong's city and county governments were able to continue with their historical projects of moving to the economic center of China.

Turning Soil into Gold: Land Development In 1987, under the new policy, Shenzhen pioneered the practice of leasing the right of usage of land to private developers. It was a fundamental shift of land policy in China, from minimum transaction of land with no monetary price of land and no time limits on the right of usage of land to a system that gives monetary value to land and allows time limits on the right of usage of land and encourages transactions in the right of usage of land. In 1992, there were 20 provinces, municipalities, and autonomous districts in China established the public land lease system. 250 cities and 2,500 towns began to evaluate their land. By April 1992, there were more than 1,500 cases of land leased in China, totaling 350 million sq m in area. The sale of land leases generated a revenue of RMB 3.1 billion for local governments. A major portion of the land leases were sold to overseas investors from Hong Kong, Taiwan, and Singapore. Between 1988 and 1992,132 million sq m of floor areas, worth US$10 billion, were sold to overseas investors.19 What made the new policies on land important for local economies is the right that the local government has had over the land, especially at municipal, district, county, and city levels, and the revenue generated from the land leases. The authority of granting land leases and development permits depended on the government's administrative ranking. For example, the municipal government of Beijing has the authority to grant development projects that require a land plot smaller than 1,000 mu (1 mu equals 0.06 hectare). For projects larger than 1,000 mu, the developer has to apply for the permit from the State Council. To avoid the involvement of the State Council, a local government may divide a project of 3,000 mu into three parts and applied for the permits separately.20 In the Pearl River Delta, the county has the authority to grant land use permits and land leases of plots smaller than 50 mu, the municipal government of Guangzhou has the authority over land smaller than 500 mu, the Guangdong provincial government has a 1,000 mu ceiling, and any projects that require a plot larger than

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1,000 mu have to be approved by the National Land Management Bureau of the State Council.21 More than one governmental agency were involved in the process of leasing land and granting development permits, such as the Bureau of Land Use Management, Bureau of City Planning, Bureau of Construction, Committee of Economic Planning, and so on. However, the very centralized power structure within each level of government has made the party secretary and governor of the county, city, or township the most important decision maker.22 Revenue from land leases in the coastal cities accounted for more than 35% of the total annual revenue of these cities in the 1980s and early 1990s. In the cities of Shenzhen and Zhouhai, where the Special Economic Zones are located, it was as high as 50%.2S In Haikuo, the capital city of Hainan province, investment on property accounted for half of the total fixed capital investment and contributed 23% of the total revenue of the city in 1991,24 In 1992, Shanghai earned US$2.65 billion and RMB 1.55 billion from land sales. The revenue from land use right sales was particularly important for the city. Unlike other sources of foreign exchange earned locally, foreign exchange earnings from the sales of land leases could be retained by Shanghai. This phenomenon of land sales serving as the major revenue source also occurred in some inland regions such as Sichuan Province. Unlike the coastal regions, the mountainous Chongqing city in Sichuan has had a difficult time attracting foreign manufacturing investment to the city. In 1990, the city government began to register and evaluate land in suburban and inner-city areas and to sell them in parcels to foreign developers. A vice mayor of Chongqing claimed that the new strategy had been successful and the land market of Chongqing was growing fast. The pace of land sales was so fast that in Shangdong Province, in the first half of 1992, more than 4,900 mu of land was leased (50% more than the same period of the previous year). In Jiangsu Province, the growth rate of land lease was 100% between 1991 and 1992.25 Deng Xiaoping's visit to Shenzhen in early 1992 strengthened confidence that the path of rapid economic growth will continue. Consequently, property market transactions accelerated. Being the hometown of Hong Kong Cantonese who are the most innovative and experienced property developers in Asia, Guangdong has advanced rapidly in the new waves of land development for commercial and office complexes, commercial housing, industrial estates, and golf courses. The new projects were mainly for the overseas markets. In 1992 there were 929 development companies in Guangdong Province, 64% of them were building for the overseas markets.26 Most of the development companies were either joint ventures of Guangdong's local governments with Hong Kong and other overseas Chinese capital or operations of local governments' total proprietary. In Guangdong, in the first half of 1992, there were 740 parcels leased out and the total area of the leased land reached 2,136 sq km, at an average annual growth rate of 130%,27 adding RMB 28 billion yuan to the revenue of the local governments (Tan and Zeng, 1994:40). Half of the newly leased land was used for the 302 economic development zones in the province,

116

Makinj} Capitalism in China

among them 257 were initiated by city and county governments (Xue & Yang, 1995:21). The land development boom in the Pearl River Delta was particularly impressive. In my visits between 1991 and 1995,1 observed the office and hotel towers shooting up in large cities. Green farmlands has been swallowed by industrial and residential complexes in the peripheries of large cities and in smaller towns. New roads and bridges were built at a breathtaking pace. The jurisdiction boundaries and administrative status of the cities and townships changed frequently to catch up with the rapid urbanization. It was impossible to obtain an accurate map of the cities or die region.28 Those towns and cities located along the Guangzhou-Kowloon Railroad, such as Zhongmutou, Changping, and Taiping in Dongguan City, have profited the greatest from land development. In 1993, Zhongmutou Town sold 11,800 residential units in the Hong Kong market, the highest record among all cities in China (Cong, 1994: 18). At the end of 1994, during the time of austerity policies and credit shrinkage, the deputy mayor of Dongguan City announced an expansion plan of 1,900 km of expressways and 23 bridges, with a total investment of RMB 6.7 billion yuan before the end of 1996; and another RMB 7.6 billion yuan for a power station to meet the two-digit annual growth rates of energy demand (Tan and Zeng, 1994:40). In Xiamen City, Fujian Province, there were 50 development companies in the city in 1990. Half of them were joint ventures with Taiwanese, Hong Kong, and Singaporean capital.29 By the end of 1993, the number of developers just for commercial housing projects increased to 330. By 1992, it was estimated that the municipal government had leased 265 parcels of land with the total area of 1,897,000 sq m. The sales contributed more than RMB 1 billion yuan to the government's revenue.30 The close relationship between the sale of land uses rights and local government revenues has made it very difficult for the central government to control land development. Most of all, with its rapidly decreasing revenue share, the central government started the value-added tax on land developments projects in 1994, of which 75% will go to the central government (Luo, 1995:39). However, the central government had to make a major concession in implementing the new tax after a series of protests from the local governments and their joint venture allies from Taiwan and Hong Kong (Zeng and Yi, 1994:41-42; Zeng, 1994:71). Foreign Exchange., Foreign Trade, and Foreign Investment Before the 1979 reform, China had experienced multiple decentralization recentralization cycles in the planning and fiscal management systems.31 However, during the previous decentralization periods, foreign trade and foreign exchange management systems remained highly centralized in the hands of the Ministry of Foreign Economic Relations and Trade (MOFERT) and the Bank of China. The 1979 reform is therefore very important in terms of the delegation of authority to local governments in these areas.

Autonomy in Local China

117

In 1981, the State Council gave ministries and localities and some enterprises the authority to conduct foreign trade. Under the Export Trade Responsibility System, provinces, municipalities, and autonomous regions signed export contracts with the MOFERT. The contract specified export volume and foreign exchange earnings (and allowable losses) the contracting unit was responsible for. If the targets were fulfilled, a portion of the additional profits could be retained by the contracting unit.32 MOFERT's monopoly of foreign trade was further eroded when local governments were given the authority to approve small- and medium-sized trade agreements and to set up foreign trade corporations to handle import and exports directly in the mid-1980s. The number of companies that were involved in import and export increased from 800 in 1987 to 5,000 in 1988. Except for a few critical commodities such as coal, food grain, oil, and steel, all other commodities can be exported and imported directly by enterprises under different ministries, trading firms established by provincial governments, or local branches of the national foreign trade corporation (Zhang and Zou, 1994:158). Guangdong received the most favorable policies in sharing its foreign exchange income with the central government. The province could keep above 1978 baseline incomes from assembling, processing, compensation trade, and joint ventures as well as from nontrade sources such as tourism and overseas remittances. It only had to remit 30% of above-baseline earning from export.33 Guangdong and Fujian were among the first to create provincial foreign trade corporations with their own foreign exchange to import and their own foreign exchange accounts in the Bank of China at home or abroad. The two provinces also pioneered setting up trading companies in Hong Kong and Macao to manage exports (Cheung, 1994:32). In addition to the control of foreign trade, provincial and subprovincial governments have enjoyed the authority of approving foreign investment projects. For those projects under US$3 million, the county government has the full authority to grant the permission. The authority of granting investment permits at each level of government varies in different areas and at different time. In the late 1980s, most county governments could approve projects under US$1 million. The municipal authorities usually have US$3-5 million leeway. By 1985, Guangdong was able to approve self-financed projects under RMB 200 million and foreign-invested projects under US$10 million that did not involve national balance and export quotas.

Material Allocation and Commodity Circulation Before the mid-1980s, allocation of materials (e.g., coal, cement, steel, timber, aluminum, and plain glass) for industrial enterprises were highly centralized. There were three levels in the system of material allocation: materials controlled by the state (tongpei wuzi), by the ministries (bugua-n wuzi), and by provinces (sanlei wuzf). Supplier enterprises had no right to allocate their own products. Since 1985, suppliers have been allowed to sell prod-

118

Making Capitalism in China

nets not included in the national economic plans. Provincial material supply companies had the primary responsibility for the allocation of supplemental materials. Materials that were controlled by the state dropped from 256 to 27 items; materials that were controlled by the ministries and mandatory planning dropped from 316 to 45 items. Prices became more flexible, and the contract system was also implemented in material supplies (Zhu, 1992: 114-115). Increasing local control of materials provided a much greater support for local governments to initiate and carry out industrial investment projects, including the ones that involved foreign capital. Similar changes have also taken place in the area of circulation. Before the reform, the commercial sector purchased its commodities (including wholesale agricultural and industrial products) from the production sector through a three-level system and on a "three-fixes" basis (fixed region, fixed object of supply, and fixed buyer). The three-fixes system broke down in 1979. The first level of wholesale and procurement was mostly in the hands of the provinces and the second-level wholesale enterprises came under the administration of medium-sized cities where the "wholesale points" in the old system used to be located. Guangdong pioneered the new system and broke down the three fixes in 1981. By 1984, four major commercial wholesalers—metal products for transport industry, electrical equipments, textiles, and general merchandise—which used to be controlled by the Ministry of Commerce, came under the control of Guangzhou Municipality (Zhu, 1992:111).

Bureaucratic Entrepreneurs Local Officials3 Direct Involvement in Accumulation The local Chinese governments' administrative functions have been mixed with their managerial ones in their relationship with the enterprises.34 As discussed earlier, China's local officials have monopolized key economic resources like credit, land, foreign exchange, and raw materials. They also possess the regulatory authority in granting tax relief and issuing investment permits. This has made the local officials the most competitive players in China's new economy. Leaders of local governments and managers of local collective enterprises have been most active and effective, forming a new class of bureaucratic entrepreneurs in the localities (Hsing, 1995). Local collective enterprises, which were owned and managed by local governments, have been growing faster than the state and the private sector in China since the reform started (Jefferson and Rawski, 1994:48). In fact, the administrative and managerial functions of the local government were often two systems in one setup. During my fieldwork in the small towns in southern and central coastal China, it was not uncommon to sec a city hall with more than 10 signs on the front gate. The signs of "Economic Development Corporation Group," "Technology Consulting Service," "Foreign Trade Consulting Service," "Tourism Service," "Real Estate Develop-

Autonomy in Local China

119

ment Corporation," "Construction and Engineering Consulting Company," "Building Material Supply Company" were hung side by side with the signs of "Committee of Construction," "Bureau of Land Management," "Bureau of City Planning," "Bureau of Industrial and Commercial Development," and "Bureau of Foreign Trade and Economic Affairs." Many of these enterprises, especially those profitable ones in the key sectors such as real estate or the industrial manufacturing, were headed by local government leaders such as the township governor or the party secretary. Local collective enterprises were also the channel to obtain loans from the banks. As I met with high-ranking local officials during my fieldwork in China, I was frequently given at least two name cards by one official. One card would identify the administrative post the official held in the government, such as director of the bureau of industrial and commercial development, the other general manager of the industrial corporation of the township. Often there was more than one business title on the second card. In a town in Guangzhou metropolitan region, the party secretary was the president of the township real estate development corporation and the general manager of the trading corporation; the township governor headed the economic development zone corporation, the construction and engineering company, and the technology consulting service.35 In some cities, the director of the city planning bureau also headed the planning and design consultants, a professional service that charged "market rate" fees.36 Examples of bureaucratic entrepreneurs are ample. A party secretary of a county in Nanjing Municipality, Jiangsu Province, had one name card with the official title for his administrative position; the other said "President of Economic Development Corporation Group" of the county. The executive party secretary was the vice president of the group. In fact, all the major personnel of the corporation had equivalent positions in the party committee. It was called "one set of horses and men, two shows" (yitao renma liangtao banzi). Reporting directly to the party committee of the county, this "corporation group" had more than 20 factories and enterprises, with fixed assets totaling US$110 million and gross value of production exceeding US$260 million (Lin, 1993). In another case, a corporation group in Shenzhen started as a pharmaceutical company in 1992. Within a year and half, the company grew into a group of more than 10 companies involved in pharmaceutical, printing, food processing, electronics, hotel, and apparel industries. The chairman of the group was also the party secretary of a county in Shenzhen. With a military background, he believed in adapting Suenzi bingfa,—The Art of War—in running business: "the market place is like battle fields, doing business is like fighting a war" (Lin, 1993). A government official from a city in Hubei Province told me that in his city of 400,000 people, every bureau in the city government owned and ran one or more enterprises. The construction committee and the housing and land management bureau had development companies, one of the most lucrative operations.37 Even for those bureaus that had no direct access to land or other key resources, all sorts of "tertiary industry" (san-chan) were established. The

120

Making Capitalism in China

city planning bureau of a northern city ran an architectural design firm, and a photocopying, typing, and printing service. The municipal construction committee of an inland city ran an architectural and building structural design company, as well as a building materials retailing business.38 There was always a karaoke restaurant across the street from or on the block next to the town hall in almost every small town I visited in the Pearl River Delta and around Shanghai. More prosperous towns also had hotel space attached to the restaurant. Owned by the local government, the restaurant was convenient for the officials to entertain their guests. Sometimes it was contracted out to individual entrepreneurs with connections. During my interviews or meals with local officials, the cellular phone carried by the township deputy governor or the director of the trade and economic development committee would constantly ring. Once, the deputy party secretary of a town in the Delta had to excuse himself for leaving a luncheon early to meet with two township leaders from a neighboring city to plan a joint golf course project. He hopped in his brand new Jaguar, which was parked near two Mercedes Benzes outside the restaurant, and took off. In a township in Wuxi County near Shanghai, the township government owned six corporation groups in construction, industry, agriculture, entertainment (including a karaoke bar and a dancing club), service and commerce, and foreign trade. Each of the corporation groups owned several enterprises. Four of the six groups were headed by the deputy township governors and deputy party secretaries as the president and vice president of the groups.39 Among them, the industrial group contributed more than 70% of the total tax and fees collected from the six groups.40 In the early 1990s, the central government forbade local government leaders from heading local enterprises (tuo-gu, cutting off the connection). However, the phenomenon of bureaucrats playing multiple roles in local politics and economies was still prevalent in lower-level local governments. Even for those bureaucrats who have already been tuo-gu from the enterprises, or those enterprise heads who have been tuo-gu from the government posts, the interpersonal relationships established among local political elites remained tight and effective.41 As a result of the local government's direct and indirect involvement in accumulation, the state bureaucratic system in China did not shrink as the economy became more "open." Instead, it has been expanding in the post1979 era. Local governments have been expanding in terms of the number of governmental agencies and the number of government employees. Under the decentralization policies, various national agencies, banks, and customs offices began to set up local branches and offices in lower ranking government jurisdictions.42 During the "Economic Development Zone" rush in the late 1980s and early 1990s, it was estimated that there were more than five thousand new economic development zones in China.43 For every development zone there was a corporation, under which there were trading, construction, planning, and other service enterprises. All of them were governmental operations.44 Collective enterprises directly owned and run by government agencies added another significant item to the list of government organizations.45

Autonomy in Local China

121

Financial Responsibilities The increasing fiscal autonomy was accompanied by an increasing financial responsibility of local authorities.46 Indeed many of the local bureaucrats have been highly motivated to exploit the new economic opportunities for their personal gains. Yet the motivation also came from the greater financial responsibility that the central authority has shifted to the local governments. Along with the new sources of revenue and extrabudgetary schemes, local governments were required to be self-sufficient financially. Additional revenues were to be sought to fund the expenditures on infrastructure construction, nonagricultural development in rural areas, town planning, subsidies of food and consumer goods, plus the increasing local shares in the areas of social welfare, education, and public health. For example, from 1979 to 1988, Guangdong invested RMB 3 billion in building 1,200 bridges, of which only 6% came from the central government; RMB 14.7 billion in education, of which RMB 100 million was from the central government (Zhu, 1992:101). According to my interviews with the deputy governor and the party secretary of a small town in the greater Guangzhou area, the township enterprises—many of them were joint ventures with Taiwanese and Hong Kong companies—contributed 70-75% of the total revenue of the town in 1992. The revenue from the state budget covered only the basic salaries of the state cadres and schoolteachers in town.47 In another interview, the deputy party secretary of a town in Wuxi County (near Shanghai, in Jiangsu Province) complained thaishangmian ("the top") imposed an increase in schoolteachers' salaries and improvement of the drainage system and the equipment in the local clinics, but did not increase the budget allocation to the township for the additional expenditures. Therefore, the towns and the villages had to foot the bill that was promised by the central government.48 In his research on rural townships in Jiangsu Province, Samuel Ho (1994) suggested that the state budget allocations were sufficient only to support the government bureaucracy and to pay for social services.49 Compared to the township, the village is more dependent on the extrabudgetary revenues, because villages do not receive any allocation from the state budget. Therefore village-owned enterprises are even more important to the village government.50 Table 5-1 is an example of the revenues and expenditures of a township government in Jiangsu Province. Tables 5-2 and 5-3 are other examples from the Pearl River Delta, Guangdong Province. There were quite a number of cases in which welfare services and public works were much improved as the local government gained greater autonomy. In the city of Shunde, one of the Four Little Ttj^enm the Pearl River Delta, it was reported that the revenues generated from the rapidly expanding collective enterprises have made it possible for the city to build sufficient transportation and telecommunication systems. New schools were built. The city government has even provided funds to local youths for free college education. Similar stories were also told in other cities and towns in the Greater Shanghai region.51

122

Making Capitalism in China Table 5-1 Receipts and Expenditures of a Township Government in Wuxiang County, Jiangsu, 1990

Sources of revenue

Amount (in 10,000 yuan)

Tax 331.70 Industrial and 263.00 commercial Agriculture 68.70 Budget 55.35 allocation

Funds saved by the township

Educational surcharge Collected from township or village enterprises Collected from private enterprises Road construction surcharge Total

172.80

35.27

Percentage of total revenue 54.36

9.07

28.32

5.78

31.00

Expenditures

Amount (in 10,000 yuan)

Percentage of total expenditures

Industrial investment

52.56

8.75

Agricultural investment Road and bridge construction Farming machinery Education and Health Wages of teachers Repairing school buildings Social welfare Public health Administration

65.00

10.82

10.98 2.17 88.43

14.72

Civil administration

2.26

0.38

Remittance to the provincial government Total

331.70

55.23

600.60

100.00

62.00 3.00

60.65

10.10

37.00

10.50

4.27

15.00

2.47

610.12

100.00

Source: Peng, 1994, pp. 33. Reprinted by permission.

Local officials also received direct personal benefits such as a large bonus in addition to their salary, generated from the profits of the township and village collective enterprises. Given the low basic salary provided by the state budget, the bonuses and allowances of officials had to come from the extrabudgetary revenue. In most cases, bonuses and allowances greatly exceeded basic salaries. The fact that local officials' incomes were directly linked to the local revenue has mobilized local officials to promote economic dcvcl-

Table 5-2 Revenues of Heren Township in Guangzhou Municipality, Guangdon, 1989-1994

1994

1993

1992

1991

1990

1989

Extrabudgetary revenues (%) Township share Industrial/ commercial tax Transfer Extrabudgetary and self-raised revenues (%) Agriculture fees Education surcharge

3.5 1.6

14.0 2.3

8.1 5.6

11.9 6.3

8.1 4.9

10.2 n.a.

5.8

2.1

1.9

2.4

6.2

12.1

0.2

0.3

0.6

0.9

1.3

0.6

0.4

0.4

1.1

1.3

Contract fees from township enterprises

18.3

23.6

49.0

60.3

58.6

32.5

Contract fees from village enterprises, including real estate firms Family planning fees, including fines Village collection income

64.1

53.6

23.8

5.1

11.1

8.6

1.2

0.5

1.1

1.0

3.3

5.4

0.4

0.5

1.1

0.8

5.6

18.8

3.5

1.7

5.5

5.1

4.2

1,895.3 1,387.5

531.3

315.3

279.5

13.69 334.7

Other collection income Others Total (10, 000 yuan)

n.a.

Source: Li and Chen, 1996:16. Reprinted by permission. Note: The name of the town is fictionalized.

n.a.

n.a.

n.a.

n.a.

11. a.

3.5

n.a.

124

Making Capitalism in China Table 5-3 Expenditures of Keren Township in Ghangzhou Municipality, Guangdong, 1989-1994 1994

1993

1992

1991

1990

1989

Administration (%) 23.3 Agricultural 2.7 investment (%) Infrastructure (%) 21.3 Capital 21.8 construction (%) 1.6 Family planning (%) 10.2 Social welfare (%) 3.1 Interest payment (%) 6.7 Education (%) 9.4 Others (%) 1,653.3 Total (10,000 yuan)

23.7 3.5

36.6 2.4

41.2 3.1

59.2 3.1

24.0 1.8

30.8 2.9

6.3 4.2

4.7 n.a.

2.0 n.a.

13.2 15.4

3.5

10.7

14.5

11.4

18.1

8.9 3.8

11.7 8.2

10.1 7.6

9.6 5.7

5.3 3.4

12.2 10.7

17.7 2.2 511.3

n.a. 2.6

1,309.8

332.5

n.a. n.a.

254.6

10.2 8.7

356.6

Source: Li and Chen, 1996:16. Reprinted by permission. Note: The name of the town is fictionalized.

opmeiit more earnestly. Although there was a standard salary scale the real income levels of local officials varied across cities and towns. A township official I interviewed in the Pearl River Delta used government officials' income levels as the measure of economic growth of the towns in the Delta.52 The local government can set the ceilings for nonwage bonus for employees of the collective enterprises and local government institutes. Between 1978 and 1989, while the nation's total wages increased by 460%, bonuses registered a 4,525% increase (Wang, 1994;103). While the basic, budgeted salaries of a state cadre at the township level were between 800 and 1,200 yuan per month, it was estimated that the real monthly income of a state cadre in the Pearl River Delta was between 6,000 to 8,000 yuan. In the prosperous towns around Shanghai, it was around 4,000 yuan. 53 The pay rates of the cadres in a village in Jiangsu Province are shown in Table 5-4.

Bureaucratic Entrepreneurs in Southern China In the first 15 years of the reform in China, Guangdong and Fujian enjoyed the most favorable policies granted by the central government. The "special policies and flexible measures" (teshu zengci tanxin0 cuoshi), which led to a high-level local economic autonomy, predominated from 1979. However, since the 1990s, especially after Deng Xiaoping's legendary visit to Shenzhen in 1992, the slogan has changed to "opening up in all dimensions" (quanfafifiwei kaifcinfj). Special policies were no longer as much a decisive factor for growth in individual provinces and municipalities. Many

Autonomy in Local China.

225

Table 5-4 An Example of Pay Rates of Village Cadres, Jiangsu, 1991 (in RMB yuan)

Post Party secretary Chair of economic cooperatrive Chair of village committee Village accountant

„ . Performance pay Basic annual Base Performance salary point points

pay

Bonus

_, . Total annual salary

1,200

1,000

94.1

941

3,721

5,862

960

1,000

94.2

942

2,605

4,507

960

1,000

91.6

916

2,605

4,481

960

1,000

93.3

933

2,605

4,498

Source: Liu et al., 1994:234. Reprinted by permission.

government officials from different regions in China admitted in interviews that Guangdong's rapid growth owes as much to the special policies as to many other advantages it has enjoyed, such as opening up the economy earlier than other regions, with the help of Hong Kong cousins. Also, Guangdong's officials have been known for their recklessness to "yongzu zkengce," that is, maximum exploitation of policies;54 to try whatever is not forbidden, instead of passively implementing what is allowed. The entrepreneurial spirits of Guangdong's officials were summarized in a modern slogan: "move quickly when the green light is on, move slowly when the yellow light is on; find a detour when the red light is on" (yudao ludeng kwaibuzou, yudao huangdeng manbuzou; yudao hongdeng raodaozou). A provincial cadre from Fujian recalled that when Guangdong started the toll systems on major expressways, visitors from other provinces refused to pay. But it has become a well-received strategy adopted by many other provinces.55 The south has set up an example of reform for the other regions in China to follow. After the austerity policies were imposed in 1993, the mayor of Guangzhou announced new infrastructure construction projects, proclaiming in a press conference that "Guangzhou will not hesitate to become the model for the rest of the nation" (Guangzhouganwei tianxia xiari) (Liang, 1995:91). As is shown in Table 5-5, the share of the utilized foreign capital in small cities and towns has been steadily increasing in the Pearl River Delta, accounted for 67.1% of Guangdong's total foreign capital inflows and 16% of the national total between 1980 and 1993 (Xue & Yang, 1995:21). One might trace the roots of the entrepreneurship of Guangdong's local officials to the region's long tradition in foreign trade and the influence of

126

Making Capitalism in China Table 5-5 Spatial Distribution of Utilized Foreign Capital in the Pearl River Delta, 1980-1993 (in US$ million)

Mega city (1) Large cities (2) Medium-sized cities (3) Small cities and counties (4) Total

1980

Percentage

1993

Percentage

1980-1993

28.34 26.57

28.1 26.3

847.55 1432.17

13.2 22.3

2936.98 5919.29

14.6 29.5

22.22

22.0

1162.62

18.0

4266.25

21.2

23.67

23.6 100

2985.40

46.5 100

20094.02

LOO. 80

6427.74

6971.50

Percentage

34.7 100

Source: Xue and Yang, 1995:22. Reprinted by permission. (1) Guangzhou, with a population larger than 1 million (2) Shenzhen, with a population larger than 500,000 (3) Zhuhai, Foshan, Jiangmen, Huizhou, Zhaoqing, with a population between 200,000 and 500,000 (4) cities with a population smaller than 200,000

Hong Kong. More importantly, Guangdong was among the first provinces to further decentralize the fiscal autonomy to the subprovincial government. The progressive revenue-sharing responsibility system (cengceng chaizheng shangjiao dizeng baqgan tizbi) was adopted to implement the revenue-sharing agreement between the provincial, county, city, township, and xiang governments. The xian and township governments remit a lump sum annually to the county, city, or municipal district; the city, county, and municipal district government, to the municipal or the provincial government. The incentives that the central government have provided to the province to explore new sources of revenues were passed down to each level of local government under Guangdong Provincial government. Government agencies at the provincial, municipal, city, and county levels have had the authority to grant permission and favorable investment conditions to foreign investment projects ranging between US$3 and $30 million (Yang, 1994:74-75). As a comparison, official of die structure reform committee in a city of Hunan Province complained that although in Guangdong, the county governments could export and import on their own and had customs offices in most of the second-level cities, counties in Hunan had much more limited autonomy in those areas.56 The decentralization of fiscal authority from the provincial to subprovincial governments in Guangdong has had a strong political implication. In China, most of the "special policies" were informal and noninstitutionalized bargaining between the central government and the provinces (Wang, 1994:92-96; Zhang and Zou, 1994:163). The central government would negotiate with individual provinces on an onc-on-onc basis, each province would get a tailor-made package of annual remittance and special contributions to the central government, special governmental matching funds, a grace period for the payment, delayed implementation of new tax policies, and so

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127

on. Each year the terms were to be renewed. The relationship between the central and the local governments is decided on a political rather than constitutional basis. The fiscal arrangements between the central and provincial governments, and those between the provincial and subprovincial governments, are subject to a fluctuating political climate.57 Consequently, in order to deal with the uncertainty in central policies toward the province, Guangdong provincial leaders have further delegated its economic authority to low-level local governments. The provincial government could therefore obtain the support from the counties and cities and broaden its own power basis and form a coalition of local governments with vested interested in economic reform (Cheung, 1994:22-23). Local officials in Guangdong, with the incentives to promote economic growth and a sense of urgency in taking advantage of the newly gained autonomy,58 were obliged to be more adventurous and to maneuver central policies in a highly flexible way. A pool of energetic bureaucrats with great entrepreneurship has emerged in Guangdong's cities and towns. The new criteria of assessing the performance of bureaucrats are the commitment to and the capabilities in inducing economic growth. A competent cadre is expected to find markets and funds, arrange transport, and obtain materials, new technologies, and expertise for local enterprises. Fund-raising for infrastructure construction and establishment of "Economic Development Zones" is also a demonstration of the cadre's competence.59 To meet the requirements, three kinds of capital are needed, namely, political capital, relationship capital, and competence capital.60 The following chapter will elaborate on such various forms of capital by looking at the reform coalition established between local Chinese officials and Taiwanese investors.

6

Reform Coalitions and Blood Connections

With the newly gained economic autonomy, the bureaucratic entrepreneurs in China have become the most important agents for Taiwanese investors in southern China. While the other foreign multinationals in China had to deal with red tape in Beijing, smaller Taiwanese investors had been negotiating with local decision makers who were endowed with economic resources, political authority, and social connections. The economic decentralization in post-Mao China has provided the institutional context for this highly localized process of transnational capital flows. This localized transnational capital inflow was not necessarily demonstrated in establishing local production networks. As mentioned in chapter 4, most Taiwanese manufacturers in China imported more than 80% of the inputs. They did not establish extensive backward or forward linkages with local industries. On the other hand, the Taiwanese have localized their overseas investment by exploring human resources in southern China, including the large pool of low-skilled workers as well as young managers and professionals. The cultural and linguistic affinity between the Taiwanese investors and their Chinese employees was well incorporated into the management and disciplinary schemes in the factories. The partnership between Taiwanese and the Chinese bureaucratic entrepreneurs is another dimension of localized transnational capital flows. The social and cultural linkages between Taiwanese investors and the Chinese bureaucrats were not only localized but also personalized. The interpersonal relationships, or guanxi, have interfered in various areas in the process of their negotiation: interpretation and implementation of the centrally imposed 128

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regulations on foreign investment; allocation of the locally controlled resources such as land, raw materials, and marketing channels. How did such cultural connections work in establishing the interpersonal relationships? If culture is defined not only as a static set of given values but also as a historically and institutionally situated dynamism (Ong, 1987),* how do the general cultural principles in Chinese traditions interact with specific institutional conditions in southern China, which have, in turn, provided the basis for building guanxi between Taiwanese investors and their local Chinese hosts?

Transnational Business Partnership in Local China In the early phase of their cross-straits investment, Taiwanese investors had low expectations and adopted a strategy called "two ends remain outside" (lianfftou zaiwai) for export processing and assembly. The export processing was promoted by many local officials in Guangdong and Fujian as one of the fastest ways of generating foreign exchange and providing jobs. Taiwanese firms imported material, components, machinery, and equipment to China. Chinese enterprises then processed or assembled them according to the Taiwanese firm's specifications and received a processing fee; the arrangement was called lailiao jingong or laijian zhuangpei. In some cases, Taiwanese firms provide only the design with a sample and then local enterprises make the product with local materials and components; the arrangement is called laiyang shengchan. The finished products would be exported back to Taiwan or shipped directly to the world market.2 The export-processing arrangement had the advantage of being more flexible and easier to establish. It did not require high technology or large amounts of capital, and the local officials in the county and townships had the authority to negotiate with these investors without the involvement of higher levels of government in the province. In 1989, in the Pearl River Delta region, processing businesses contributed 46% of total export value and 24% of total foreign exchange income. Export-processing investment helped provide jobs and would not compete for local materials or markets with Chinese producers. In addition, the arrangement helped Chinese enterprises to acquire foreign machinery without spending China's scarce foreign exchange. Therefore, in the first 10-15 years of the reform, export-processing investments were strongly supported by local Chinese governments.3 In the export-processing and assembly arrangements, the Taiwanese investors' contribution was mainly material supply and marketing, with limited fixed capital investment. Since the late 1980s, an increasing number of Taiwanese investors began to make longer term arrangements. They would set up joint ventures4 with Chinese enterprises owned and run by local authorities. Local officials tend to be more flexible in their implementation of investment regulations and are more willing to cooperate with overseas investors. Many Taiwanese and Hong Kong investors I interviewed agreed that it is faster and simpler to deal with the local than provincial or central authorities.5

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For export-oriented manufacturing, which most of the overseas Chinese investors were engaged in,6 speedy production and delivery is one of the most important competitive edges in the world market. The companies, particularly the small- and medium-sized companies with limited operational capital, have to bypass the formal, bureaucratic procedures and keep production and delivery moving as quickly as possible. In an interview with a Taiwanese investor in China, when I asked about the effect of the policy of three-year tax holidays for foreign investors, the electronics company owner told me that these policies are "made for fools." The more generous investment conditions were to be tailor-made through individual negotiation with local officials.7 These include simplified application procedures for project approval; more favorable tax breaks; cheaper land, power, and water; the policy of "opening one eye with the other closed" when inspecting import materials and export products in the custom; half-hearted implementation of environmental and labor regulations; allowance of a greater percentage of domestic sales; quick approval of the expansion plan of the factory, and so on. The advantage of making "flexible" deals with the low-level Chinese officials has been a major attraction to the small- and medium-sized investors from Taiwan. Some medium- to large-sized investors "would even split their investment into a number of smaller projects to avoid the involvement of higher level governments. For instance, a Taiwanese shoe company has built six establishments in different towns in the Pearl River Delta region, hiring more than 4,000 workers altogether. Yet each establishment was kept small enough, in terms of the total amount of capital, the number of employees, and the size of land used for factory buildings, in order to be qualified as a small project that could be approved by the county government. Even large projects that have been approved by the provincial, municipal, or even the central authority, were not guaranteed full support at the local level where production was actually carried out. Bureaucratic holdups could happen at any stage of the investment process, such as getting the land lease; applying for electricity, water, telephone lines, and business permits; recruiting workers; and meeting environment regulations. Consequently, the profitability of investment and efficiency in conducting business in China largely depended on the relationship the investors have cultivated with the local officials who had the economic resources and political power. Investors had to cultivate good relations with the party secretary and the township governor, as well as officials of various agencies such as the economic planning committee, the foreign economic and trade committee, public security bureau, electricity, water and telephone companies, the customs office, the public health department, the tax bureau, the labor department, local banks, and so on. The support of local officials is also important in gaining access to China's domestic markets.8 As competition in the world market became more vigorous and protectionism in the OECD markets mounted, the imperative to search for new markets became more compelling for Taiwanese manufacturers. Most of the Taiwanese shoe manufacturers I talked to admitted that

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their shift of production across the straits was motivated not only by low production costs in China but more importantly, by China's huge domestic markets.9 The manufacturing establishment was the beachhead for tapping the domestic market. On the other hand, the Chinese shoe producers have not been able to satisfy Chinese consumers' demand in terms of fashion styles and quality. Taiwanese shoemakers were very adaptive to the domestic market. China's consumer market has been highly segmented and regionalized, and there were no national retail chains. There were great: differences in customs, consumer tastes, levels of affluence and openness, foreign exchange availability, and the degree of flexibility in local policies. A highly segmented market required a more localized marketing strategy. The marketing networks were locationspecific and exclusive. A broker who was familiar with one city of Guangdong might not be as effective in another. For this reason, distributors were never exclusively granted channels for an entire province, let alone for all of China. Distribution solutions arrived at in one city or region were not necessarily transferable elsewhere. Such a characteristic in China's consumer market has been seen as a major problem to large U.S. producers and distributors who were used to larger and more homogeneous markets (Keenan, 1993). On the other hand, the Chinese consumer market has not been dominated by established brands, a situation described by a Taiwanese investor in this way: "it is easier to write on a blank paper."10 On a blank piece of paper, small firms will have a better chance to establish themselves, to the advantage of Taiwanese small- and medium-sized investors. Taiwanese shoemakers have been exploring the Chinese market through both formal and informal channels. For those who were involved in the "two ends remain outside" type of investment, which was supposed to be entirely export-oriented, Taiwanese producers still found ways of selling shoes to department stores in China and to small private shoe retailers. The average size of the sales was small, and many Taiwanese manufacturers complained about delayed payment from local buyers. Yet, as a Taiwanese shoemaker pointed out, "a pagoda is built with many grains of sand."11 Small-sized sales helped the Taiwanese shoemakers build marketing connections for the future; they also served as a testing ground of consumers' tastes.12 To sell the products to the Chinese markets, Taiwanese shoemakers needed the support of their Chinese partners, the foreign economic and trade committee, the commerce and industrial department, the commodity distribution bureau, the tax bureau, customs,13 state department stores, and other agencies in the local governments related to commodity circulation. Since the 1990s, groups of Taiwanese producers have begun to establish wholesale centers by themselves. With the permission of—or in joint ventures with—local authorities, they combined property development projects with wholesale or retail businesses in the central commercial districts of towns and cities. A Taiwan Shoe City was built in Zhongshan in the Pearl River Delta, where a large number of Taiwanese shoe-manufacturing factories were concentrated. The Shoe City was planned as a wholesale center for shoes

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made by Taiwanese-funded factories in southern China. In this case, more governmental agencies, in addition to the ones mentioned above, were involved: the economic planning committee, the city planning bureau, the land management bureau, the construction committee, the water and power companies, public security bureau, and so on. Consequently, more intensive networking with local officials was needed.

Gift Exchange and Guanxi Building Developing guanxi networks may corrupt local officials. For example, the owner of a Taiwanese shoe factory located in a fishing village two hours from Shenzhen told me that he made a deal with the local party secretary of the county that if he helped to pay the remittance for the county to the provincial government, the county customs office would not inspect the company's exports and imports too closely, nor would the tax bureau audit its accounting books. The officials would "open one eye, with the other closed" when they visited the factory.14 However, a rigid moral judgment may be misleading in the analysis of local politics in transnational capital flows; and a sweeping categorization that a practice is corrupt may distort our understanding of a more subtle cultural phenomenon. Many of the Taiwanese investors I interviewed agreed that, compared to other overseas production sites, China is more attractive to them because of the cultural and linguistic affinity.15 They added that the cultural affinity was particularly important in establishing guanxi with the local officials. The significance of guanxi is by no means unique to Taiwanese investment in China. The question is, if guanxi is a key factor in the success of Taiwanese investment in southern China, and the cultural affinity between the investors and their local agents crucial for the establishment of guanxi, what are the cultural principles for establishing guanxi in this particular institutional and historical context? What are the ways of exchanging gifts and favors in the process of building guanxi between Taiwanese investors and local Chinese officials?

Flexible Interpretation and Implementation of Policies As discussed in chapter 5, the Chinese central-local relationship is a process of constant bargaining. The relationship is politically rather than constitutionally defined. Most of the terms of obligation and rights are tailor-made between the central government and individual localities. Documents and policies concerning the matter are usually written in ambiguous language. The ambiguity provides the space for contingent interpretations. In fact, the flexible interpretation and implementation of policies has long been a part of the Chinese bureaucratic tradition, along with the other tradition, that is, the tension between the central and the local governments. Local Chinese officials since the imperial period have been skillful in avoiding the scrutiny of the central government while not creating direct

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conflicts with it (Min, 1989). They were able to make decisions based on what higher level officials would not oppose rather than what they would allow.16 In modern China, it is called "looking for holes" (zuan kong-zi\ the philosophy being "if something is not explicitly prohibited, then move ahead; if something is allowed, then use it to the hilt" (Vogel, 1989). The application of such a strategy is demonstrated by the flexible interpretation and implementation of the regulations imposed by the higher level governments. A modern Chinese idiom reflects well such a trend of superficial compliance of top-down policies and the tension between the high- and low-level authorities: "policies from the top, counterstrategies at the bottom" (skangyou zhengce xiayou duice). It means that whatever the policies from the top may be, there is always a way to implement them to the benefit of the localities. The degree of local officials' autonomy and the disparity between the written regulations and their actual implementation depends on how well such a culture of superficial compliance is developed and how fiscally independent the local government is. An official in charge of foreign trade and investment in Xiamen, Fujian Province, explained to me why Guangdong has been one step ahead of Fujian in economic reform: ". . . leaders in Guangdong have been more willing and daring to push beyond the limits of the policies imposed by the central government. They are always ready to try out new strategies before they receive clear signals from Beijing."17 Facing the problems of rapidly declining tax revenue to the central government, Beijing began to limit local governments' control of credit and their project approval authority in the early 1990s. However, in a city district of Guangzhou, an official of the land management bureau explained that since the central government imposed the austerity policies in 1993 and reduced the size of land that the district government could lease to developers, the bureau had adopted the strategy of "small is beautiful," dividing the land for one project into several smaller lots, and granted land use permission individually, in order to avoid the lengthy process of approval by the municipal government of Guangzhou.18 The practice of shangyou zhengce xiayou duice is rooted in the bureaucratic tradition in China. It blossomed in the institutional context in which opportunities for local accumulation, including local governments' increasing fiscal authority and influx of foreign capital, were present. Under the stated policies that were supposed to be applied universally, the actual investment arrangements were mostly tailor-made for individual foreign investors. As a Taiwanese investor forthrightly put it, "No favorable investment policies issued by Beijing can be as favorable as the special deals I made with the local officials."19 Taiwanese investors obtained favorable investment conditions from local officials on the basis of their understanding of such a flexibility in the interpretation and implementation of policies. A Taiwanese investor suggested that the way he dealt with mainland Chinese officials was very similar to the way he used to deal with Taiwanese officials.20 Given the loose control of the central government on small business and the negotiable policy imple-

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mentation in Taiwan, Taiwanese investors have found few "cultural barriers" in "finding the holes" (zuan kong-zi) in southern China. Lower levels of government have a greater degree of flexibility. Tax rates have been one of the most critical investment conditions. The standard enterprise income tax rate of foreign-funded joint ventures was 33%. This tax was totally exempted for the first two-to-three profitable years. For the following threeto-four years, half of the tax would be exempted. In many cases, the tax holiday was extended or tax rates were kept at 15%, after the tax holiday was over. Most of all, the definition of "profitable year" is highly negotiable.21 Other favorable investment conditions that local governments had the authority to grant to foreign ventures entailed profit transferring out of China; relaxation of the rules on foreign exchange balance; reduction of power and water fees and land price for factory buildings; exemption of the import license; provision of cheap loans; relaxation of restrictions on hiring nonlocal workers; exemption of social welfare contributions; and so on. For imported inputs used for export production, manufacturers could claim 30-70% importtax exemption. For those imports designated as "high-tech" or "special" items, the tax rate was 15-20% lower than for standard items. Customs officials had the authority to decide whether the imports belonged to the "special" or "high-tech" category. Again that left space for flexible definition. Another example is the loan policy of the banks. There were no upper limits on the size of loans to be granted to enterprises, nor were there any clearly stated policies on the criteria for loan approval. Therefore, the directors of the local banks enjoyed a high degree of flexibility in granting loans and setting interest rates and terms.22 In the area of property development, the floor area ratio (FAR) was crucial to the profitability of a development project. Usually a range of FAR, rather than a fixed figure, would be applied to different types of development. For example, FAR for the city center area may be between 3.8-4.5. Within that range, the exact ratio would be decided on individual basis. Or, if an additional open space for public use is provided by the project, then its FAR could go beyond the upper limit of 4.5. All these gray areas were open for negotiation. It is in this tradition of flexible interpretation and implementation of policies and regulations that the building of guanxi through gift exchange is practiced. Gift exchange is not unique to the Chinese culture. Compared to market exchange, gift exchange is much more personalized, embedded in ongoing personal relations. The meaning and the effect of the gift depends on who gives and who receives, what their relation is and will be. Unlike market exchange, the value of the gift is not always measurable in monetary terms, and gifts have a utility independent of their monetary value. Meeting the expectation of reciprocity and fair return is crucial in sustaining the exchange relationship. The timing of returning the gift is not as fixed and does not require immediate return. In fact, an exchange relationship does not come to a clear end after one transaction; it is an indefinite indebtness between the participants (Malinowski, 1961; Sahlins, 1972; Tsao & Zhang, 1992; Yang, 1994).23

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Although the gift economy is not unique to the Chinese society, there are differences in the ways that gift economy is executed with the culturally and institutionally available tools and media. In the case of Taiwanese investment in southern China, the general principles of gift exchange were applied in the interaction between Taiwanese investors and local officials.

Measurements of the Value of the Gift Gift exchange is not always an equal exchange in quantitative terms and the exchanged "gift" is not necessarily of material forms. In fact, the art of gift exchange is to maintain the balance between offering material favors and demonstrating friendship and loyalty as the basis of mutual trust, which goes beyond immediate material benefits. Although mutual benefits between gift givers and receivers are the ultimate principle, the way to achieve it is more intricate; and it is hardly as straightforward as buying privileges with cash. It takes cultural understanding to perceive where the balance point is and what the value of the gift is in nonmonetary terms. In many cases, the nonmaterial form of gift is even more valuable than the material gifts, if the former expresses a greater degree of loyalty. For example, an Chinese official might ask a Taiwanese investor to be the sponsor of his or her child who planned to attend a U.S. university. The Taiwanese investor might or might not have to take the financial responsibility for the child, but being a sponsor involves greater risks than offering some luxurious gifts or cash.24 A favor that requires a certain degree of risk is far more effective in winning the appreciation and trust of the receiver; and it paves a smoother path for future collaboration. What matters is not just the gift itself but also the message carried by the gift. Gifts also have a use value independent of their monetary value.25 A rare, but not necessarily expensive, gift that cannot be bought "just because one has the money" demonstrates greater sincerity and respect for the gift receiver. If it is something that is not available in the market and cannot be obtained without making special efforts and going through special channels (again that takes another personal network to gain access to the channels), such as a specific type of herb medicine that is found only in the deep mountains in the northeastern China, and the medicine happens to be just what the mother of the gift receiver needs, the gift will be much more valuable and appreciated. Consequently, a return of the favor of even greater value can be expected. A Taiwanese investor told me that when he visited the town where his factory was located, he would bring to the executive party secretary a copy of poems by his favorite poet; in another case it was a brand-name tennis racket for the chair of the local construction committee who just started the sport with great enthusiasm. Yet another case, a diamond necklace was presented to the wife of the director of the planning bureau during her all-expenses-paid trip to Hong Kong.26 The monetary value of these gifts varied greatly, but what was consistent in all cases was the thought involved in the gifts and the effort in finding out die receiver's interests. This leads to the next principle in establishing guanxi, that is, the understanding of culturally defined time.

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Efficiency, Timelessness, and Timing In market exchange, the object to be exchanged is detached from the persons involved in the exchange. Therefore, the exchange can take place between strangers. In gift exchange, the persons who are engaged in the exchange relationships determine the nature of the exchange. Unlike the market exchange, gift exchange cannot happen between strangers; it only happens between those who have a preexisting interpersonal relationship, such as classmates, people from the same native place, relatives, or those who were sent down to the country during the cultural revolution. When such a preexisting relationship is absent, potential participants would be linked up through a mutual acquaintance and establish a basis for the gift-exchange relationship. A Chinese official admitted that in southern China one can find brokers, usually retired government officials, with multiple social networks to penetrate into the local social circle and to initiate the connection.27 Another Guangzhou official pointed out that the slow yet necessary initiation of the connection explained why the restaurants and karaoke bars were always busy in the city.28 When dining and wining together, the potential participants of the networks would "measure one another's weight" (chenchenfenliang) and "assess one another's bottom line" (mo-di) by chatting about family, common friends, and personal history to help the participants estimate one another's command of monetary as well as sociopolitical capital. The Chinese culture of group drinking is highly elaborated, and almost ritualized in business and political cultures. Those of lower status and who have favors to ask from those who have the power to give the favor are expected to take the initiative and propose toasts to others. They also drink more to show respect and demonstrate sincerity. The person who does not hesitate to drink as many shots as demanded is praised as a "real man," a "true friend," and "willing to open his heart." The person who brags a lot but tries to avoid drinking is denounced as "non-committal," "not a team player," and "calculative." The aggressive type will propose toasts to others frequently to challenge their capacity for alcohol; whereas the mild and introverted type will accept challenges quietly without avoiding drinking too much. Also, accepting toasts and drinking for friends who have limited capacity is considered a gesture of friendship, or sometimes subordination. Usually a low-status person will drink for his superior when someone else has proposed a toast to the superior. As the drinking proceeds, the personality of each participant and their relationships will be revealed. For those who are planning to do business together, the drinking provides the best opportunity to observe one's potential partners. Although good interpersonal relationships facilitate the investment process and move things forward quickly and more efficiently, it takes time to build such relationships. When an investor boasted of being able to "solve any problem immediately by placing a phone call to the party secretary or the chief customs officer," it meant that a vast amount of time and energy had been invested in advance before such "efficiency" was reached. Efficiency

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requires patience to allow a trusting relationship to grow gradually over time. It is not just "getting things done in the shortest possible time," but establishing an effective interpersonal network that can facilitate the process of investment at critical moments. Gift exchange is also a continuous practice. Unlike the market exchange, the relationship between the participants of gift exchange does not end immediately after the exchange is completed. One is expected to return the favor that is given to him or her, which is seen as repaying the "debt" of favor. On the other hand, those who give others a favor see it as a form of saving. Eventually the one who has received the favor will have to repay the "debt" of favor, with interest. It is important to pay back more than what one has received, as a Chinese idiom says, "When given a foot, give back a yard." Since gift exchange is not always an equal exchange in quantitative terms, the "favor debts" rarely get cleared in one transaction. As a result, favors are accumulated and the relationships strengthened as the exchanges of gifts/favors continues. An investor in the Pearl River Delta pointed out that it will be seen too pragmatic to stop the communication immediately after a single favor exchange is completed. Since no one knows when the needs for favors will arise again, it is the best to keep the visits and small gifts flowing for those times of need on a more regular basis, especially in the three major Chinese festivals of the year: New Year's Day, the Dragon Festival, and the Mid-Autumn Festival.29 A Taiwanese investor commented that many foreign investors in China were overwhelmed by the investment opportunities presented by the competing local cities and towns, and they tended to fly constantly from city to city all over China. But he decided to concentrate in one area because the establishment of interpersonal relationships demanded much time and energy, and the effectiveness of the network depended on the extensiveness of the network in one particular area. It is more effective to spend the time building networks in one area than to spread too thin. The shrewd Taiwanese investor said: "If you hop from Dalian to Shanghai, then on to Shenzhen in one week, you will have a hard time even remembering the names of the people you met. The names in Dalian will disappear in the air even before you arrive in Shanghai. How can one make trustworthy friends this way?"30 According to a Taiwanese investor, the least effective way of making friends with local officials is to shower them with cash or luxurious gifts right at the beginning or to present the gift in a once-and-for-all fashion. Instead, a "constant drizzle" (xiaoyu changxia) will facilitate a more stable and lasting relationship. To present the gift in advance before asking for favors is also important. A Taiwan-China joint venture in Shanghai that had a number of trucks frequently delivering materials and finished products had managed to maintain a good relationship with the traffic police, who belonged to the public security bureau, in town. The company would present imported liquor or other gifts to the public security bureau a few days before each of the three major Chinese festivals of the year. Last Chinese New Year, the company manager forgot to send the gifts. As a result, right after the New

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Year, their trucks started getting speeding tickets. The manager got the message and brought the gifts to the bureau. But the gifts were returned. The policemen told the manager that they could not accept the gifts because "it is obvious that you are trying to bribe us."31

Public Versus Private Domain It is often argued that the Chinese do not see the public and the private domain as two polar opposites. Instead, the public and the private are on a continuous spectrum (Yuzo, 1994) or a concentric circle. The public domain is a congregation of private, individual entities, and there are different levels of publicness. Therefore, the expansion of the private domain is not always considered as an invasion of the public domain but an adjustment of the level of publicness (or privateness) in different situations. Such statements can be overly generalized. Nevertheless, the way Chinese local officials deal with overseas Chinese investors provides the qualification of the general observation. As China has been transforming from a socialist system in which the public sector is pervasive, and a clear legal framework redefining the "private" is yet to be built, border crossing between the public and the private domain has been a matter that mixes legal considerations with culturally informed interpersonal relations. Also, it is not the individuals, but the individual and his or her family together, that compose the private domain. The boundary of the family defined the private domain and is not separable from the individual. A gift for the children, the parents, or the spouse of the target person was as effective as delivering it to the target person. Therefore, as in the example presented previously, the sponsorship for the official's son who was studying abroad, or the medicine for the mother of the official, was considered a valuable gift to the official. True friends are those who are willing to risk consequences of intruding into public orders. If the Chinese official decided to give a favor to a Taiwanese, he would say, "I bent the rules for you, because I see you as a friend." By the same token, one might feel offended if one's request was rejected for the reason of "a rule is a rule." The rules can also be used as an excuse when the official is not prepared to grant the requested favor. Therefore, rules that are supposed to define the right and obligation and draw the lines between the private and the public can be manipulated according to the whim of the official. In the negotiation process between Taiwanese investors and local Chinese officials, the benefit that an official acquires from offering a favor to an investor is not necessarily seen as an act entirely for personal gains or an invasion of public interests, if it is arranged properly. For an investor, the art of offering favors to individual officials is not to put them on the spot. It is important to take care of the latter's colleagues and not to embarrass any individuals. On the other hand, the investor would need some special friends to rely on when the need of special help arises. The key is to maintain a good

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relationship with everyone in an institute while at the same time making special efforts in building stronger relationships with selected ones. The public and the private domain are often intertwined, and private and public interests are not always in conflict. A Taiwanese investor commented that the best way to maintain and to enforce the relationship with an official is to offer him or her personal gains while at the same time benefiting his or her institute.32 For example, if a state-owned factory needs new machinery, the broker is more likely to get the contract if he or she can arrange a trip for the factory's decision makers to visit the foreign equipment supplier. Those who get to represent the customer factory and take the trip gain a direct benefit of a free trip abroad, and therefore owe a favor to the broker, while at the same time the entire factory benefits from getting more information about the new technologies. In fact, a U.S. equipment supplier told me that a free trip to visit the suppliers abroad has been part of the deals he negotiates with his Chinese customers. It has been built in the system as a routine, and his company has had a long-term contract with a travel agent who arranged all the trips for his Chinese customers. In the typical one- or twoweek visit to the United States, there would be a one-day visit to the supplier's factory; the rest of the time usually included trips to Las Vegas, New York, Los Angeles, and so on.33 In another case, a Taiwanese developer and a collective development company owned by a northern city formed a joint venture to develop a piece of land in the center of the city. In the agreement, the Taiwanese investor was to raise the funds for the project and the local development company was responsible for obtaining the land lease and the development permit and moving residents to other sites. The project was a residential and commercial complex. To obtain the full support of the government and to get the land lease at the lowest possible price, 12 units of the new apartments were promised to each of the government agencies with authority over the project, such as the land management bureau, the urban planning bureau, and the construction committee. In the meantime, those officials who were directly involved in the project could "purchase" units at extremely low prices.34 One of the most widely used terms in the government is "collective discussion." The official in charge of granting import licenses might tell the applicant, who wishes to have more generous tax breaks on import materials, that the case needs to be discussed collectively with his or her colleagues in the department. This means that the favor expected from the applicant will be shared by a group of officials at different ranks, as will the risks involved in granting a special tax break to the applicant. Public welfare also was used as the screen for private benefits. In the communist era, the usage of "the Public" has been mixed with "the People." Shrewd local bureaucrats often used the slogan of "serving the people" to cover the gray zone in their dealing with overseas capital. In the process of obtaining land leases for property development, well-connected developers often could get the most desirable lots at low prices by obtaining "memos" (tiaozi) from someone on the top. For example, after the friendship between

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a developer and the party secretary of the county is firmly established, the party secretary might "pass a memo" (xia tiaozi) to the land management bureau, requesting it to grant the lot to the developer. In the memo, the secretary might have stated that "Mr. Li is a patriot who has committed himself to the construction of his mother land and hometown. Please give a very special concern to his requests." The presence of a memo signed by the local party secretary or some leader of a higher-level government or party organization demonstrated the developer's endowment of political capital. The connections usually gave the developer the priority in choosing a welllocated lot, a trouble-free review of his development plans, or a bargain in die land lease price. If the price that the land management bureau asked for was too high for the developer, the developer's friend in the party might talk to the land bureau about a lower price, because "If we charge him too much, our county might lose the precious foreign capital to the neighboring county"—A reason that no one could reject as benefiting private interests.35 These local officials demonstrated the skills of using (or abusing and misusing) the sacred concept of the public and "the people" in the private giveand-take. A story about the legal contracts told by a Taiwanese investor in Shanghai shows the importance of detecting the fine line dividing public from private, and another related cultural principle, that is, "losing face" and "giving each other face"36 in the public. One problem frequently raised by foreign investors in China has been inadequate legal institutions to protect the interests of foreign investors. Many complained that even with the promulgation of the contract law, foreign investors still had frequent disputes with their Chinese partners and government officials over contract negotiation and compliance. This Taiwanese investor commented that Western business people are too superstitious about a sheer piece of paper. When a contract was breached, Westerners would keep insisting that the contract be honored, or demand compensation according to the law. " . . . [the Western business people] had no patience for looking into the matter to find out what caused the contract breakup and to find a midway solution. The worst possible scenario, which happened to be the favorite approach by Western investors, was starting the legal process and taking the partner to court." The legal action was the least recommended by the Taiwanese because: "when you bring in the legal authority you are denying the possibility of solving the problem without causing loss efface in the public for individuals; when you sue the partner company, you are actually breaking up the relationship with the individual who handled the deal in that company." Not only was the relationship with that person damaged permanently, the investor's social credit also was lost in the business-bureaucrat circle for his insensitivity to the cultural mores.37 On another occasion, a public forum was organized by the foreign economic and trade development committee of a southern city for foreign investors to "solve the problems face to face." The mayor, other high-ranking officials, and the press also were present. According to a Taiwanese investor

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who attended the forum, during the meeting the Western business representatives complained openly and directly about the problems of the government in dealing with foreign companies. The Taiwanese commented that " . . . the Western businesspeople took the forum as a grievance session and an opportunity to make their voice heard by the high-level decision makers in the Chinese government. They also thought they could use the press to force the Chinese partners to do things their ways." But by criticizing the officials in charge of the foreign trade and investment in the public and in front of their supervisors and the press, the critics actually made the officials " . . . so embarrassed that they would neither admit their mistakes nor make efforts to improve the situation."*'1'

Hidden Messages in Spoken Words As mentioned previously, when asked about the major advantage of investing in China compared to other overseas production sites in Southeast Asia, most Taiwanese investors cited the common language they share with local Chinese. In gift-exchange relations, participants need to express their expectation explicitly enough in order to obtain satisfactory results. Yet it is also important to demonstrate that the exchange relationship is not just based on the immediate material benefits but on a long-term friendship. One should not expect anything in return when offering a gift/favor to a true friend. Therefore, the expectation of the gift giver from the receiver cannot be too explicit in order to look sincere, respectful, and not too pressing. On the other hand, the gift receiver is expected to understand what is expected of him or her, without explicit explanations, if he or she is a true friend of the gift giver. To reach such a subtle balance between the explicitness and implicitness requires effective communication between both parties. Taiwanese speak the same dialect as southern Fujianese. In Guangdong, the official language of China, Mandarin, has been an effective language for communication between the Taiwanese investors and their local Chinese agents. Although linguistic commonality is not the only tool to build trusting relationships, it opens doors more easily. Sharing a common language does not just mean effective communication in technical terms. More importantly, it is the understanding of the hidden messages that determines the effectiveness of the communication. On many occasions, what is spoken is not as important as what is unspoken. Therefore, it takes both technical understanding of the spoken words and cultural understanding of the hidden meanings to fully grasp the expectations of the participants of gift exchange. For example, when an investor asked for a greater allowance of domestic sales, the official in charge might tell the investor, "Let me yanjiu, yanjiu about it." Literally yanjiu means doing research or looking into the matter carefully. Yet, the conclusion of the "research" often depended on the favor that the applicant was willing to offer the official. Since the pronunciation of yanjiu is close to "cigarettes and liquor" in Mandarin, in the earlier days of the reform yanjiu literally implies the demand of cigarettes and liquor as gifts.39

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There are several important elements in gift giving: the type, the timing, and the occasion on which the gift is presented and received. All these are parts of the hidden message. If the cigarettes offered by the applicant are not good enough, the official may reject the gift and at the same time offer the applicant one, usually the most expensive brand of cigarettes, as a way of showing the applicant the type of cigarettes that is preferred. As suggested before, no official will accept any gift before the preliminary friendship and trust is established with an investor. And it takes time to build a trusting relationship. Before an official and a potential investor become friends, they usually meet each other in the restaurants, "assessing the bottom line" (mo-di] of one another by drinking together for several runs in various occasions. Very little, if at all, about the investment projects would be mentioned. Then the official might suggest: "It is too noisy in the restaurant and it costs too much, let's drink in my house next time." By issuing an invitation like this, the official is actually stating that it is time for the negotiation to start, and the official was ready for a gift to be presented in the residence. Whether the official accepts the gift or not indicates the chances of whether the favor will be granted to the applicant. If the official felt the requested favor was too unrealistic or beyond his or her realm of influence, the former would not accept the gift as a way to tell the latter that he or she was unable to help. Silence is also an important component of the language. Presentation of the gift often proceeds in silence. It is considered rude for the gift receiver to unwrap the gift in front of the gift giver. The purpose of the gift giving is not to be talked about openly. A Taiwanese investor was told by a local official that the power supply in the county was very tight and his application for the increase of power supply at the current rates was not acceptable by "'shanjj-miari" (those on the top). The Taiwanese visited the residence of the official a few days later. He was received by the host who sat down with him and chatted about the plans of a new four-lane expressway the county government was working on, then about die children of the Taiwanese, who were coming to visit from Taiwan for the Chinese New Year, and so on. After 45 minutes, the Taiwanese left. Beside the sofa were two bottles of imported liquor that the Taiwanese had brought with him. But nothing about the gift or the electricity rates was brought up in the conversation. In the following week, the Taiwanese received a call from the official and was told that "sbangmian" was seriously considering his appeal. I was told that, if the Taiwanese suggested when presenting the gift , something such as "please accept my respect with this very humble gift," it would have made it too embarrassing for the official, and the gift would have been politely but firmly rejected.40 It takes a linguist of human relations to grasp fully the unspoken language. After a banquet in a southern city, the main guest of the banquet—a high-ranking official in the local city planning bureau—complained to his colleagues that the host of the banquet, a Taiwanese developer, was too shrewd to deal with. Although the banquet was the developer's friendly gesture to the city planning official, who had the authority to grant develop-

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ment permit, the developer also invited the party secretary of the city to the banquet. The hidden message, according to the reading of the city planning official, was to unveil the developer's political capital and to say "Yes, I do need your help but I also have friends in higher places, and you are not the only friend I have in town."41 Transnational capital has not been as footloose as the theorists of the new international division of labor have proposed. Direct Taiwanese investment in China represents a case of transnational capital flow shaped by local cultural and institutional conditions. The newly gained economic autonomy of local governments, as well as the Chinese bureaucratic tradition of flexible interpretation and implementation of policies, defined the institutional conditions for Taiwanese investment in southern China. Such an institutional context provided the space for the local government in China to bypass the scrutiny of the central state and link up with the world economy directly through overseas Chinese investors. Cultural and linguistic affinity between the Taiwanese investors and local Chinese officials has provided the tools for establishing guanxi between them through the principle of gift exchange. Indeed, the importance of interpersonal ties is not unique to Chinese societies, nor is gift exchange a principle of establishing guanxi that has been adopted only by the Chinese. However, Chinese tend to rely on the gift exchange-based guanxi more than some other people (Ruan, 1993); and the cultural tools for establishing guanxi and the forms of gift exchange in the Chinese culture are distinctive, such as in the case of Taiwanese investment in southern China.

7 Global Networks and Local Development

Taiwanese manufacturing investment in southern China since the late 1980s represents a new pattern of foreign direct investment in the newly industrializing regions. The investment has been dominated by small- and mediumsized firms and characterized by the collaboration between the investing firms and local government officials in the new production sites. These firms are organized in networks to ensure flexibility in production and marketing. As the networks moved across the regional border, in this case from Taiwan to China, such flexibility was maintained and enhanced with the facilitation of low-level local Chinese officials. The increasingly autonomous local government in China and the cultural affinity between the Taiwanese investors and their local Chinese agents, including local government officials and workers, contributed to a much faster and smoother process of cross-border capital flows. The alliances established between Taiwanese investors and local Chinese officials have provided the local governments with direct linkages with the world market, which in turn strengthened their bargaining position with the central government. The alliances also have accelerated the expansion of the overseas Chinese investment networks in East Asia. Taiwanese investment in China does not necessarily reflect an encountering of "socialist" and "capitalist" systems. The phenomenon is situated in a historical conjuncture in which the internal and external structural elements interact and shape the development trajectories of southern China in the reform era. After Mao's death and the charismatic leadership he had initiated in the Chinese communist regime waned, China's highly centralized political and economic system began to decentralize. China's inward144

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oriented development strategies also shifted to open-door policies. In Taiwan, the economy was restructuring after three decades of export-oriented industrialization. Taiwanese manufacturers were faced with the challenges posed by the emergence of new competitors in the Association of Southeast Asian Nations (ASEAN), rising production costs and exchange rates with US dollars, and protectionism in the Organization of Economic Corporation and Development (OECD) markets. Taiwanese export manufacturers sought alternative production sites and markets and found them in Southern China, with its open economy, entrepreneurial and accommodating local officials, and abundant supply of trainable yet unprotected migrant workers. Coming from two different political-economic systems and socialized under two rival regimes for more than 40 years, there were indeed barriers between Taiwanese and mainland Chinese when they first resumed contact in the 1980s. But the 40 years of political separation between the two peoples had not totally overshadowed their historical linkages nor the economic pressure. The periodical migration waves from China to Taiwan in the last 400 years and the linguistic and cultural connection between Taiwanese and mainland Chinese proved to be mighty tools that continue to cement the relationship between Taiwanese investors and Chinese local officials. The new pattern of foreign capital flows from Taiwan to China raises questions about the nature of local-global coalitions in China's reform process; the new dynamism between the central government and the increasingly autonomous local powers; and the implications of the decentralizing and diversifying economy for grassroots democracy in China. The networks that Taiwanese investors established with local Chinese officials have invigorated the discussion of the role of culture in the process of international capital flows and the working of ethnic-Chinese entrepreneur networks. The sustainability and transformation of the family-based Chinese business organization is under examination as family firms expand transnationally. The increasingly frequent border-crossing of capital, commodities, and people within and between the networks has raised the question of the consistency of economic, political, and cultural boundaries. Prior to China's economic reform, the development of overseas Chinese capitalism and the socialist alternative of development in China had been two separate issues. Since the 1980s, the dominance of overseas Chinese capital in China blended the issue of overseas Chinese capitalism with that of making capitalism in China. The emerging networks of ethnic Chinese entrepreneurs in China are not established despite the state. The networks are established and expanded because of the transformation of the state. In other words, networks can be reinforced by a decentralized state structure. Here the state in question is not just the host countries of the overseas Chinese, but also the state of China, and not just the State of China, but many states in China. Further, the involvement of many states in and outside China, connected through the networks of ethnic Chinese in China and other Chinese societies, has again placed the topics of multidimensionality of Chinese

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and Chineseness, and the building, manuevering, and shifting of Chinese identity on the top of the agenda in the research on Chinese capitalism.

Networks of State-Based Powers In my analysis of local Chinese officials, I have tried to avoid the dichotomous debates on the autonomy of either the state or society or the relative strength of each.1 The increasing fiscal autonomy of the local government does not necessarily presuppose a stronger society or a weaker state, especially when "society" is understood as the private sector and the "state" as a homogeneous and coherent entity. Between the central state and the society, the Chinese local state has conceived its own political agenda and economic interests and, therefore, demands an independent analytical category. Expanding from Peter Evans's triple alliance model (1979,1995), which deals with the triangular relationship among the national state, foreign capital, and local industries in the Third World's industrialization, I consider the dynamism of local development in southern China a negotiation process among the central state, the local state, the diversified foreign capital, and the emerging socioeconomic forces created by the interaction among these three agents, especially the local bureaucratic entrepreneurs. The East European transitional economies provide a useful comparative perspective on the role of the local state. In the discussion of the economic reform in the former Eastern European socialist countries since the late 1980s, one of the central controversies has been the contribution of the nonstate sector to economic growth (or slow growth, even nongrowth). The policy implication from such debates is usually about public ownership and privatization of state enterprises (Kornai, 1980, 1992; Lipton and Sachs, 1990). An absolute distinction between the state and the nonstate sector has neglected their interdependence and competition (Naughton, 1995b:21), and the sectors in between (Walder, 1995). In the case of China, between the state and the nonstate sector, there are local collective enterprises that are owned by various levels of collectives (e.g., villages, counties, and townships) and represented and managed by local governments. These collective enterprises have been growing faster than the state and the private sector since the reform started (Jefferson and Rawski, 1994:48). The monopoly of key economic resources by local officials and their direct involvement in local accumulation and the introduction of market competition among localities and collectives have created a vast gray area in China's decentralized economy. This gray area has permitted a variety of ownership and management structures to evolve. As Walder suggests (1995), there are "multiple owners of the public enterprises" in China, not just one owner called "the state."2 This logic also is applicable to die relationship between central and local governments, which should not be framed by the zero-sum game thesis that presumes a "strong central state versus weak local state" scenario or vice versa. Local politics and the local-central relationships are, in fact, a multilayered power dynamic among different jurisdictions and among different agencies

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of the same jurisdiction. Reform coalitions as well as competition in the newly opened market could happen among provinces, between a province and subprovincial agencies, or between a ministry in the central government and an agency at the provincial level. Furthermore, China's economic decentralization is practiced in various forms. It is best understood as an ongoing process of negotiation and bargaining between the central and the local governments, combined with the flexible local interpretation and adaptation of centrally imposed policies. While bargaining has always been a part of socialist China's economic system,3 it is the alternative access to economic resources, especially those outside the national fiscal system, that sustains and strengthens the autonomy of the localities. Guangdong has been able to limit the impact of austerity policies imposed by Beijing since the second half of 1993, largely because of the strong linkages with the world market. The role of foreign capital has become increasingly critical to the scope and scale of China's local autonomy, not just to Guangdong but also to other coastal and border provinces (Womack and Zhao, 1994). Exports from collective enterprises in rural China also increased rapidly from US$4 billion in 1985 to more than US$12 billion in 1991, contributing more than 20% of national total exports (Zweig, 1991; Lardy, 1992). The active role that local officials have played in negotiations with foreign capital and the consequent tension, competition, and alliance between governmental agencies (either between the central and the local governments or among local governments) when bargaining with foreign capital have contributed to the complexity of local politics in the process of China's outward-oriented economic development. However, the increasingly strong linkages between local Chinese governments with the world market do not necessarily imply the withering of the Chinese communist regime. The regime can be seen as a network of state-based powers composed of the central state, local states, and collectives which form the reform coalition, with the Communist Party still in the central position. In fact the dominance of the Chinese Communist Party in the national political system has ensured a more consistent process of fiscal decentralization,4 as well as a certain level of coordination as regionalism escalated in the reform era. The coordinator of the networks of statebased powers is the state at various levels. The form of the coordination is bargaining between high-level governments and individual localities, which has resulted in tailor-made policy packages. The mechanism of the bargaining is the flexible implementation of state policies; and allocation of state resources based on a central-local relationship that is defined by politics more than the constitution.

China, and Transnational Networks of Chinese Entrepreneurs As suggested before, more than 70% of the foreign direct investment in China, about US$70 billion between 1982-1994, was funded by overseas Chinese

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investors. In Guangdong and Fujian, the home provinces of most overseas Chinese, overseas Chinese capital contributed 85-95% of the total foreign investment in the region (East Asia Analytical Unit, 1995:206, 212). The impressive volume and the level of concentration of the investment demonstrates the importance of overseas Chinese capital to China's economic development. Furthermore, the overseas Chinese-funded investments in China have provided the platform for the consolidation and further expansion of the global networks of Chinese entrepreneurs. The establishment of Chinese ethnicity-based transnational trade networks in Asia can be traced back to the late fourteenth century. The networks flourished in the nineteenth century, coinciding with several waves of mass migration from southern coastal China to Southeast Asia and the establishment of overseas Chinese communities throughout the region. During World War II, the overseas Chinese entrepreneurs in Southeast Asia became increasingly dominant in commerce as the European colonial powers retreated. While many entrepreneurs maintained small trading operations, some become large conglomerates, supported by their patrons in elitist political circles of their adopted country (G-W. Wang, 1990; Mackie, 1992a; McVey, 1992; Menkhoff, 1993). The evolution of Chinese enterprises and entrepreneurial practices in Southeast Asia have been examined with rigorous scholarship (L. Y. C. Lim, 1983; Jesudason, 1989, 1994; Hamilton (ed.), 1991; Mackie, 1992a, b; McVey, 1992). Much of the effort has been devoted to the intra- and interfirm organizational and managerial characteristics of Chinese firms, the sociocultural and value system underlying the entrepreneurial practices, and the statebusiness relationships. Most writers agree that the formation and transformation of overseas Chinese capitalism is a dynamic process rather than a static model to be perfected by more studies of the "cultural traits." "Chinese entrepreneurs" and "Chinese entrepreneurial practices" are hardly a homogeneous construct. They vary in different institutional and historical contexts. For instance, in Southeast Asia where the ethnic Chinese were a minority, Chinese entrepreneurs were treated as subordinate compradors under the colonial rulers, or "pariah entrepreneurs" dependent on local patrons following political independence (Riggs, 1967). The state of the adopted countries of overseas Chinese entrepreneurs is not necessarily a facilitator of the business. Yet the relationship between overseas Chinese entrepreneurs and the state of their adopted country changed in different historical periods. Hewison (1993) suggests that since the 1960s, Chinese entrepreneurs in Southeast Asia have gained more political influence and are no longer "minority capitalists." Hamilton and Waters (n.d.) and Suehiro (1989) report that different groups of Chinese entrepreneurs have emerged in different periods of modern Thai history. In the 1960s and 1970s, as die Thai economy became export-oriented, the export industrialists mostly belonged to large ethnic Chinese business groups with closer connections to China and the East Asian NICs. These new rich have little history to share with the "old money" who are mainly involved in banking and operated as tax farmers and rice

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exporters in the 1940s and 1950s, supported by the Thai elitist networks. Jesudason's (1994) assessment of the transformation of the capital-cultural nexus in Malaysia since the 1980s suggests that the weakened ethnic solidarity among the new generation of Chinese entrepreneurs and Malay economic nationalist politics have facilitated new alliances between individual Chinese entrepreneurs and Malay companies. These new alliances have benefited Malaysian Chinese entrepreneurs and become the basis of the expansion of the Chinese business networks. Since the 1970s, Hong Kong, Taiwan, and Singapore, the overseas Chinese societies in which ethnic Chinese are the majority, have grown rapidly due to export manufacturing, further strengthening the economic forces of ethnic Chinese in Asia. In Hong Kong, Taiwan, and Singapore the statebusiness relationship is mostly analyzed in the framework of "development because of the state"; the developmental state has played a more active role in the process of industrialization (Gold, 1986; Deyo, 1987; Cheng, 1990; Haggard, 1990; Wade, 1990; Castells, 1992). Enterprise networks are also the core of the studies of East Asian Chinese capitalism (Numazaki, 1986; S. Wong, 1988; Gereffi, 1990; Hamilton and Biggart, 1988, 1991; Shieh, 1992; J. Chen, 1994; Castells, 1996). Beginning in the mid-1980s, East Asian Chinese capitalism began to expand overseas. The Southeast Asian Growth Triangle recorded the state-led outward expansion of the Singaporean model (Parsonage, 1992). The investment from Taiwan to China and Southeast Asia has been more privately initiated and sometimes of a semiunderground nature (Hsing, 1995). While the Singaporean model is more "businesslike," with a strong presence of the state, Taiwanese and Hong Kong business people relied more on interpersonal networks in the process of overseas investment (East Asia Analytical Unit, 1995). The average size of Taiwanese investments in China has grown; in the late 1980s, investment was about US$500,000-700,000,5 by 1991 it reached US$1 million (Kao, Lee, and Lin, 1992:194), and by 1993, US$1.35 million (Kao et al. 1995:161). This level is less than the investments of West European and US in China;6 however, it has doubled in less than a decade. In addition, large Taiwanese business groups7 started to stretch across the straits and diversify into a wide variety of sectors, which marked a shift in the Taiwanese investment strategy in China (Gu, 1994; Lin and Gu, 1994; Shi, 1994; P. Zhang, 1994; Zou, 1994).8 From 1987 to 1995, Taiwanese direct investment in China went through two major phases, in terms of the type of investors and sectors and the investment strategies (see Table 7-1). Do such spatial and temporal variations of Chinese capitalism imply that "Chineseness" is an adaptive strategy rather than an identity? Linda Lim (1983) suggested that, considering that many overseas Chinese firms are evolving into transnational business groups, with the introduction of Western management into traditional family firms and the expansion and separation of ownership from management, the uniqueness of Chinese entrepreneurial practices must be questioned. Lim proposes a thesis of convergence of ethnic differences in business practices through growth. Following this line of argument, it also is necessary to question whether guanxi-based net-

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Table 7-1 Two Phases of Taiwanese Investment in China Strategies First phase 1987-1992

Second phase 1992-present

Major investors

Locations

short-term; export; small-medium firms coast/south (average size of low value-added; investment US$1 downstream million) manufacturing medium-large firms inland and longer term; export coast/south, (average size of and domestic central investment market; higher US$1.5 million), value-added; more technology intensive; and companies diversification and from large business groups, US$5-200 upstream million per project manufacturing

works of entrepreneurs develop only in Chinese societies, and whether gift exchange as a means of establishing interpersonal relations is adopted only by the Chinese. The answer to both questions is no: the establishment of guanxi-based entrepreneur networks is shared by other cultures (Marceatt, 1989; Kotkin, 1992); and the practice of gift exchange and the principle of reciprocity is found in various societies (Malinowski, 1961; Mauss, 1967; Sahlins, 1972; Geertz, 1973). One way of determining what constitutes the essence of Chineseness, if there is any, is to detach the question of uniqueness from that of difference (Nathan, 1993). As guanxi and gift exchange exist in more than one culture, they might have different levels of presence and intensity in different cultures.9 However, a comparative analysis inevitably encounters the problem of positivism and scienticism. More importantly, the question of Chineseness —whether it is about its uniqueness or differences from other cultures— presumes definite and static cultural (if not genetic) boundaries, and a consistent association of a people with a particular culture. Even when cultural attributes are possible to identify methodologically, the connection of cultural attributes with the identity of a people is not always natural; and ethnic identity does not necessarily lead to ethnic solidarity. Jesudason (1994) has questioned the presumption of "blood-based" solidarity in the process of capitalist expansion. As the result of the Malaysian nationalist economic policies and new economic opportunities in China, strategic alliances have been established between individual ethnic Chinese and Malay capitalists in Malaysia. Recent studies by Ong (1997) and Nonini (1997) have gone one step further and examined the cultural politics implied by the narratives of "alternative modernities" in the recent "high romance" of transnational Chinese capitalism. Nonini argues that the diaspora Chinese identities in Southeast Asia can only be seen contrastively and situationally vis-a-vis alternative and opposed indentitics of citizenship and indigcnousness. Therefore, the diaspora

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Chinese identities should be rethought in terms of class and gender. Ong sees the Chinese modernity being used as a part of the negotiation process for transnational economic advantage and solidarity. From this view of ethnicity as an "imagined community," identity becomes a "regime of power that imagines a nation beyond the state" (Ong, 1997). Between the two ways of problematizing Chineseness—one that sees Chinese as a given with fixed boundaries and the other that sees Chinese as an imagined category—there exists a historical process that shapes, and is shaped by, the presentation, interpretation, and transformation of a people who are labelled, or label themselves, Chinese and their cultural and social practices. The meaning of boundary negotiation and the construct of Chineseness are exhibited through the actual practices of this people (or a fraction of them) and their interaction with others in commerce or other areas of activities. The historical experiences of Chinese entrepreneurs in the last two centuries can be recapitulated with some characteristics, such as what Hamilton (1991) has proposed, "collective entrepreneurship."10 In other words, identity is a historical product and the boundary is defined by historical processes. The interaction of Taiwanese investors with Chinese workers and officials and the cultural-linguistic affinity and sociohistorical connections between Taiwanese and Chinese have facilitated a smoother and faster process of crossborder capital flows. However, this situation implies neither an involuntary empathy developed simply from blood ties nor an automatic identity affirmation among Chinese. Taiwanese investors in China are constantly negotiating their relationships with local Chinese workers. When authority is needed for disciplining the workers and for legitimizing their commanding position, Taiwanese managers summoned the necessary distance by emphasizing that Taiwan is rich, modern, and capitalistic in its best sense, thereby implying that the Taiwanese are more intelligent, worldly and superior than the 'country bumpkins' and communists in China. When solidarity is reqxiired for preventing skill—workers and managers from job hopping, nationalism is adopted and a different line between "us" and "others" is drawn: Taiwanese bosses are not cold-blooded whereas those Korean or Japanese bosses are. This is because Taiwanese are Chinese also. We are in the same boat. Sometimes a regionalistic refrain is heard. A Taiwanese boss patronized a foreman from Fujian Province by speaking to him in Hokkien dialect, which is also spoken in Taiwan, to distinguish the foreman from his colleagues from other provinces, and make him feel closer to the boss.11 Identity can be manipulated by individuals for various purposes, but the options for shifts in identity are provided by historical conditions. As the reciprocal principles of gift exchange are materialized in the process of establishing guanxi between Taiwanese investors and local Chinese officials, the actual practices and forms of such exchanges are shaped by specific historical and institutional situations (Hsing, 1996). The specificity of Taiwanese investment in China is not necessarily found in the importance of guanxi in Chinese entrepreneurial practices. Instead, it is the way guanxi is

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practiced with culturally available tools that are allowed or encouraged by institutional conditions. These tools include linguistic familiarity that helps to read hidden messages; the measurements of the value of the gift and the expectation associated with the gift; the meaning and practice of time (such as timing, timely, and timelessness) in the sequence of exchange; and the demarcation of space, such as private and public domains, when legal and moral issues are concerned in the exchange. The institutional and historical conditions that shape the establishment of guanxi in the process of Taiwanese investment in China also include the increasing fiscal autonomy of China's local governments in the years of open-door policies, as does the vitality of a pool of bureaucratic entrepreneurs who are embedded in the long tradition of superficial compliance under the "emperor." Two new phenomena evolved in the 1980s that added to the complexity of the story of Chinese entrepreneur networks. First, China has taken steps to integrate into the world market and is becoming the focal point of the networks of Chinese entrepreneurs.12 Second, with the increase in intraregional capital flows in Asia, overseas Chinese are competing with the Japanese as the main capital provider in Asia (E. Chen, 1993; Chu, 1995; Lim, 1995). In addition to trade, commerce, agri-industries, and manufacturing, the networks have diversified into financial, real estate, and service industries across regional and national boundaries (Goldberg, 1985; Gutstein, 1990; Thrift, 1994; Tseng, 1993; Mitchell, 1995; Olds, 1995; Yeung, 1996). One of the most distinctive characteristics of China's current economic reforms has been the extensive involvement of overseas Chinese capital in trade, manufacturing, and land development. There are about 55 million overseas Chinese in the world and about 1.1 billion Chinese in China. An estimated 51 million overseas Chinese in Asia created US$450 billion gross national product in 1990 (East Asia Analytical Unit, 1995). Worldwide, the overseas Chinese probably hold liquid assets (not including securities) worth $1.5-2 trillion.13 The resources that the overseas Chinese command, and the transnational networks they create, potentially provide the technologies, information, and finance that China needs. China's development path is therefore different from the "Four-Dragon" model in both the scale and diversity of the resources within the Chinese capitalist network. When overseas Chinese capitalists face rivalry and suspicion between China and their own country, what new configuration of state-business relationships emerges between China and the adopted country of the overseas Chinese entrepreneur? How is the tension between the local resistance of external powers and the capitalist imperatives of expansion resolved? With economic deregulation and transnational expansion of private sectors, do nation-states have sufficient control over globalizing capitalist networks? Does the issue of state-business intersection have any relevance for Chinese capitalistic development? These questions are significant given the trend of establishment of strategic transnational alliances among large Chinese business groups, which often bypass the direct intervention of the state.14

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Chinese entrepreneur networks are enhanced by a variety of transnational Chinese associations, which distinguish them from the expansion strategies of the OECD multinationals. There is a long history of formal and semiformal associations of Chinese entrepreneurs in overseas Chinese communities. As Chinese immigrants first arrived in an adopted country, these associations provided social support to the newly arrived. Such associations were organized around dialect, clan (kinship by surname), locality, or craft (guilds). In Singapore and Malaysia, the Chinese chambers of commerce have consolidated Chinese business communities and have played an active role in domestic politics.15 Modern Chinese associations, such as university alumni groups, trade associations, or branches of Lions and Rotary Clubs, have also emerged and are attracting younger and more "westernized" Chinese entrepreneurs. The less formal associations include brotherhoods (xionpfdi hut) established among business partners,16 or looser associations such as monthly get-togethers among real estate developers, land owners, and bankers in Taipei.17 Since die 1980s, the investment opportunities in China and the East Asian NICs' overseas investment have stimulated a renaissance of Chinese entrepreneurs associations. These associations have expanded from national to transnational, and even global. At the local level in Southern China, locality and clan associations have mushroomed since the 1980s, and are aimed at channeling back overseas Chinese capital to hometowns and villages in China.18 Chinese chambers of commerce in Southeast Asia are establishing regional coalitions across national borders in their dealing with China. Taiwanese investors have formed associations in at least 18 different cities in China.19 The Asian General Taiwanese Chamber of Commerce was established in Taipei in 1992, with more than 3,000 members from Malaysia, Indonesia, Hong Kong, Japan, Singapore, Thailand, and the Philippines (Huang, 1993,1994b). The World Taiwanese Entrepreneur Association, established in 1994, has more than 16,000 member firms in Asia, North America, Europe, Australia, and other parts of the world. With strong financial and organizational support provided by the Taiwanese government, the World Taiwanese Entrepreneur Association is facilitating the provision of investment loans to its members (Huang, 1993), and is now using the Internet to disseminate business information and to enhance the networking function.20 The political implication of the emphasis on "world Taiwanese" as opposed to "overseas Chinese" in the names of these associations, and the fact that the Taiwanese government provides financial support, can hardly be ignored as another example of manipulation of identity in the political arena. The establishment of the World Chinese Entrepreneurs Convention in the early 1990s as the world's biggest networking event for ethnic Chinese entrepreneurs serves as an example of the recharged Chinese identity encouraged by China's growing economy. The first World Chinese Entrepreneurs Convention was held in Singapore in 1991, the second in Hong Kong in 1993, and the third in Bangkok in 1995.21 Each of the first two conventions attracted more than 800 participants from all over the world, among them

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the most famous of ethnic Chinese entrepreneurs, Li Kai-shing and Henry Fok. The message given by the conventions is noteworthy. The central theme of the first convention was "A Global Network." Lee Kuan Yew, the senior minister and the former prime minister of Singapore, gave the keynote address entitled "On China and Chinese Overseas: That Vital Empathy," which highlighted a China-oriented global Chinese network (Singapore Chamber of Commerce and Industry, 1991). The Singaporean government's active role in the convention and the efforts undertaken to direct investment by Singaporean enterprises into China suggests the intention of the Singaporean state to build a China-oriented, yet Singapore-centred, Chinese entrepreneur network. Lam Fong Loi, the vice president of the Singapore Chinese Chamber of Commerce and Industry, further promoted the strategic position of Singapore in the new Asian economy by stressing how multiethnic Singapore can facilitate the expansion of Chinese entrepreneur networks by building alliances with other ethnic entrepreneur networks in different markets.22 Hong Kong, with the limited involvement of its colonial/transitional government, has been another contender vying for a central position in the network. Foreign investors from East Asia, Southeast Asia, North America, and Europe have used Hong Kong as a beachhead for investing in China. With their local knowledge and guanxi networks in China, Hong Kong entrepreneurs have been most active in linking China with the world market.23 Hong Kong also has become a center for Chinese-funded companies to raise funds in the international financial markets and to make connections with foreign investors and traders.24 At the second World Chinese Entrepreneurs Convention, while the organizer was the Hong Kong Chinese General Chamber of Commerce, mainland Chinese participants, especially government representatives, enjoyed a much higher profile, thereby placing China at the focal point of the convention.25 It is questionable how much actual networking can be achieved at formal and large conventions. More empirical information is needed before we can further speculate on the implication of such events for the consolidation of global Chinese entrepreneurs. However, these formal, international conventions of global Chinese entrepreneurs in the 1990s have not been a historical coincidence. The rapid changes in the political economy of East Asia in the last two decades have paved the way for the seemingly symbolic events. The industrial growth in the ASEAN Four, the aggressive outward expansion of the East Asian NICs, China's open-door strategies and unprecedented growth, plus the opportunities presented by other socialist economies like Vietnam, in which ethnic Chinese are active in the transitional economy, have prepared the way for the symbolic event. As the concerned governments and ethnic Chinese business individuals and groups alike expect to further exploit "that vital empathy," they face the need not only to recognize the divergent territorial identity among ethnic Chinese (Hong Kong Chinese vs. mainland Chinese; Taiwanese Chinese vs. mainland Chinese; or Malaysian Chinese vs. mainland Chinese) but also to redefine their positions in the increasingly convergent political economy of East Asia.

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Foreign Investment and Local Development What has been the impact of local government's increasing fiscal autonomy on local development in post-Mao China? Decentralization of economic power may introduce the possibility of political restructuring, but does it necessarily broaden the base of participation at the grassroots level? As collective enterprises exercise greater influences over local economies, do they also foster the emergence of new social forces that are substantially independent from the dominant party-state? A preliminary examination of the question can begin with the way town planning and land development projects proceed in small towns in rural China. Alliances between local governments and foreign capital has strengthened the bargaining power of local governments against the national government, creating a basis for local governments to take initiatives in town planning and land development. Among the projects undertaken by overseas Chinese in collaboration with local Chinese officials in China, land development has been the most important sector next to manufacturing, and it is growing rapidly; such investment has been one of the major directions of diversification for overseas Chinese firms in East Asia, with many Taiwanese, Hong Kong, and Singaporean developers seeing property projects in China as one of the most promising directions for their business expansion. On the other hand, as most key planning issues are decided at the local level, land development represents opportunities for local planners to respond to local situations more directly and to shift urban planning standards away from universal norms set by the central government. However, the potential for greater local initiatives in town planning is not always supported by either a competent and clean bureaucracy or an open system. Persistent bureaucratic monopoly over land has created severe problems of corruption that the central government has failed to control. The notion that "some people should be allowed to get rich first" as a necessary precondition of national prosperity is footnoted by the fact that local bureaucratic entrepreneurs are among the ones who get rich first (Liu & Lu, 1989; Xiao, 1993; Yang, 1993; Cheng, 1994; Peng, 1994; Wang and Zhang, 1995).26 In addition, the prospect of quick and large returns in hard currency from sales of land leases, which used to be considered worthless in pre-reform China, has been very tempting for local governments that are under fiscal pressure. The strategy of raising revenues and attracting foreign investment through sales of land leases has raised substantial problems. Large areas of agricultural land have been converted to industrial estates and commercial housing. Local governments sell farmers the much sought after urban hukou (residency) in exchange for their land. In Hubei and Jiangsu Provinces, farmers paid RMB 8,000 to 10,000 to obtain urban hukou, while the local government got the land and capital to develop economic zones. A local official of Jiangsu Province suggested that the county sold 1,000 urban resident identification cards to collect RMB 10 million, the most efficient way of fund raising.27

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In many cases, the approval of land leases by local governments was not always done with proper feasibility studies; and the leased parcels tend to be too large for any developer to develop in a short period of time.28 Many of the so-called economic zones were designed simply as land development projects without infrastructure construction plans or agreements from investors to set up enterprises in the zone. A report prepared by the Research Institute of Economic Development of the State Council suggested that by 1992 the total area of the economic zones that were formally approved by the State Council and provincial governments was 15,000 sq. km. The total capital required to develop infrastructure in these zones would be abovit RMB 500 billion, much beyond the financial capacities of local governments. Since 1984, there have been more than 5,000 "development zones" established at or above the county and city level. In the first half of 1992, there were more than 1,800 development zones established without the approval of the State Council. In Jiangsu and Zhejiang Provinces almost ever)' county had a development zone. The "development zone rush" was promoted by the media. The news program of the Central Television Station carried 15 stories about economic development zones in one week in July 1992. In Hunan Province, there were no less than 300 economic development zones at the level ofxiangr (a jurisdiction one level lower than county) and the total area had reached 2,400 sq. km. Even in an inland province such as Shangxi, the slogan was "learning from the coastal region," and more than 100 development zones emerged in the second half of 1992. A city in Laoning Province in the northeast spent more than RMB 10 million to move its own large enterprises into the development zones in order to attract foreign investors.29 Frequently, a substantial portion of the leased land parcels was left undeveloped for a long time. Farm lands were cleared for the development of industrial zones; but in many cases there was no follow-up development project and the cleared farmland was abandoned. In Zhejiang, die abandoned farmland in the winter/spring of 1992-1993 accounted for one quarter of the total farmland in the province.30 The provincial governor of Guangdong admitted that the overheated property market has had a negative impact on agricultural development in Guangdong. By 1992 the province had lost 3 million mu (about 455,000 acres) of grain fields.31 Until the beginning of 1993, there was no regulation on the maximum number of years the land was allowed to be vacant after the lease was granted. In Hainan Province, the land in Haikou and Shanya Economic Zones was monopolized by several large developers, and parcels changed hands many times before any real investment was made in the land. It was reported that a sale of a 6.66 hectare lot returned a US$12 million profit to the seller. As for the commercial housing projects, speculative investment generated soaring land and housing prices that were not supported by the export housing market and the housing was not affordable to local residents. The booming land market does not always reflect the pace of construction or "development" of the land. Many "developers" simply held on to the land they leased and waited for opportunities to resell the land to an-

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other "developer."32 In Hainan Province, by 1992, only 18.9% of the total leased land of 2,800 hectares was built on or was under construction.33 In order to attract foreign investment, local governments sometimes leased land at a price that was lower than what they paid for the infrastructure construction. In many cases, the local government is responsible for site preparation, road pavement, water and power supply, and telephone line and sewage system installation. In 1993 the National Land Agency estimated that developed land should be leased for a minimum of RMB 300 per sq. m. to break even. But most of the land was leased at only one-third of that price. Several local governments in remote regions were so desperate that they even granted the land to foreign investors for free.34 Similar problems also happened to foreign-initiated commercial housing projects. Rapidly growing commercial housing complexes required more public facilities and more responsibility of the local government for postal service, power and water supply, schools, roads, telephone lines, sewage system, and so on. Many of the new complexes did not have such basic facilities for many years after they were occupied.3b The decisions on land use and sales of land leases are mostly in the hands of the party secretary and the county or township chief. Planning departments and professionals were consulted, but they had little impact on the final results of development projects. Farmers were compensated for the land they lost to the development projects, but they rarely had any input in the projects. Incidents of unfair compensation and much-delayed payment of compensation were not unheard of, especially in the inland regions.36 The practice of flexible implementation of policies, in this case, only reduces the accountability of local officials. The problems created by the development zone rush were so severe that at the beginning of 1993 the State Council imposed tighter controls over land sold by local government agencies to foreign developers. Both the State Council and some provinces such as Guangdong announced a halt to the granting of permits for development zones and began to reassess existing zones. Zones established or designated without the approval of the central or provincial government would not gain official recognition. Legal responsibility for the abuse of state-owned land was investigated.37 In March 1993, several state agencies in the central government, including the State Land Agency, the Construction Ministry, the Agriculture Ministry, and the Economic Planning Committee, organized a special committee headed by Premier Li Peng to investigate the problem of farmland abuse and loss. Austerity policy packages were announced and bank loans for land development were frozen.38 The new policies were effective in some regions as the land development rush was curtailed. However, as indicated in chapter 6, for cities with sufficient supplies of foreign capital, especially those in the coastal south, the damage the property development projects imposed on agriculture and the environment could not be reversed easily (Smil, 1993).39 The tradition of superficial compliance with policies continued during the austerity era.40 Ovcrconcentration of foreign capital in the coastal regions and unevenly decentralized rural industrialization have intensified the intra- and interrc-

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gional disparities (Blecher, 1988b; S. Li, 1993; Hsing, 1995; Wang and Zhang, 1995; J. Yang, 1996). Regional disparities between the coastal and inland regions grew greater in the 1980s and 1990s (see tables 1-17 and 118). Those small cities and towns that have the advantages of easy access to large cities and sufficient infrastructure have received most of the foreign investment and experienced rapid growth. The major change in the poor and remote villages in Guangdong and Fujian has been massive population outflow. Therefore, although the growth of small towns has helped to decrease rural-urban disparities, especially in income terms, there has been an increase in intraregional disparities between suburban rural areas and the more remote rural areas. Table 7-2 shows the economic disparities between the Pearl River Delta and the mountain regions in Guangdong. Further, whether that "vital empathy" based on the cultural affinity between overseas Chinese investors and local Chinese agents led to a more balanced division oflabor between them remains debatable. Would such a Table 7-2 Economic Disparities between the Pearl River Delta and the Mountain Regions in Guangdong (in million yuan) 1984

1985

1989

1990

Total industrial output Pearl River Delta Mountain regions

15,146 8,992

19,786 10,330

56,751 20,648

69,185 22,795

Per capita industrial and agricultural output Pearl River Delta Mountain regions

159,200 42,600

205,300 48,400

357,100 84,400

417,800 90,300

Per capita industrial and agricultural output index (mountain regions = 100) Pearl River Delta Mountain regions

37,400 10,000

42,400 10,000

42,300 10,000

46,300 10,000

Per capita industrial and agricultural output index (1984 = 100) Pearl River Delta Mountain regions

10,000 10,000

12,900 11,400

22,400 19,800

26,200 21,200

Exports, 1990 (US$ billion) Pearl River Delta Mountain regions Three SEZs

3.49 (33.0% of Guangdong total) 0.24 (2.3%) 3.45 (32.7%)

Source: Sawada, 1992:7, based on Guangdong Statistics Yearbook, 1989; Yukawa, 1992:13. GuangAong Statistics Yearbook, 1991. Reprinted by permission of China Newsletter.

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division of labor go beyond the overly optimistic thesis of "comparative advantage" that relies heavily on the cheap labor of the capital-receiving region? What does the case of Taiwanese investment in China tell us about the possibilities of South-South collaboration? As a way to maintain competitiveness in the world market, Taiwanese manufacturers have relied on the intensive use of labor as well as managerial input as they shifted production to southern China. In some factories, the labor practices have been highly exploitative (see chapter 3). The shared language and culture between Taiwanese employers and their Chinese employees have facilitated a more effective transfer of not only managerial skills but also the capitalist ideology of efficiency to local Chinese operators and shopfloor managers. Since 1992, wage levels in China have increased rapidly,41 and labor conditions in foreign-invested ventures have received greater attention from the Chinese government.42 Meanwhile, China continues to be a lucrative market and attracts increasing amounts of foreign capital.43 Deng Xiaoping's legendary visit to Shenzhen in the beginning of 1992 was considered a reassuring act to demonstrate the commitment of the Chinese leadership toward the continuation of economic reform since the political turmoil in 1989. Giant multinationals and other East Asian NIC investors began to invest in China at full speed. Taiwanese investment in China was no longer the only force in investment, nor was the Chinese market a "domestic" one. As Taiwanese investors in China had to compete with other international capital, China was no longer a jungle for adventurous guerrilla investors^ In the early 1990s, Taiwanese investors began to adjust their investment strategies toward longer term investment plans, larger investment scales, and more dispersed operations from southern China to other coastal and some inland regions (Rao etal., 1995:161).45 In addition, international competition has become more rigorous not only in the traditional sectors such as the shoe and the apparel industries but also in new industries like electronics. Taiwanese personal computer and PC peripheral makers have been expanding their production in China at high speed (Chung, 1994) and aggressively recruiting skilled workers, technicians, and local managers. To compete with other employers for skilled workers and to reduce turnover rates, companies have to provide housing (or loans for housing mortgages) or other fringe benefits.46 This new development is likely to generate a fragmentation and polarization of China's labor market. The general trend of increasing wage levels for all types of workers and the continuation of capital inflow to China suggests the need to revise the presumption of the necessity of cheap labor as a comparative advantage in Third World industrialization. Labor costs alone cannot explain the movement of capital; a sufficient supply of labor with diversified qualifications is equally important. The size of domestic markets is also an important leverage for bargaining with foreign capital, especially in the case of China. 47 As Rhys Jenkins pointed out (1984), the cheap labor thesis can be double-edged: it is either used to argue against Third World industrialization because of its exploitative nature or seen by others as a necessary evil for the continuation

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of foreign capital inflow (pp. 50-51). The latter view often has been held by some local Chinese officials, which, in turn, has legitimized the local officials' attitude of "opening one eye, with the other closed" toward the exploitation of unprotected migrant workers. In light of the increasing importance of skilled labor, the deterioration of the quality of education and the increasing illiteracy and dropout rates in primary and junior high schools in China is alarming.48 This deterioration is mainly due to the new economic opportunities in villages and towns since the reform started. As foreign investors took advantage of the oversupply of labor in the first 10-15 years of the reforms and employed the most qualified pool, it remains a major challenge for China's policymakers to keep up with the growing demands for high-quality workers in the coming decades. The picture of China's local development in the reform era has been a mixed one. A mixed picture can leave us with greater hope than a clearly bleak one, but it also diverts attention from formulating a vision of development. With the assistance of the overseas Chinese capital, local Chinese officials have been able to take initiatives in local development. But we need to question if the strengthened local state will bring about a transformation of local autonomy from the economic to political domain, and eventually lead to local power reconfiguration (Watts, 1993); if the development of local industries and the local-global links will generate greater economic dynamics within China's cities and towns; and if the new economic forces in the collective sector will ultimately exceed the control of local power brokers and result in a more diversified economy and a more dynamic society. The hope for this vision may lie in an alternative development that merges the dual trends of what Arturo Escobar prescribed as "the defense of cultural differences, not as a static but as a transformed and transformative force; and the valorization of economic needs and opportunities in terms that are not strictly those of profits and markets" (1995:226). As the overseas Chinese entrepreneurs continue their role in China as the middlemen between the local economy and the rest of the world and the networks of overseas Chinese entrepreneurs continue to strengthen the local state in China and to be strengthened by such alliances, I look for alternative social forces that will emerge in such processes of reconfiguration and diversification.

Appendix A Notes on Methodology

The major source of information used in this book is my field research conducted in Taiwan, Hong Kong, Singapore, Guangdong (the Pearl River Delta), Fujian (Xiaman Special Economic Zone), Shanghai, Beijing, Chendu, and Vancouver between 1991 and 1995. My fieldwork was conducted in the following periods of time: July-August 1991 (southern China, Taiwan); January-June 1992 (southern China, Taiwan, Hong Kong); March, August, October, and December 1993 (China); AprilJuly 1994 (China, Taiwan); August 1994 (Singapore); December 1994 (China); March-May and August 1995 (China, Taiwan); October-November 1995 (Vancouver); March-May, December 1996 (China, Taiwan). The total time I spent in the field was about 15 months. I conducted interviews with 80 local Chinese officials, including interviews at tax and land bureaus, local banks, city/town planning departments, committees for foreign economic relations and trade, labor departments, and collective enterprises which belong to these units, such as land development companies and foreign economic development corporations; and interviews with county party secretaries and township and district heads. My field research also included interviews of 141 Taiwanese and Hong Kong investors and their local managers and workers (see Appendix B for the list of interviews). In addition, I used the method of participant observation by attending banquets and site tours with local officials and investors; and I stayed in two Taiwanese-funded factories in the Pearl River Delta for a total of one month in March-April 1992. Most interviews lasted one to three hours; some had follow-up interviews. Interviews conducted with key informants in the factories where I stayed had several follow-up interviews combined with participant observations in die offices, dormitories, and on the shopfloor.

Industry The characteristics of an industry—its products, production processes, labor, technologies, nature of materials, and markets—have a substantial influence on the pro161

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Appendix A

cess of the industry's shift of production sites. I selected the shoe industry as the focus of my study of Taiwanese manufacturing investment in southern China. For a general discussion of Taiwan's shoe industry, see Taiwan Footwear Industry Association and Taiwan Industry Bureau, the Ministry of Economics, Report on Productivity Improvement of Traditional Industries: The Footwear Industry, 1990; and Taiwan Shoe Manufacturer Association, Thirty Tears of Taiwan's Shoe Industry (Taipei), 1989. I chose the shoe industry for two reasons. First, the shoe industry was one of the most important industries in Taiwan's export-oriented industrialization from the early 1970s to the late 1980s. Taiwan was the world's largest exporter of shoes between 1976 and 1987; and shoes have been one of the three major exports of Taiwan since 1980. More important, the structure of the shoe industry, especially the fashion shoe sector, best represents Taiwan's industrial structure. The shoe industry is mainly composed of small- and medium-sized firms, and it has established an extensive production and marketing network. The network has contributed to the industry's flexibility in responding to the changing conditions of the world market and has provided the access to new technologies in product development and production. Such small business-based networks of production and marketing can be found in other major Taiwanese export-manufacturing industries such as garments, bicycles, umbrellas, toys, small metal tools, and electronics. On the other hand, the fashion shoe industry is distinctive in its greater sensitivity to the rapidly changing fashion trends in the world market. Therefore, there is higher demand for an effectively coordinated network that can respond to such changes. In short, the fashion shoe industry has the characteristics that are shared by other important export manufacturing industries in Taiwan; and these characteristics are more clearly demonstrated in the fashion shoe industry. Second, export shoemakers have composed the largest group of Taiwanese manufacturing investors in China; they were also among the first to shift production overseas. More than 700 Taiwanese export shoe manufacturers and suppliers, which accounted for about 90% of total, had shifted their production to China by the early 1990s. Among the 2,505 investing enterprises registered with the Ministry of Economic Affairs in Taiwan in 1991, 306 were shoe manufacturers. As one of the most labor- and management-intensive manufacturing industries in Taiwan, the shoe industry has an urgent need to cultivate local human resources in southern China. Therefore, their restructuring processes in southern China represent the investment strategies that small producers adopt in a specific cultural and institutional context.

Logic of Research Strategies This research attempts to bridge the gap between macro- and micro-analysis of regional development and international capital flow. I have stressed the significance of institutional settings of production at the regional level; and the cultural connection between investors and local agents at the firm and individual level. To understand the local dynamism in the global investment system, we have to fill the macro theories with concrete analyses of the locality in which global forces are actually at work. Informed by such a theoretical approach, I depended more on firsthand data collected from fieldwork, with aggregate data at the macro level as background information. After a first run of general fieldwork in 1991, I selected a number of

Appendix A

163

investing firms and local government agencies as the focus of my case studies in the second run of the fieldwork. My in-depth interviews with Taiwanese investors and factory owners, managers, local workers, and local officials and participant observation of their interaction and work constituted the major sources of information for firms' investment strategies, interfirm networks, the relationship between overseas investors and local workers, and the relationship between local governments and overseas investors. Although case studies have often been criticized as not able to be generalized, I agree with what Michael Burawoy (1991) has suggested, that micro case studies do not necessarily exclude macroanalysis, and that it is possible to connect micro- and macroanalysis by investigating "the institutional context that shapes and distorts what happens in the lifeworld" (p. 6).

Strategies of Data Collection Two characteristics of Taiwanese manufacturing investment in southern China shaped the strategies of data collection in this research: first, it is a very new phenomenon and has been growing at an extremely rapid pace; second, direct investment in China has been forbidden by the Taiwanese government. Therefore, a major part of the activities has been underground and unrecorded. These two features created substantial problems in tracing the development of investment projects funded by capital from Taiwan and in collecting comprehensive and creditable data. My strategies to confront the problem are as follows: Written Sources of Information The new and rapid development and the semiunderground characteristic of the capital flow from Taiwan to China have made it difficult to gather official data. Yet the very same characteristic has made it one of the hottest stories in Taiwan and China's newspapers. Although press reports do not necessarily follow the rules of academic writing, they are one of the best written sources to grasp the dynamism of the activities. Furthermore, the newly developed investment rush in China has generated a wave of publication of guidebooks for investing in China, many of these are written by business consultants and attorneys. They provide a glimpse into the differences between official policies and actual practices. In-depth Interviews One of the most important sources of information has been in-depth interviews. It was difficult to select informants. The lack of general information and the problem of finding people who were willing to be interviewed made it almost impossible to conduct a rigorous sampling of informants; especially the interviews with Taiwanese investors whose operations in China have not been totally legal from Taiwanese government's point of view. Nevertheless, I believe that a smaller number of indepth interviews is more informative and creditable than a large number of general and superficial interviews chosen by a sampling method, because sampling methods do not always have connections with the context in which the interviews are conducted. Three major techniques were used for the interviews. First, my interviews were open ended and semistructured. I had a list of general questions at the beginning of my fieldwork. As the fieldwork progressed, the questions became more focused

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Appendix A

and I came up with some arguments. Then I used these arguments to stimulate some debates with the respondents in order to explore their own thinking and analysis of the issue. Second, it was more useful to maintain the interview as a dialogue than as a question-and-answer type of exchange. The interviewee often felt more willing to spend the time and be more engaged in an interview if he or she found that he or she could also obtain some information from the interviewer. For example, workers were usually very interested in knowing what it was like working in other factories, or in different regions and countries; investors were eager to know my analysis of the prospects of their investment. My experiences in the research could provide the interviewee with a bigger picture of where she or he stood. Third, it is necessary to cross-check the information from one informant with other informants and other sources (Castells, 1983). It is not only a way to verify the information but also a method to find out the different opinions that people in different positions hold. For example, in the factories I usually asked the same questions to managers or workers in different departments, positions, or place of origins.

Participant Observation and Situational Analysis I combined in-depth interviews with extensive participant observation. In addition to short visits to about 40 factories, the information on firm investment strategies and the production processes was collected by staying for a month in two key shoe factories, talking, observing, and participating in the daily work and other activities of Taiwanese factor)' owners, managers, and Chinese workers. I joined the assemblyline work with workers and shopfloor managers, chatted with them during the lunch break in their factory dormitory and at the snack stands outside the factories, shared a room with the clerical staff of factories, and occasionally met them outside their workplaces. I participated in the meetings between local tax officers and Taiwanese investors and their Chinese managers; and between Taiwanese investors and Chinese local enterprises. I also had daily meals with factory managers in their lounges, went to visit their partner firms with them, and sang along with groups of shoe businesspeople in local karaoke bars. Most of the interviews with local government officials were conducted in more formal settings, in combination with participant observation at some social occasions, stich as at banquets that were held by Taiwanese investors. What the respondents said in interviews was always shaped by the context of the interview, and it has to be understood with reference to the position of the respondents in the organization concerned—be it the factory or the city government. The awareness of the position of the interviewee is especially important in a society in which hierarchy has been a dominant organizational principle. On the occasion when there was more than one person present, their relative positions would affect what they would and would not say in front of others. Their interaction among themselves also revealed much information. The situational analysis was also applied to the interaction between the interviewer and the interviewee. I was never a neutral or invisible being. Gender and cultural and social backgrounds of the interviewer and the interviewee would influence the dynamics between them and therefore the process and contents of the interview. Instead of ignoring it or creating an artificial togetherness, I found it helpful to admit the difference and be open about such differences.

Appendix B List of Interviews

For each interviewee, I have listed the gender, age, nationality, and position. M indicates male and F female.

Company A (July 1991; March-April, June 1992) A-l. M 40s, Taiwanese, general manager and co-owner of a Taiwanese shoe-manufacturing firm in Dongguan A-2. M 40s, Taiwanese, general manager and co-owner of a Taiwanese shoe-manufacturing firm in Dongguan A-3. M 40s, manager of a Taiwanese shoe-manufacturing firm in Dongguan A-4. M 40s, Taiwanese, manager, of a Taiwanese shoe-manufacturing firm in Dongguan A-5. M 30s, Taiwanese, manager/technician of a Taiwanese shoe-manufacturing firm in Dongguan A-6. M 30s, Taiwanese, manager/technician of a Taiwanese shoe-manufacturing firm in Dongguan A-7. F 30s, Taiwanese, manager of a Taiwanese shoe-manufacturing firm in Dongguan A-8. M 20s, Taiwanese, manager/engineer of a Taiwanese shoe-manufacturing firm in Dongguan A-9. F 20s, Chinese, secretary of the general manager of a Taiwanese shoe-manufacturing firm in Dongguan A-10. F 20s, general secretary of a Taiwanese shoe-manufacturing firm in Dongguan A-ll. F 20s, Chinese, staff of local purchasing department of a Taiwanese shoemanufacturing firm in Dongguan A-12. F 20s, Chinese, accountant of a Taiwanese shoe-manufacturing firm in Dongguan A-13. M 40s, Taiwanese, general manager a Taiwanese sole-manufacturing firm in Dongguan 165

166

Appendix B

Company B (July 1991; March-April, June 1992) B-l. M 50s, Japanese, president of a Taiwanese shoe-trading firm in Guangzhou and Taichung B-2. M 30s, Taiwanese, manager of a Taiwanese shoe-trading firm in Guangzhou and Taichung B-3. M 30s, Taiwanese, quality inspector of a Taiwanese shoe-trading firm in Guangzhou and Taichung B-4. M 30s, Taiwanese, quality inspector of a Taiwanese shoe-trading firm in Guangzhou and Taichung B-5. M 40s, Taiwanese, technician of a Taiwanese shoe-trading firm in Guangzhou and Taichung B-6. F 30s, Taiwanese, vice general manager of a Taiwanese shoe-trading firm in Guangzhou and Taichung B-7. M 20s, Chinese, quality inspector of a Taiwanese shoe-trading firm in Guangzhou B-8. M 30s, Chinese, quality inspector of a Taiwanese shoe-trading firm in Guangzhou

Company C(]uly 1991; March-April 1992) C-l. M 40s, Taiwanese, general manager of a Taiwanese shoe-manufacturing firm in Dongguan C-2. M 40s, Taiwanese, production manager of a Taiwanese shoe-manufacturing firm in Dongguan C-3. M 30s, Taiwanese, manager of a Taiwanese shoe-manufacturing firm in Dongguan

Company D (February-March 1992) D-l. M 40s, Taiwanese, marketing manager of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Zhongshan D-2. M 30s, Taiwanese, manager of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Zhongshan D-3. F 20s, Chinese, secretary of a Taiwanese-Chinese joint venture shoe-manu facturing company in Guangzhou D-4. M 50s, Taiwanese, vice general manager of a Taiwanese shoe-manufacturing firm in Hua County, Guangzhou D-5. M 40s, Taiwanese, general manager of a Taiwanese shoe-manufacturing firm in Hua County, Guangzhou D-6. M 40s, Taiwanese, vice general manager of a Taiwanese shoe-manufacturing firm in Hua County, Guangzhou D-7. M 30s, Taiwanese, manager of a Taiwanese shoe-manufacturing firm in Hua County, Guangzhou

Company E (February-March 1992) E-l. M 40s, Taiwanese, general manager and co-owner of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Guangzhou, Baiyun District E-2. M 40s, Taiwanese, vice general manager and co-owner of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Guangzhou, Baiyun District E-3. M 40s, Chinese, vice general manager of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Guangzhou, Baiyun District

Appendix B

167

E-4. F 20s, Chinese, assistant in the personnel department of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Guangzhou, Baiyun District

Company F (March-April 1992) F-l. M 40s, Taiwanese, general manager of a Taiwanese-Chinese joint venture shoemanufacturing firm in Guangzhou F-2. M 50s, Chinese, personnel manager of a Taiwanese-Chinese joint venture shoemanufacturing firm in Guangzhou F-3. M 50s, Taiwanese, plant manager of a Taiwanese-Chinese joint venture shoemanufacturing firm in Guangzhou F-4. M 40s, Chinese, warehouse manager of Taiwanese-Chinese joint venture shoemanufacturng firm in Guangzhou F-5. F 20s, Taiwanese, purchasing assistant of a Taiwanese-Chinese joint venture shoe-manufacturing firm in Guangzhou F-6. M 30s, Taiwanese, assistant chief factory manager of a Taiwanese shoe-manufacturing firm in Guangzhou F-7. M 40s, Taiwanese general manager of a Taiwanese sole-manufacturing firm in Guangzhou, supplier of the firm listed in F-6

Company G (March-April 1992) G-l. F 20s, Chinese, secretary of the general manager of a Taiwanese sole-manufacturing and shoe-material supply firm G-2. M 40s, Taiwanese, plant manager of a Taiwanese insole-manufacturing firm in Guangzhou G-3. M 40s, Taiwanese, president of a Taiwanese footwear textile (insole) company in Guangzhou G-4. M 30s, Taiwanese, manager of a Taiwanese footwear textile (insole) company in Guangzhou G-5. M 30s, Taiwanese, manager and co-owner of a Taiwanese insole-manufacturing company in Guangzhou G-6. F 20s, Chinese, personnel office worker, of a Taiwanese insole-manufacturing company in Guangzhou G-7. F 20s, Chinese, accountant of a Taiwanese insole-manufacturing company in Guangzhou G-8. M 20s, Chinese, customs procedure assistant of a Taiwanese insole-manufacturing company in Guangzhou G-9. F 20s, Taiwanese, accountant of a Taiwanese insole-manufacturing company in Guangzhou G-10. M 30s, Taiwanese, manager and technician of a Taiwanese insole-manufacturing company in Guangzhou G-ll. M 40s, Taiwanese, manager and technician of a Taiwanese insole-manufacturing company in Guangzhou G-12. M 40s, Taiwanese, manager and technician of a Taiwanese insole-manufacturing company in Guangzhou G-l 3. M 30s, Taiwanese, manager and technician of a Taiwanese insole-manufacturing company in Guangzhou

168

Appendix B

Other Taiwanese Shoe-Companies in China (July-August 1991; February-May 1992) H-l. M 30s, Taiwanese, manager of a Taiwanese shoe-manufacturing firm in Shenzhen H-2. M 40s, Taiwanese, general manager of a Taiwanese shoe-manufacturiong firm in Fushan, Guangdong H--3. M 40s, Taiwanese, manager of a Taiwanese shoe-manufacturing firm in Shenzhen Nan-au H-4. M 40s, Taiwanese, vice manager of a Taiwanese shoe-manufacturing firm in Shenzhen Nan-au H-5. M 30s, Taiwanese, manager of a Taiwanese shoe-manufacturing firm in Renhe Town Baiyun District, Guangzhou H-6. M 30s, Taiwanese, assistant plant manager of a Taiwanese shoe-manufacturing firm in Dongguan H-7. M 40s, Taiwanese, vice president of a Taiwanese shoe-manufacturing firm in Baiyun District, Guangzhou H-8. M 40s, Japanese, president of a shoe-company moving from Taiwan to Fushan, Guangdong H-9. M 40s, Taiwanese, vice general manager of a Taiwanese shoe-manufacturing firm in Guangzhou H-10. M 40s, assistant general manager, of a Taiwanese shoe-manufacturing firm in Xiamen H-ll. M 30s, general manager of a Taiwanese shoe-trading firm H-12. M 40s, quality inspector of a Taiwanese shoe-trading firm in Guangzhou H-l 3. M 3()s, American, quality inspector of an American export company in China H-14. M 50s, American, technical and quality control manager of a U.S. shoe company in China H-15. M 30s, Taiwanese, quality inspector of a U.S. shoe company in China

Taiwanese Shoe-Supply Companies in China (July-August 1991; February-May 1992) I-1. M 30s, Taiwanese, sales manager of a Taiwanese firm in Shenzhen, producing glue for shoe manufacturers 1-2. M 20s, Taiwanese, manager of a Taiwanese garment manufacturing firm in Zhongshan, Guangdong 1-3. M 50s, Taiwanese, president of a cutting-die-manufacturing firm in Dongguan 1-4. M 50s, Taiwanese, manager of a Taiwanese shoe-making machinery firm in Taiwan 1-5. M 30s. Taiwanese, engineer of a Taiwanese shoe-making machinery firm stationed in Guangdong

Other Taiwanese Manufacturer-Investors in China and other Countries J-1. M 40s, Taiwanese, vice manager of the garment department of one of the largest textile companies in Taiwan, February 1992, Taipei J-2. F 50s, Taiwanese, president of one of the largest textile companies in Taiwan, investing in a garment manufacturing firm in Shanghai, June 1991, May 1992, Taipei

Appendix B

169

J-3. M 50s, Taiwanese, president of a trading firm associated with textile companies in Taiwan, June 1991, May 1992, Taipei J-4. M 30s, Taiwanese, quality inspection manager of a Taiwanese shoe-trading firm in Dongguan, March 1992, Guangdong J-5. M 50s, Taiwanese, president of a Taiwanese suitcase-manufacturing firm investing in China; a board member of Taiwan/China Commercial Negotiation Committee, June 1991, Taipei J-6. M 30s, Taiwanese, general manager of a Taiwanese down product company investing in Shenzhen, June 1991, Taipei J-7. M 40s, Taiwanese, vice general manager of a Taiwanese garment-manufacturing firm investing in Hongzhou, China, June 1991, Taipei J-8. M 40s, Taiwanese, general manager of a Taiwanese electrical medical equipment-manufacturing firm investing in Shenzhen, June 1991, Taipei J-9. M 50s, Taiwanese, general manager of a Taiwanese plywood company investing in Malaysia, June 1991, Taipei J-10. M 30s, Taiwanese, general manager of a Taiwanese trading company that imports medical equipment from China, June 1991, Taipei J-ll. M 50s, Taiwanese, president of a Taiwanese suitcase-manufacturing firm investing in Shenzhen, June 1991, Taipei J-12. M 50s, Taiwanese, president of a Taiwanese suitcase-manufacturing firm investing in Dongguan, June 1991, Taipei J-13. M 40s, Taiwanese, managing director of a Taiwanese trading firm organizing a group of Taiwanese manufacturers to invest in a industrial park in China, June 1991, Taipei J-14. M 50s, Taiwanese, president of a Taiwanese plastic tube-manufacturing firm investing in Hainan, June 1991, Taipei J-15. F 40s, Taiwanese, vice president of a Taiwanese investment-holding company investing in industrial parks in Ireland, August 1991, Taipei J-16. M 30s, Taiwanese, general manager of a Japanese auto parts-trading firm in Taiwan, January 1992 J-17. M 30s, Taiwanese, vice president of a Taiwanese property-development firm in Shanghai, April 1995 J-18. M 50s, Taiwanese, general manager of a Taiwanese electronics company in Shanghai, April 1996

Chinese Workers in Taiwanese-Invested Factories (July-August 1991; February-May 1992) K-l. K-2. K-3. K-4. K-5. K-6. K-7.

F 21, Chinese, operator of a Taiwanese eyewear factory in Xiamen F late teens, Chinese, fired operator of a shoe-manufacturing firm in Xiamen F 19, Chinese, operator of a shoe-manufacturing firm in Xiamen F 37, Chinese, worker of a shoe-manufacturing firm in Fushan F 18, Chinese, foreman of a Taiwanese shoe-manufacturing firm in Dongguan F 19, Chinese, foreman of a Taiwanese shoe-manufacturing firm in Dongguan F late teens, Chinese, foreman of a Taiwanese shoe-manufacturing firm in Dongguan K-8. F late teens, Chinese, foreman of a Taiwanese shoe-manufacturing firm in Dongguan K-9. M 20s, Chinese, foreman of a Taiwanese shoe-manufacturing firm in Dongguan K-10. M20s, Chinese, foreman of a Taiwanese shoe-manufacturing firm in Dongguan

170 K-ll. K-12. K-13. K-14.

Appendix B F 20s, Chinese, operators in factory A F 20s, Chinese, operators in Factory F F late teens, Chinese, operators in Factory G F 20s, Chinese, foreman in Factory G

Taiwanese Electronics and Other Industries L-l. M 40s, president of a Taiwanese telecommunications firm planning to invest in China, April 1994 L-2. F 40s, manager of a Taiwanese telecommunications firm planning to invest in China, April 1994 L-3. M 40s, manager of a Taiwanese telecommunications firm planning to invest in China, April 1994 L-4. M 30s, engineer of a Taiwanese telecommunications firm planning to invest in China, April 1994 L-5. M 40s, president of a Taiwanese telephone-manufacturing firm investing in China, January 1992 L-6. M 40s, general manager of a Taiwanese electronics firm investing in Shenzhen, February 1992 L-7. M 40s, president of a Taiwanese precision tool-manufacturing firm investing in Indonesia, June 1992 L-8. M 40s, president of a Taiwanese firm producing chemical materials for silicon chip production, April 1994 L-9. M 50s, vice president, Institute for Information Industry of Taiwan, December 1994 L-10. M 45, vice president and general director of Industrial Technology Research Institute, Taiwan, December 1994 L-11. F 40s, vice president of an electronics company producing silicon chips, Taiwan, December 1994 L-12. M 40s, executive vice president of an electronics company producing silicon chips (same company as L-ll), Taiwan, April 1994, Shanghai L-l 3. M 40s, president of an electronics company producing silicon chips and chip sets, Taiwan, May 1994 L-14. M 50s, Taiwanese, general manager of a Taiwanese investment group (mainly wire companies) in Shanghai and other cities in China, June 1994 L-15. M 50s, Chinese, general manager of a Taiwanese wire company in Shanghai (belongs to the L-14 group), June 1994 L-l 6 M 50s, Chinese, factory director of a Taiwanese wire company in Shanghai (same company as L-15), June 1994 L-17. M 50s, Chinese, factory director of a Taiwanese wire company in Shanghai (same company as L-15), June 1994 L-l 8. M 40s, manager of a Taiwanese investment group (mainly wire companies, same as L-14) in Shanghai and other cities in China, June 1994 L-19. M 50s, manager of a Taiwanese investment group (mainly wire companies, same as L-14) in Shanghai and other cities in China, June 1994 L-20. M 40s, president, a Taiwanese computer company investing in Malaysia, December 1994 (interviewed in Taiwan) L-21. M 40s, deputy general manager, a Taiwanese electronics appliance company, December 1994 L-22. M 40s, senior director in marketing and sales of an electronics company producing ICs, Taiwan, December 1994

Appendix B

171

L-23. M 40s, president of an electronics company producing ICs and chip sets, Taiwan, December 1994 L-24. M 30s, co-owner of a Taiwanese property-development firm investing in Taiwan and China, May 1995 L-25. F 30s, co-owner of a Taiwanese sweater-trading company buying from China, December 1994, June 1995 L-26. M 40s, vice president of an electronics company producing ICs and chip sets, Taiwan, May 1995 L-27. M 40s, chairman of a Taiwanese computer company, July 1995 L-28. M 40s, general manager of a Taiwanese property-development firm, May 1995 L-29. M 40s, president of a Taiwanese sweater-trading company buying from China, March 1995

Local Chinese Officials and Enterprise Managers M-l. F 50s, executive director, tax bureau, Tianhe District, Guangzhou, March 1992 M-2. M 50s, senior engineer, Guandong Foreign Economic Development Corporation, Development Department, Guangzhou, April 1992 M-3. M 50s, manager, Guangdong Foreign Economic Development Corporation, Dongguan Branch, Enterprise Department, April 1992 M-4. M 30s, deputy director and deputy editor-in-chief of a publishing house in Xiamen, May 1992 M- 5. M 40s, engineer of a Chinese state-owned watch factory in Jinan, Shangdong, February 1992 M-6. M 50s, executive vice governor of the People's Government of Panyu County, Guangdong, March 1992 M-7. M 40s, Chinese, general manager of a provincial-owned Chinese sugar mill, Panyu, Guangdong, March 1992 M-8. M 40s, director, Foreign Investment Committee, Project Approval Unit, Xiamen, May 1992 M-9. M 40s, assistant director, Real Estate Management Bureau, Xiamen, May 1992 M-10. M 40s, general manager of a private enterprise manufacturing handbags in Shilong, Quanzhou, Fujian Province, May 1992 M-ll. M 30s, deputy director, Xiamen Municipal Economic Affairs and Trade Committee, Xiamen, May 1992 M-12. M 50s, party secretary, Renhe Town, Guangzhou, December 1993 M-13. M 50s, deputy party secretary, Renhe Town, Guangzhou, December 1994 M-14. M 40s, governor of Renhe Town president of a joint venture shoe-manufacturing firm with a Taiwanese investor, and president of a joint venture industrial park-development company, December 1994 M-15. M 40s, deputy vice governor of Renhe Town, Guangzhou, December 1993, December 1994 M-16. M 30s, director, Trade and Economic Development Committee, Renhe Town, Guangzhou, May 1994 M-17. M 50s, supervisor, commission for inner-city redevelopment, Jinhua neighborhood, Liwan District, Guangzhou, December 1994 M-18. F 50s, director, office of Jinhua neighborhood, Liwan District, Guangzhou, December 1994 M-19. M 50s, deputy district magistrate, Nanshi District People's Government of Shanghai Municipality, August 1993

172

Appendix B

M-20. M 40s, journalist, Shanghai Fazhi Daily, March 1992 M-21. M 40s, engineer, Shanghai Zhabei District, housing construction office, development unit, August 1993 M-22. M 40s, deputy party secretary, Fengxian County, Hongmiao Xiang, near Shanghai, March 1992, August 1993 M-23. M 40s, deputy director, Shanghai Minhang Economic and Technological Development Zone and Shanghai Minhang United Development Company, Business Department, December 1994 M-24. M 40s, Committe for Foreign Economic Relations and Trade, Tianhe District, Guangzhou, May 1992 M-25. M 50s, director, Nansha Port Transportation Company, Panyu County, Guangdong, December 1993 M-26. F 20s, purchasing representative for shoe department of a department store in Beijing, March .1992 M-27. M 40s, purchasing representative for a shoe department of a department store in Beijing, March 1992 M-28. M 40s, manager, Beijing, Shangdi Information Industrial Development Corporation, December 1994 M-29. M 50s, section chief, Fujian Provincial Economic Commission, March 1993 M-30. M 30s, representative, Fujian Provincial Economic Commission, March 1993 M-31. F 30s, representative of a municipal trade-development company in Shanghai, March 1995 M-32. M 40s, general manager of a district collective enterprise producing sweaters, Shanghai, March 1995 M-33. M 40s, vice general manager of a municipal textile-trading company in Tianjin, April 1995 M-34. M 50s, vice general manager of a municipal textile-trading company in Tianjin (same company as M-33), April 1995 M-35. F 50s, factory director of a state textile factory in Tianjin, April 1995 M-36. M 50s, general manager of a U.S.-China joint venture in Shanghai designing 1C, June 1994, April 1995 M-37. M 30s, executive agent of a Canadian trading company, based in Beijing, March 1994, interviewed in Vancouver M-38. M 30s, general manager of the Strategic Management Department of Shenzhen Special Economic Zone Overseas Chinese Town Economic Development Company, December 1994 M-39. M 50s, member of party committee of JT Town Committee and deputy director of Standing Committee of the Management Committee of JT Economic Development Area, SJ County, Shanghai, March 1995 M-40. M 50s, general manager and chief officer of an electrical appliance company in JT town, SJ County, Shanghai, March 1995 M-41. M 50s, party secretary of a municipal metal work factory in JT town, SJ County, Shanghai, March 1995 M-42. M 50s, village and town office director, LQ township, Wuxi County in Jiangsu Province, near Shanghai, March 30, 1995 M-43. M 50s, vice director of the Wuxi County Branch of the Construction Bank, March 1995 M-44. M 40s, deputy general manager of the Industrial Corporation of LQ township, Wuxi County in Jiangsu Province, near Shanghai, March 1995

Appendix B

173

M-45. M 50s, governor of LQ township, Wuxi County, and vice president of LQ Enterprise, March 1995 M-46. M 40s, director of village and town construction office of LS Township, Wuxi County, June 1994, May 1996 M-47. M 40s, deputy party secretary of LS Township, Wuxi County, June 1994 M-48. M 30s, executive general engineer, Chengdu Institute of Urban Planning and Design, August 1995 M-49. M 50s, deputy director, Chengdu Urban Planning and Management Bureau, August 1995 M-50. M 50s, director, Chengdu Residential Housing Construction Office; general engineer, Chengdu Mingjiang Property Development Corporation, August 1995 M-51. M 50s, deputy director, Institute of City Planning, April 20, 1995, Beijing M-52. M 30s, engineer, Land Management Bureau, BY District, Guangzhou, December 1994 M-53. M 50s, party secretary of LF village, LL County, WJ City, Jiangsu Province, May 1996 M-54. M 30s, associate director, the Overseas Chinese Office of Guangdong Provincial People's Government, Guangzhou, December 1993

Hong Kong and Other foreign Investors in China, N-l. M 30s, Hong Kong, vice president of a Hong Kong investment company, interviewed in Hong Kong, March 1992 N-2. M 30s, Hong Kong, director of a large Hong Kong-based investment company, interviewed in Hong Kong, March 1992 N-3. M 40s, Hong Kong, president and chief executive officer of a Hong Kongbased ferry company, interviewed in Vancouver, March 1993 N-4. M 50s, general manager of a German-funded chemical venture in Shanghai, interviewed in Shanghai, October 1993 N-5. M 40s, director of planning department of a Japanese electrical appliance company investing in JT Town, SJ County, Shanghai, March 1995 N-6. M 40s, sales manager of a U.S.-based equipment-supply company, August 1993 N-7. M 40s, vice president, Singopore Chinese Chamber of Commerce and Industry, interviewed in Singapore, August 1994

City Planners and Other Professionals in China P-l. M 50s, certified general accountant, Guangzhou, March 1992 P-2. M 40s, vice director of a branch of Bank of Taiwan Small and Medium Enterprises, Taiwan, May 1992 P-3. F 30s, architect in Taipei, May 1995 P-4. M 40s, architect and manager of a large development company in Taipei, planning to invest in China, May 1994, December 1996 P-5. M 30s, planner and architect in Beijing, December 1992, December 1994, May 1995, December 1996 P-6. M 30s, planning professional in Guangzhou, September 1994, December 1995, December 1996

174

Appendix B

P-7. M 50s, university professor and planning professional in Guangzhou, August 1992, September 1994, December 1995, December 1996 P-8. M 30s, university professor and planning professional in Shanghai, March 1992, September 1993, December 1994, October 1996 P-9. M 40s, university professor and planning professional in Shanghai, September 1993, December 1994, May 1995, October 1996 P-10. M 30s, university professor and planning professional in Guangzhou, August 1992, December 1995, December 1996 P-ll. M 30s, university professor and planning professional in Guangzhou, August 1992, October 1995, March and December 1996 P-12. M 30s, university professor and planning professional in Guangzhou, August 1992, September 1993, September 1995 P-13. F 30s, planning professional in Hainan, February 1993 P-14. M 30s, planning professional in Guangzhou, December 1995, March 1996 P-15. M 50s, university professor and planning professional in Guangzhou, October 1995 P-16. M 30s, planning professional in Beijing, May 1995, May and November 1996

Interviews Conducted in Vancouver (October-November 1995) V-l. M 30s, urban planner, Shangdong Province V-2. M 30s, urban planner and manager, Hainan Province V-3. M 30s, city management officer, Htibei Province V-4. M 30s, urban planner and manager, Hebei Province V-5. F 30s, urban planner and manager, Shanghai Municipality V-6. M 30s, provincial government coordination officer, Fujian Province V-7. M 30s, urban planner, Beijing V-8. F 20s, urban construction committee official, Jiangsu Province V-9. M 30s, urban planner and manager, Henan Province V-10. M 20s, urban planner, Yunan Province

Appendix C Production Process and Division of Labor in the Footwear Industry

Cutting and Component Preparation 1. Issue leather to cutters from the warehouse 2. Upper cutting—use hand-clicked cutting machine/presser to cut PVC sheets, nylon, canvas, etc. The traveling head hydraulic cutting machine can cut multiple layers of sheets at one time. It can also cut leather. 3. Leather splitting—use bandknife splitting machine to split natural leather to get an even thickness of upper components 4. Lining marking—mark details of last size and shoe-style codes 5. Stitch marking—mark stitching guide lines 6. Inspection and sorting upper components 7. Sock embossing 8. Batching of components

Stitching and Belated Operations 9. Stitching department work handling (assignment) 10. Skiving of uppers—use hand-guided skiving machines to skive (taper) the edge of leather pieces for light seams 11. Folding and cementing of edges—use hand-guided folding machines to fold the edge of the uppers. In China, this step is done by hand with small hammers. 12. Stitching uppers—use manually controlled stitching machines but sometimes need hand-stitching. This step includes stitching of both lining skeleton lining, quarter lining, and so on) and the leather pieces. 13. Seam reducing—reducing bulk of back seams 14. Seam taping—back scams 15. Eyelet reinforcing—reinforcing strip 175

176

Appendix C

16. Punching and eyelet insertion—eyeletting and inserting machines or footoperated punches and eyeletter, or handheld punches 17. Temporary lacing—for lasting 18. General cementing and toe puff insertion—cementing; use upper roughing machine (hand-guided), use thermoplastic toe puff applying machine or hand to insert the toe puff to reinforce the toe part 19. Trimming and fitting of uppers

Sole Preparation 20. Storage of bottom components—insole sheets, shanks, forepart fillers 21. Insole cutting—use beam press cutter or swing-arm press to cut insoles from sheet materials 22. Insole edge beveling and size stamping—use insole beveling machines and sole stapling machines, or hand-stapling Premolded Insole " Use traveling-head hydraulic cutting machine and cutting dies to cut insoleand shank boards • Use automatic shank board reducing machine to reduce the thickness of cut shanks • Use eyeletting machine to locate steel shank on shank boards 11 Use neoprene glue pasting machine to glue insoles and shank boards, activate the glue through conveyor, then stick insole and shank boards together » Use automatic insole molding machine to press insole so the insole will be molded according to the shape of shoe-lasts • Use insole backpart trimming machine to bevel trimming the sides of premolded insole • Use insole edge folding machine to cover the insole with leather, if it's required by design

Lasting Department 23. Storage and distribution of stitched uppers 24. Hand working in lasting— the hand lasting of a complete shoe is assigned to a single operator 25. Insertion of heel stiffeners 26. Insole tacking—hand-guided insole tacking machine to attach insoles to lasts temporarily 27. Forepart lasting—use heater and semiautomatic toe-lasting machine to pull the forepart of the upper over the last 28. Side lasting—cement side-lasting machines 29. Seat lasting—automatic cement heel lasters 30. Tack removal and inspection—tack-pulling machines to pull the insole tack

Sole Attaching 31. Bottom roughing—use automatic or hand-guided roughing machine or scouring machines to rough lasting margin of upper

Append'ix C

177

32. Shank attaching—staple fastening machine to stiffen shank for instep 33. Bottom cementing—use bottom-cementing machines or hand to cement lasted margin of upper 34. Bottom filler insertion—forepart filling 35. Outsole storage and issuing 36. Sole cementing and drying—sole-cementing machine and racks 37. Sole attaching—cement sole-attaching machines, or manual pneumatic presses to reactivate the cemented sole by heat 38. Last removal—last-pulling machine Pre-Molded Outsoles

Rubber and EVA Outsole • Use the splitting machine to split the EVA sheet into required thickness • Use traveling-head hydraulic cutting machine and cutting dies to cut EVA sheet into required shape of sole • Use slope-splitting machine to split the slope of EVA outsole • Use slope-cutting machine to cut the slope of front and heel part of EVA outsole • Use double-faced slope-roughing machine to rough both faces of EVA outsole for cementing • Use rubber sole-grinding machine to rough the face of rubber outsole • Glue the EVA sole and the rubber sole together « Use auto-balance hydraulic sole press to press the outsole • Use front and heel part hydraulic sole press to press front and heel part • Use vertical spindle edge grinding machine to grind the edge of the outsole

Injection Outsole • Use plastic injection machine to inject the outsole

Finishing Department 39. 40. 41. 42. 43. work 44. 45. 46. 47.

Removal of creases on uppers—use hot blast treeing machines or handwork Sock cementing and insertion—sock from step 7 Cleaning and repairs—handwork only, cement-removal tools needed, etc. Initial and final upper dressing—in spray booth Final cleaning and polishing—mopping and polishing machine or handLacing—handwork only Marking of labels for shoe-boxes—handwork only Shoe box and top forming—hand-guided shoe box-forming machine Inspection and boxing—see if each pair matches, handwork only

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Appendix D Labor Contracts in Two Taiwanese Shoe Factories

Factory A: A Taiwanese/Chinese Joint Venture (April 1992) General Disciplines 1. The length of the contract is one year. 2. The worker agrees to complete job assignment and job shifts decided by the management of the company. 3. The worker will follow all government policies and company disciplines and obey the leadership of the company. The worker will do his or her best to carry out the production obligation.

Working Hours and Holidays 1. The company will follow the government's regulation on working hours. When overtime is necessary, workers should comply with management's arrangement. Overtime will be paid with overtime rates, but piece-rate work will not be paid differently from work done during regular working hours. 2. Workers have seven days off ever)' year on national holidays. In addition, there is a Lunar New Year holiday.

Pay Rates 1. New workers will be paid 81 yuan in the first month as a trainee; after the first month the wage will be decided by the skill level and effort of the worker. The harder one works, the more one earns. 2. New workers will not be paid at all if they resign or are fired within one month. 3. The probation period is three months. 179

180

Appendix D

Insurance and- Fringe Benefits 1. The company provides free meals, dormitory housing, and medical care. 2. The company is responsible for the worker's labor insurance during his or her employment. 3. Workers will get an appropriate bonus after working for the company for more than one year. 4. When an immediate family member of a worker dies, the company will give 100 yuan (equivalent to about US$18.00) to the worker, provided the worker has worked for the company for more than six months. 5. If the worker dies on the job, the company will comply with government regulation to pay for the funeral expenses and provide monetary compensation to the immediate family. 6. If the worker is injured on the job, the company will pay for medical expenses and standard living expenses; wage compensation will be paid by the insurance company. For an off-the-job injury, the company will pay for medical and food expenses, no salary will be paid. 7. Sick leave: those who have worked for the company less than one year will have 20 days sick leave; more than one year, one month; the maximum is three months.

Health and Safety 1. The company is responsible for the safety and health of the worker in the factory. 2. The company is responsible of training the worker to do the job assigned to him or her. 3. The worker can voice a grievance if the company ignores the safety and health problem of workers. Rewards and Penalties The worker should comply with all disciplines set by the company, and the company has the right to impose penalties and deliver rewards to the worker.

Termination of the Contract and Dismissal of Workers Both parties should give the other party a 10-day notice if one party decides to terminate or change the contents of the contract. A. The employer can dismiss the worker legally under the following conditions: 1. The company does not have sufficient orders or is having financial difficulties. 2. The worker is injured and can not resume his or her work. 3. The worker is ill or injured away from work, and the length of sick leave exceeds the limits. For those workers have worked for the company for more than six months, the company will give the worker from 100 to 300 yuan as a compensation. 4. The worker is found to have a chronic disease during the probation period or fails to qualify' after a three-month probation period. 5. The worker does not comply with job assignments.

Append ix D

181

6. The worker is absent for more than two consecutive days without permission from the management. 7. The worker steals, cheats, fights, gambles, drinks excessively, slows down or interrupts production, or is involved in immoral sexual relationships. 8. The worker violates labor disciplines or other company regulations or commits crimes. If the worker violates any of the disciplines listed in #4-8, and if the worker has worked for the company for less than one year, the company will not refund the deposit (100 yuan) and training deposit that the worker has paid to the company when he or she first joined the company. B. The worker can resign under the following conditions: continuing higher education or entering the army, immigration to Hong Kong or elsewhere, or being recruited by state sector.

Others 1. The worker has to be between age 16 and 22. 2. The worker has to pay 100 yuan as a deposit when joining the company. 3. The worker has to pay an administrative fee to a local labor service bureau. 4. If the worker causes any financial loss to the company and cannot afford to compensate, the sponsor (bao-ren) of the worker has to be responsible for the loss. 5. The worker is responsible for the expenses of home visiting, holidays, and fees for the health examination required by the company.

Factory E: A Taiwanese Sole Proprietorship (March 1992) This is not called a contract, but a "Letter of joining X company with free will" (Dong-rui Company) I join your company out of my free will. I agree that I will follow all the factory regulations from the day I join. I will comply with all job assignments, I will respect the instruction of the leaders of all levels in the factory; I will learn diligently and follow all work rules. I will not waste materials and will take care of the facilities in the factory. I will sincerely work for the factory and see the company as my own home. And I will comply with the following rules: 1. The type of work and the length of work is decided by the management of the factory. I will have one month trial period. If I fail the one-month trial, I will leave without any complaint. If I am fired within 15 days, I will not be paid at all. 2. If I have to leave the company, I will give the management a 10-day notice and I should wait for permission to leave. Before I leave, I will return all tools that are lent to me. If I fail to do so, the management has the right to deduct the value of these items from my salary. 3. I will follow all operation rules in the factories and rules in dormitories; and I will accept penalties as written in the rules. 4. If I am fired because of my failure to comply with a rule, I will accept termination unconditionally and I will give up my rights without complaint. 5. If I steal any facilities and goods from the factory, I will be fired and be legally responsible. I sign this letter with my own free will, signature)

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Notes

Introduction 1. In order to avoid government scrutiny, more than half of the Taiwanese capital in China was registered as Hong Kong companies. Shim Jae Hoon and John McBeth (1995) estimated that the total Taiwanese capital in China is about US$20 billion. 2. China interview A-2. See Appendix B for a brief description of each person interviewed. 3. The names of the restaurant and the town are fictionalized. 4. The street address of the company is fictionalized. 5. The name of the restaurant is fictionalized. 6. For a comprehensive review of the works on Third World multinationals, see Henry Yeung, 1994b. 7. Such as strategic alliance, international subcontracting, or what Gary Gereffi and Miguel Korzeniewicz (1990) have called "global commodity chains" that involve both production and circulation in the analysis. 8. For example, Manuel Castells (1993) suggested that with networks of small and medium enterprises as well as alliance among MNCs and between firms of all sizes, with the penetration of transnational capital, information, and other factors of production across national boundaries, the nation-state is no longer "the only agent or the unit of economic accounting as well as the frame of reference for economic strategy" in the face of globalization. This body of literature not only deals with the manufacturing sector within the framework of a new international division of labor but also looks at the globalization of financial, telecommunication, and other service sectors as well as the real estate industry. 9. In this research, culture is seen not only as a given set of values but more importantly, a historical formation of a specific type of social relationships. The for183

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Notes

matioii and the workings of cultural elements cannot be separated from a specific institutional context. Yet this is not to deny the active role that culture plays in shaping social practices and therefore its "relative independence" from structural constraints. 10. In their study of Hong Kong investors in Guangdong, Smart and Smart (1991) found that gift exchange is a way of bridging the socialist and the capitalist economic systems for Hong Kong investors. Participation in the system of gift exchange with local Chinese officials helps the Hong Kong investors to "facilitate the speedy establishment of small-scale, socially mediated investment." Smart and Smart reported that personal relationships act as a catalyst to facilitate an investor's ease in establishing enterprises in China: " . . . paperwork can be speeded up, and negotiations are less detailed than in larger, bureaucratically mediated investments." The "gift" may be in material form, or a piece of information concerning whom one should talk to in order to get certain requests accepted, or greater cooperation from local bureaucrats regarding production and management issues (Smart and Smart, 1991:227-8). As a comparison, Andors's (1988) research on Shenzhen showed Japanese managers' frustration over their lack of fjuanxi with local Chinese officials and their disadvantage in obtaining special privileges compared with their Hong Kong Chinese counterparts (p. 35). Although I think the meaning of gift exchange in this context is more complex than "bridging the socialist and the capitalist economic systems," Smart and Smart's pioneering work on the subject is very important in its cultural-institutional understanding of economic transformation.

Chapter 1. Taiwan, Southern China, and the New East Asian Economy 1. North America, especially the United States, has been another important destination for the East Asian NIC's transnational investors. The investment in North America is mainly for access to the market and technology, whereas the investment in Asia is for access to the markets, low production costs, and natural resources and to circumvent protectionist measures of the OECD countries (Yue, 1993:86). However, the investment within Asia has been growing faster, and the role of EANICs in ASEAN and China has been more important than in North America. 2. By the end of June 1991, there were 20,000 Hong Kong enterprises conducting out-processing operations employing more than 2 million workers in Guangdong (Maruya, 1992:137). Victor Fung-Shuen Sit estimated that by 1986 in the Pearl River Delta alone, there were already 3 million jobs provided by Hong Kong investors (Sit, 1991). Yun-wing Sung's estimate in 1994 was still 3 million (Sung, 1994:13). According to my interview with a Hong Kong planner, the actual number can be as high as 5-6 million. 3. See, for example, Ozawa, 1979; Yoshihara, 1978; Yamazawa, 1990; and more recent accounts such as Elger and Smith, 1994; Doherty, 1994. 4. Director-General of Budget, Accounting and Statistics, R.O.C., Monthly Bulletin of Earnings and Productivity Statistics, Taiwan Area, Republic of China, March 1994. 5. Accounting and Statistics, R.O.C., op. cit., 1994. 6. Ministry of Finance, R.O.C., Monthly Statistics of Exports and Imports, Taiwan Area, R.O.C., March 1994. The United States imported 40% (US$23.9 billion) of Taiwan's manufactured commodities in 1989, accounting for 58% of

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Taiwan's $75.09 billion GNP and 88.7% of Taiwan's trade surplus (Dittmer and Choy, 1991:5). 7. Zhonghwa minjjuoguomin jingji dongxiang tongji jibao (Economic Statistic Quarterly Report of Republic of China), quoted in Taiwan-China Economic Yearbook, Taipei: Chunghwa Economic Research Institute, 1994, p.441. 8. The Economist, October 6, 1990, p. 33. 9. In the period of 1986-1990, the average size of the Taiwanese investment in Thailand was US$1.2 million (Chang and Thomson, 1994:117). 10. China interviews C-l, D-l, D-3, F-I. 11. Before 1988, trade with China was strictly forbidden by the Taiwan government. Taiwan's traders pretended not to be informed of the final destinations of their exports to Hong Kong, and the merchandise was reexported to China. But illegal trade between Taiwan and China increased quickly and soared to a height that could not be ignored by the Taiwan government. 12. Textile materials constituted 34% of the total US$2.9 billion worth of Taiwan's exports to China in 1989. Other commodities being exported to China via Hong Kong from Taiwan were light industrial machinery, electrical appliances, and electrical parts, which in 1989 amounted to US$593.6 million or 20% of the total Taiwan exports to China (Dittmer and Choy, 1991:10). 13. Chen Mingzhang, director of the Economic and Trade Division, Mainland Affairs Council of Taiwan, estimated that the bilateral trade between Taiwan and China "by the fishermen" across the Taiwan Straits was worth US$200-300 millionin 1994 (China Market, no. 57,February 1995,p. 111). My interviews with Taiwanese business people also confirmed the prevalence of the cross-straits smuggling. And the "official guestimation" of $200-300 million can be an underestimate. Chinese liquor could be found everywhere in Taiwan, and so could Chinesemade pistols, only a little less visible. The coastal southern cities and towns of China were the first stop of smuggled Taiwanese-made VCRs and color TVs, as well as stolen cars from Taiwan. 14. Quoting Chen Mingzhang, director of the Economic and Trade Division, Mainland Affairs Council of Taiwan (China Market, no. 57, February 1995, p. 110). China's imports to Taiwan were increasing slowly but surely. In the late 1970s, imports from China to Taiwan were dominated by a limited number of permitted items, such as Chinese herbal medicine and industrial raw materials. The total value of imports from China routed through Hong Kong in 1988 increased 65.6% from US$288 million in 1987; and in 1989, despite the Tiananmen massacre, China's exports to Taiwan still increased another 22.6% (Dittmer and Choy, 1991:11-12). 15. Kao, Lee, and Lin's 1991 survey shows that the overall production cost in China was 24.3% lower than Taiwan (Kao, Lee, and Lin, 1992:195). Land in Guangdong, on leases of 50-70 years, much like those used in Hong Kong, costs only 2-3% of what it does in Hong Kong. The average factory wage in Fujian is 350 yuan ($65) a month, about one-tenth the rate in Taiwan; a square meter of land in Xiamen can be had for 2 yuan (US$0.35) a year on a 70-year lease. On average, manufacturing production costs in Xiamen are 25% lower than in Taiwan. Labor costs five times as much in Hong Kong as in Shenzhen SEZ and 10 times as much as elsewhere in Guangdong. 16. China interviews A-l, A-2, C-l, D-l, E-l, E-2, G-l, G-3, H-2, H-4, EMI. 17. According to Pearson (1991b), between 1979 and 1989 the total value of pledged (contracted) foreign direct investment in China was US$32.37 billion, the actual (realized) was US$ 15.61 billion, 48% of the total pledged (p. 70).

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18. According to the associate director of the Foreign Investment Division, Ministry of Foreign Economic and Trade Cooperation, by the end of 1994, China had absorbed US$95.567 billion in actual foreign investment; of this, 74% was in industry, 14.3% in real estate and sendee industry, 2.5% in agriculture, and less than 10% in infrastructure. Hong Kong-Macao and Taiwan were the two largest investors in China (Industrial and- Commercial Times, Taipei, June 7, 1995). 19. The Journalist, Taipei, March 18, 1991, pp. 80-83. 20. Because more than 70% of the Taiwanese investing firms in China were registered in Hong Kong, the figure of Taiwanese capital in China, as shown in Table 1-8, was lower than the actual amount. 21. Liangan jingmao, (Economy and Trade between Taiwan and, China] no. 46, October 1995, p.27, quoting Fu Dongcheng, director of the Economic Affairs Division, Mainland Affairs Council, the Executive Yuan, Taiwan. It is nearly impossible to secure accurate figures for Taiwanese direct investment in China due to the fact that more than 70% of the Taiwanese investing companies in China are registered as Hong Kong capitals. The director of the Trade and Economic Department of Taiwan's Mainland China Affairs Commission reported that by August 1994 there were 10,517 Taiwanese enterprises that had registered investments in China, with a total value of US$4.1 billion. The director estimated that the actual number should be around 15,000, with a total investment of US$8 billion (China Market, no. 57, February 1995, pp. 108-114). A Taiwanese banker estimated that by 1992, there were more than 4,000 Taiwanese investment projects in China and that the total amount of Taiwanese investment in China had exceeded US$5 billion, ( World Journal, Nov. 3, 1992). 22. The Pearl River Delta, occupying the southeastern part of Guangdong Province, is among the fastest industrializing areas in southern China. Between 1980 and 1989, the annual growth rate of industrial output in the Delta was 21.6%, compared to the provincial average of 15%. The geographical proximity and cultural affinity to Hong Kong has helped the Delta link up with the world market and attract the largest volume of overseas Chinese capital since China's economic reforms began. The Delta has also been the destination for the majority of rural migrants from the inland to southern coastal regions. When Taiwanese export shoemakers started to shift production operations to China in the mid- to late 1980s, the Delta's experiences and infrastructure of export manufacturing and the abundant supply of labor made it one of the most attractive sites for investment. 23. Fujian is separated from Taiwan only by a narrow strait that takes a 20minute flight to cross. However, compared with Guangdong, the pace of industrialization in Fujian has not been as fast, especially in the first decade of economic reform in China. Until the end of the 1980s, the Taiwanese government imposed rigid restrictions on Taiwanese manufacturers' investments in China, so the geographical proximity and cultural affinity between Fujian and Taiwan was not fully exploited until then. The degree oflocal autonomy and export infrastructure such as transportation and telecommunications has not been as well developed as Guangdong. Consequently, in spite of the fact that Taiwanese investors speak the same dialect as Fujianese rather than Cantonese, Fujian was not as popular as Guangdong in the first wave of Taiwanese manufacturing investment in southern China. I chose the Xiamen area to compare Taiwanese manufacturers' investment in Fujian and in the Pearl River Delta. Xiamen has a Special F,conomic Zone and has been one of the centers of Taiwanese investment in the province. However, because the Tai-

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wanese fashion shoe industry was not as well developed in the Xiamen area, my analysis will focus more on the Pearl River Delta. 24. During the Cultural Revolution, when any connection with the outside world was prohibited and relatives of overseas Chinese remaining in China suffered from the connections, overseas Chinese and Chinese compatriots still managed to send about RMB 745 million yuan to Guangdong through deposits in branches of the Bank of China in Hong Kong, Macao, and overseas. Taiwanese sent funds indirectly through other relatives in the United States or Hong Kong, but Fujianese in Southeast Asia sent them directly (Sit, 1991). 25. GDP grew at 12.3% annually between 1986 and 1990. For comparison, Thailand (population 55 million, compared to Guangdong's 62.4 million in 1990) had an annual real GDP growth of 7.5% over the same period. The Economist, October 5, 1991, p. 20. 26. Guangdong tongji nianjian (Guangdong Statistical Tear Book), 1991. 27. China Economic News Supplement, no. 7,1991, industrial production figures of 29 provinces and municipalities in 1990. 28. Guangdong tongji nianjian (Guangdong Statistical Tear Book 1990). Guangzhou, Shantou, and Foshan are the main bases of light industries. Guangzhou, Maoming, and Zhanjiang have more heavy industries. 29. At 1989 exchange rate of RMB 3.71 yuan to US$1.00. 30. China Economic News Supplement, no. 7,1991, industrial production figures of 29 provinces and municipalities in 1990. 31. Guangdong's foreign trade dates from the eighth century; the province has long been on the forefront of China's encounter with the outside world. In 1699, the British established a regular trading base in Guangzhou (then Canton), the capital city of Guangdong; it was a center for the China trade, and from 1760 until the end of the Opium War in 1842, Canton was the only Chinese port open to the outside. The city remained as the center for the interaction between China and the West until the communist revolution in 1949 (Woon, 1990:143). 32. Business China, vol. 16, no. 13, July 1990. p. 100. 33. The figures of China's utilized foreign capital varied according to different references. Lin et al.(1995) recorded that between 1978 and 1994, China had absorbed a total of US$84.5 billion foreign capital(p. 7), while Table 1-9 shows that the total utilized capital in China by 1993 had already reached US$107.4 billion. Lin (1995) also suggested that Guangdong had 35% of the nation's total inward foreign direct investment, with the annual growth rate of 38.8% (p. 7), Guangdong's share of nation's total did not exceed 23% (see Table 1-13). Sit (1991) suggested that between 1979 and 1988, Guangdong received a total of US$8 billion of foreign direct investment, roughly 50% of the investment received by the whole nation (p. 162). 34. Business China, vol. 16, no. 13, July 16, 1990, p. 99. 35. At the end of 1988, Guangdong had 7,377 foreign-invested enterprises. Major foreign joint ventures include: Peugeot's US$79.5 million automobile plant; PPG's US$50 million float glass project; American Standard's US$17 million bathroom fixtures factory; Beatrice Go's US$10 million food products venture; Bishop Graphics and Tai On Trading Corp.'s US$l-million printed circuit board plant; Cable and Wireless's US$4-million telephone transmission operation; H.J. Heinz's US$10-million baby food venture; and Mayne Nickless's US$3.5-million storage and transport project. While Hong Kong and Macao account for the largest per-

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centage of investment in Guangdong, their projects tend to be on a smaller scale (Business China, vol. 16, no. 13, July 16, 1990, pp. 99-100). 36. Interview N-3. 37. Most of Hong Kong's direct investment projects in Guangdong have been small-scale, export-processing manufacturing. These processing agreements accounted for 42% of total foreign investment in the 1980s. In Dongguan County in the Pearl River Delta, export-processing investment grew dramatically in the 1980s. From 1979 to 1986, export-processing fees from US$2.4 million to US$62.7 million. Almost all of this processing was subcontracting for Hong Kong firms (Smart and Smart, 1991:222). 38. Victor Fung-Shuen Sit (1991) estimated that by 1986 in the Pearl River Delta alone, there were already 3 million jobs provided by Hong Kong investors. Yun-wing Sung's (1994:13) estimate in 1994 was 3 million. 39. "Who's whose biggest investors: foreign direct investment in Asia," Far Eastern Economic Review, October 12, 1995, p. 55. 40. Given the highly concentrated Hong Kong direct investment in Guangdong, we can assume that a major portion of Hong Kong-China out-processing trade was based in Guangdong. 41. Waishang kanhao Xianggang touzi huanjing (Foreign investors are optimistic about the investment climate in Hong Kong), (China Times Weekly), no. 111/ 112, Feb.13-26, 1992,42. 42. Chinese companies would buy a listed but not operating company (the so-called empty shell company) in Hong Kong to raise funds in the stock market, rather than go through the lengthy process of going public themselves. Because of the increasing demand, the price of an "empty shell" listed company in Hong Kong rose from HK$20 million in the beginning of 1993 to HK$170 million by the end of the year. See Maike shangshi suowei helai (why are they buying the "shells"?), China Times Weekly, no. 79, July 4-10, 1993. 43. The US$10 billion figure was estimated in Zhongzi jigou jiancheng gong touzi zhuli (Chinese funded institutions becoming the major investor in Hong Kong), The World News Daily (Shijie Kibao), San Francisco, November 4, 1992. The US$20 billion figured was estimated in a report by Beijing TV, quoted in Dalu zhongzi jigou zaigang (Chinese companies in Hong Kong), Zhongguotong (ChinaMarket), December, 1993, p.21. 44. Interview N-2. 45. Hong Kong cousins' economic success has even affected the logic oifengshui in Guangdong. In the tradition of feng-shui, the location and the orientation of the ancestors' tombs is believed to have the power of affecting the welfare and prosperity of the family. In Hong Kong, the practice of feng-shui has been particularly popular. Those who are in the rather unpredictable world of business or politics pay special attention to the matter. Usually one would choose a graveyard with open fields in the front and hills in the back, to symbolize stable foundation and unlimited prospect of growth of the family. It is important that the tombs face the open fields. Feng-shui is also popular in Guangdong. But in a town in Shenzhen, the most popular site for graveyards is not facing an open field but an expressway, cutting all the inflows of fortune to the families, according to the old-fashioned principles of feng-shui. The new logic is that it is more important to have the tombs facing Hong Kong, which is what the site in question has, because Hong Kong is the source of the family fortune (China interview, P-18).

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46. China Times Weekly (Zhongguo shibao zhouka-n), no. 56/57, JanuaryFebruary 6, 1993. 47. Interview N-l. 48. But these rural migrants are not always involved in the industrial seetor. Many of them have found temporary farm jobs in the rich region, where industrial growth has created labor shortages in farm fields (Xu and Li, 1990:53). 49. China. Market, no. 14, April 1991. 50. The contract worker system has several major advantages from the point: of view of the Chinese government. First, contract workers are cheap: the state does not have to feed them or house them and the workers have few benefits (or it is a way to displace the costs of housing and servicing them from the central government onto the employers and local authorities); it is easier to dismiss contract workers than state workers; it reduces rural unemployment while at the same time solves the problem of labor shortages in the rapid industrialization areas; and it reduces urbanization pressure (the family is not allowed to move with the contract workers) in the industrialization process (Blecher, 1988a:lll). 51. Farmers who moved to towns had to give up entitlement to tilling a piece of land in the place of origin. Many rural residents did so. But for those "rural residents" who lived near the fast-growing cities in coastal China, the mushrooming property development opportunities in the suburban areas have had a reverse impact on their attitude toward land. 52. China interview G-7. 53. China interview P-6. 54. For general discussions of Guangdong's population growth and migration, see Liu, 1990; L. Wang, 1990; and Y. Wang, 1991. 55. Shijie-ribao (WorldJournal), December 28, 1992. 56. China Times Weekly, no. 62, March 1993. 57. As mentioned before, Hong Kong-invested ventures hired about 3 million people. Taiwanese investors contributed another 3-3.5 million jobs. The survey by Kao et al. (1995) has shown that the average size of Taiwanese-invested enterprises was 260 employees (p. 161), and it estimated that there were 20,000 Taiwanese-funded enterprises in China. Therefore, the total number of jobs pro vided by Taiwanese-funded companies in China was about 5.2 million (20,000 x 260 = 5.2 million); Guangdong and Fujian had about 3.6 million (5.2 million x 70% = 3.6 million). For a more general discussion of the matter, see Guangdong Statistics Bureau, 1990:56-60; and Chan and Kwok, 1991. 58. A study of the rural labor force in Hangzhou, Zhejiang (another coastal province north of Guangdong), in 1984 confirmed this finding. Two-thirds of the high-school graduates and one-third of the middle-school graduates have migrated out of the home villages, whereas nine-tenths of those who are illiterate or semiliterate have remained at home (Wu and Xu, 1990:131). On the other hand, C. K. Lee (1994) cited Solinger that 87.3% of the migrants in Guangdong had less than a junior-high diploma. Finding contradictory figures on a semiunderground and rapidly changing phenomenon such as rural-urban migration in a country without an easy access to reliable statistics is no news. The percentage of higher-educated workers in the total labor force also varied immensely, depending on the type of industries and the size and the location of the towns. 59. Guangdong attracts better-educated migrants. A national survey of migration in 1986 showed that the educational level of the rural labor force in gen-

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eral was very close to that of the rural-urban/rural-rural migrants (Guang, 1995:178). 60. Women occupied more than 80% of the operator jobs in these foreigninvested ventures. 61. China interviews K-3, K-4, K-5, K-7. 62. For example, a research fellow in a research institute of chemistry in Beijing was bored with his job. He would leave the office five minutes after reporting to work and spend most of the day out fishing. By the time he returned to the office at 4:50 in the afternoon to close the day, the fish soup was boiling in his kitchen at home. The young researcher finally decided to look for opportunities in the south. He got on his squeaking bicycle and headed south. Two weeks later, the Beijing University graduate started working for the Port Authority of Shenzhen Special Economic Zone. He did not know anything about port management at first but he learned fast and soon became a qualified port manager. Then he quit the job after an argument with the boss. Before long he found a job in a private company and worked for the general manager as a stock market researcher. Again, he found his way in the stock market within weeks and helped the company make a huge fortune. He also got his fair share of the profit. The most recent move of our former fishing king from Beijing was to a real estate firm in Hainan SEZ (Mingbao Tuekan [Mirror Monthly], April 1991). 63. There were several ways to recruit Chinese clerical staff. One way was to go through labor recruitment agents in different provinces, another was to place an advertisement in local newspapers. 64. China interview J-8. Also see Taiwan Zixunye jjuahai jiejiang (Taiwan's information industry borrowing talents from across the straits), China Times Weekly, no. 66, April 4, 1993, pp. 56-57. 65. During the contract period between the employee and the foreign firm, the employee could not enjoy workers' benefits such as health care and other subsidies and would not receive a salary from the original work unit. The employee also had to pay registration fee of several hundred yuan to the center every year. 66. China Market, no. 31, March 1992. 67. China interviews B-8, G-7. 68. A Chinese accountant of a Taiwanese shoe factory, who used to work for a state steel factor}' in Guangxi Province, told me that the terms of the leave of absence package varied greatly and were largely dependent on whether one had a good relationship with the management of the original work unit (China interview G-7). 69. Employees who decided to leave the state enterprise had to pay a compensation fee to the original work unit, which could be as much as RMB 1,500 yuan, equivalent to 3-6 months's salary in a state enterprise (China interview B-7). 70. China interviews G-8, G-6. 71. China interview E-3. 72. Mirror Monthly, April 1991. 73. World Journal, February 5, 1993. 74. MingPao Daily News, Richmond, B.C. Canada, May 10, 1995. 75. Shiye dajun chongji dalu zhengjing wending (the troop of the unemployed threatening economic and political stability of China), China. Times Weekly, no. 149, November 6, 1994, p. 36. 76. China interview F - l .

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Chapter 2. Networked Investors from Taiwan 1. My fieldwork on the Taiwanese-funded fashion shoe industry was mainly conducted in Houjie County, Dongguan City in the Pearl River Delta. The area has had the most concentrated Taiwanese shoe investment in the Pearl River Delta. More than half of the 600 Taiwanese export shoe manufacturers and suppliers in Pearl River Delta are located in Dongguan City. Within Dongguan City, more than 300 Taiwanese-funded shoe factories and firms have concentrated in the county of Houjie, including shoe manufacturers and various material and components suppliers and related services such as shoe-making machinery maintenance. In the summer of 1991, when I conducted the first run of my field survey, many respondents called Houjie a Taiwanese Shoe Town, not only because of the high concentration of shoe firms in the area but also because of the networks they have reestablished there. Before they moved to southern China, Taiwanese shoe firms concentrated around the city of Taichung in central Taiwan and formed tightly connected networks of production and marketing. The Shoe Town in Houjie is a good example of the maintenance and expansion of the old network among Taiwanese shoe firms. In addition, being at the central point of the Pearl River Delta and possessing the most concentrated institutional elements of the region, such as local officials' greater autonomy and an abundant supply of labor, Houjie (or Dongguan at large) presents an ideal location for the study of the interaction between overseas investors and local agents. 2. The lines between standardized and fashion shoes are blurring. Athletic shoes have become more diversified in styles and types of sports. Korzeniewicz (1994) noted that by 1989, Nike was producing shoes in 24 footwear categories, encompassing 300 models and 900 styles (p. 249). Also, some brand name athletic shoes (such as L.A. Gear) are produced for fashion just as much as for sports. There are also price differences among different product lines of the same brand name. Within the athletic shoe industry there is an increasingly clear line between "statement products," the group that changes designs every six months at the high-market end; and "volume products," which have standardized designs and lower added value for the price-sensitive market (Donaghu and Barff, 1990). 3. China interviews A-l, B-l, B-3, B-4. 4. Gereffi and Korzeniewicz (1990) provide an excellent analysis of the problems of material supply in the shoe industry. The shoe industry has to cope with broad fluctuations in the price of its raw material inputs because footwear accounts for only a very small percentage of the total demand for crude oil and cattle. The bulk of synthetic rubber output, for example, is used to manufacture automobile tires, with only a fraction going to shoes. Similarly, rawhide accounts for only about 5% of the total sale value of bovines. The demand for cattle is mainly determined by patterns of beef consumption, which depend on factors such as a country's caloric intake, income levels, and volume of beef export. The primary materials used for shoes are also subject to fluctuations in the quantity of supply. Oil supply has been extremely vulnerable to political change and control by economic cartels. The supply of rawhide and skins is dependent on so-called "cattle cycles." Over a relatively long period of time, when the price of beef drops below a certain level, the number of bovine kills increase and the stocks are reduced. This leads to a higher price for beef and the rccomposition of stocks until the cycle recommences. Footwear producers, and particularly those who ex-

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port to world markets, need to find means to ensure not only an adequate supply of leather at predictable prices but also of consistent quality. While the quality of synthetic leather is generally uniform, differences in the texture, thickness, and color patterns in natural hides are a potential source of difficulty for shoe producers. The quality of rawhide and tanned leather is affected by a variety of factors: cattleslaughtering techniques, climate change, pests, and other environmental conditions. In the last two decades, there have been important shifts in the geographical location of rawhide and tanned-leather production in the world economy. Third World countries have sharply reduced exports of unprocessed rawhide and skins, while core countries have increased them. Argentina, for example, exported 65% of its rawhide in 1970, but only 12% in 1980 and none in 1985. Brazil exported 20% of its total production in 1970, but none in 1980. Conversely, core countries have increased their rawhide exports. The United States exported 24% of its production in 1970 and 59% in 1980. The trend for tanned leather is in the opposite direction: production and exports have rapidly shifted in location from core to Third World countries. In Latin America alone, exports of tanned leather increased from an annual average of US$9.6 million in 1961-1965 to US$400 million in 1980. The fluctuations in price, quantity, quality, and geographic origin of the main materials used in shoe production create the organizational imperative for shoe manufacturers to create stable and effective networks for the supply of these materials. There are at least two options available to manufacturers. The first option is vertical integration. In Brazil the large shoe manufacturers have purchased or have joint ventures with local tanneries in order to control the flow of rawhide and leather. Vertical integration of footwear producers with petrochemical firms is much less likely, given the scale involved. The second option is the establishment of stable procurement networks. The stability of these networks may rest on personal ties, common ethnic backgrounds, and a history of previous common transaction. Shoe producers in the Vale dos Sinoa area of southern Brazil, for example, rely on ties based on common Germanic descent (Gereffi and Korzeniewicz, 1990:56-57). 5. Gary Gereffi and Miguel Korzeniewicz (1990) and Gereffi's (1994) works on the global commodity chains of the footwear and apparel industries have provided a very comprehensive analysis of the complex division of labor from production to the marketing ends in fashion-oriented industries. My analysis of the fashion shoe industry in this chapter did not intend to provide a worldwide picture. Instead, I chose to focus on the role of Taiwanese shoe producers and marketing agents and their connections with the world market. 6. In highly automated, large U.S. shoe factories, the work is divided into several sections on the basis of the type of machinery used. Each major step (cutting, stitching, sole preparation, lasting, sole attaching, and finishing) is carried out in separate rooms. According to a report on technology and its impact on labor in the footwear industry (U.S. Department of Labor, 1986), there have been several major advances in the microprocessor-based automation technologies in the footwear industry since the 1980s. The degree of automation of these new technologies and their labor implications are as follows: (a) The use of CAD in designing reduces unit labor requirements and improves quality. Shoe styles can be depicted rapidly in three dimensions on a screen. CAD is also used to derive measurements for component parts and to grade the pattern for all ihe different sizes and widths of a shoe pattern prior to its production. The pattern grading data and tapes developed in the CAD process can be used in manufacturing processes, including computer-controlled cutting and stitching.

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(b) The microprocessor-controlled stitching machine can be used for functional (e.g., vamping—attachment of the vamp or front part of a shoe's upper to the quarter or back part) and fancy (design) stitching. The machine stitches automatically with plug-in modules that contain stitching patterns. The quality of the product is improved through greater accuracy and consistency. A productivity increase of at least 25% is associated with some decline in employment and replacement of skilled workers by semiskilled operators. A mechanic can often become qualified to program the modules. (c) The process of roughing consists of scouring the margin area of the fitted shoe upper with a rough brush (usually wire) to provide a good base to which cement can adhere. The traditional, and still most common, method (for 90% of output) is manual, with reliance on the operator's hand-eye coordination. Another method used is one in which the shape of the shoe is formed on a metal template and the upper is roughed with a wire brush that follows the outline of the shoe template. A numerically controlled (NC) machine automatically directs a brush in roughing part of the shoe upper to provide a base for cementing. It has several advantages over both the manual method and the automatic machine utilizing templates. For example, it can operate on a wider range of shoe types with greater speed in shifting from one shoe style to another. In addition, shoes are sometimes damaged in the manual process when the operator holds a shoe incorrectly when applying it to the rotating brush. With the NC machine, unit labor requirements are slightly lower than for manual roughing, in part because of the decrease in the number of damaged shoes (also, the operator may be required to perform other work after the machine is set in motion). Operator skill requirements are also reduced. (d) The machine can be programmed to determine size and to position the upper automatically. It assures precise lasting for the processes of stretching the upper over the last and cementing it to an insole. It can also adjust rapidly to various shoe styles constructed with different materials. The machine eliminates the need for manual adjustments. Programming can be easily mastered by workers with experience in lasting. (e) The machine automatically makes a shoe bottom made of thermoplastic or polyurethane. Machine parameters such as temperature can be set through simple digital input. The quality of output is also higher with injection molding because of the considerable uniformity of the units produced. Labor requirements for injection molding are relatively low and only modest skills are required to operate the machines. Injection molding eliminates steps and is therefore much less labor intensive. An automatic loading feature may eliminate one operator on a molding machine. (f) While cementing a sole to the upper part of a shoe is still labor intensive, automatic adjustments on some sole-laying presses substantially improve the uniformity of production. An operator, who receives the tippers and soles with cement already applied to them, uses heat to reactivate cement and then temporarily spots the soles to the uppers. In the new sole-laying presses, the operator uses a selfadjusting pad box that automatically determines the contour of the shoe's bottom as well as a toe and heel rest that automatically adjusts for heel height to ensure that the lasted shoe is accurately positioned before permanent attachment of the sole to the shoe bottom. Less operator skill is required in this operation and the quality of output is improved over that of machines without automatic adjustments. On a traditional machine lacking the automatic adjustments, an operator may break a last when high pressure is applied or fail to adhere the shoe's parts precisely.

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7. China interview E-l. 8. Over 90% of the Italian firms hire fewer than 200 employees, and 80% of these companies have fewer than 100 workers on their payrolls (Lim, 1994:572). 9. Amin also reported that one of the most significant advantages is the accumulation of artisan skills by the owner and the craft workers, which enables the firm not only to produce designer quality shoes but also to respond easily to new market signals. The craft tradition itself encourages flexibility on a least-cost basis. The "composite" workers display a wide array of skills. With the help of apprentices and complementary tools, they produce the whole or a large part of the entire product and are paid on a piecework basis. There is less technical pressure than in an assemblyline industiy to maintain constant and high levels of output and to ensure a continuous flow of parts from one production phase to the next. Instead, each selfcontained work group regulates its own output. 10. On the other hand, countries with good potential to develop a footwear industry, such as Argentina and Mexico, did not manage to occupy a significant position in the world footwear market, despite their abundant leather supply. 11. Taiwanese fashion shoe manufacturers for the domestic markets are similar to their Italian counterparts. Usually there are nine craft workers in a selfcontained work group, organized by the "making-through" principle. One group will be responsible for the entire production process of one style, including cutting, stitching, lasting, cementing, insole and sole attaching, and finishing. They produce small batches of fashion shoes in short production runs, with unit prices 30-60% higher than the shoes for export. These are mostly experienced shoemaker masters working with apprentices, while little machinery is involved in the process. Workers are paid at piece rates. A group of nine can produce 200 pairs a day, compared to 3,000 pairs a day on one assembly line with 80 to 100 workers. (See Table 2-1). 12. The small- and medium-sized enterprises (SMEs) have been dominant in Taiwan's export-oriented manufacturing sector. From 1966 to 1981 around 70% of manufacturing establishments employed less than 10 workers, some 80% employed less than 20 workers, and 90% employed less than 50 workers. In contrast, manufacturing establishments hiring more than 100 workers never exceeded 5% of all production units (Shieh, 1992). In 1989, Taiwan exported US$36 billion-worth of manufacturing products, which accounted for 67.1% of the total export value that year. Among them, small- and medium-sized manufacturers contributed 70.8% of the total value of export and small- and medium-sized trading companies contributed 60.2% of the total (Chen, 1994:117). 13. Taiwan Footwear Manufacturers Association and Taiwan Industry Bureau, The Ministry of Economics. Report on the Current Situation of the Shoe Industry. Taipei, 1986. 14. The five items are plastic casual shoes (11.5%), vulcanized canvas/rubber shoes (9.2%), special shoes (7.5%), plastic sandals (7.2%), and plastic high heels (7.0%). 15. By 1989, Nike was producing shoes in 24 footwear categories, encompassing 300 models and 900 styles (Korzeniewicz, 1994). 16. Not all these activities are totally legal. Taiwanese shoemakers and traders bring miuicameras hidden in their pockets and take pictures of the designer shoes displayed in the windows of the boutiques in Milan or New York. 17. As the competition in the world market grows fiercer, there arc no longer clearly marked production seasons in the industry, especially for fashion followers

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like Taiwan's shoemakers. Being passive on the marketing front, Taiwanese shoe manufacturers receive orders from international buyers who, in order to minimize risks in the world fashion markets, place orders on a monthly basis. The lead times between order placement and product delivery has shrunk from 3-4 months to 1-2 months. The temporal compression, in turn, generates a substantial impact on the organization of fashion shoe production. 18. The impetus of Taiwan's shoe export in the early 1970s was provided by the decision of Mitsubishi, the leading Japanese trading firm dealing in footwear, to shift the manufacture of plastic sandals for the U.S. market from Japan to Taiwan. Taiwanese plastic shoe producers thus linked with the world market through the Japanese trading firms (Levy, 1991:155). 19. Taiwan Shoe Manufacturer Association, Taiwan xieye sanshinian, Thirty Years of Taiwan's Shoe Industry, 1989, pp.1-13. 20. Taiwan Footwear Manufacturers Association and Taiwan Industry Bureau, the Ministry of Economics. Report on the Current Situation of the Shoe Industry. Taipei, 1986. 21. China interview B -1. 22. China interview D-4. 23. Except for 1979. 24. Taiwan Shoe Manufacturer Association, Thirty Years of Taiwan's Shoe Industry, 1989. 25. The quota allocation among producers was controlled by the Taiwan Shoe Manufacturer Association (TSMA). Thus, it is not surprising to find that the board of directors in TSMA was mostly composed of representatives of large companies (China interview A-l). 26. China interviews A-l, B-2, B-3. 27. China interview A-1. 28. Business groups are those multicompany firms that transact in different sectors (markets) but that do so under common entrepreneurial and financial control. Their activities are often highly diversified and may involve quite unrelated products. Although many of the firms are based on, or start from, a family business, they usually have a broader management and ownership base than independent, small- and medium-sized firms. 29. China interview A-2. 30. Taiwan Shoe Manufacturer Association, Thirty Years of Taiwan's Shoe Industry, 1989, pp. 1-13. 31. The abolishment of favorable tax rates on import materials in Taiwan in the same year was another blow to Taiwan's export shoe manufacturers. 32. Taiwan Shoe Manufacturer Association, Thirty Years of Taiwan's Shoe Industry, 1989, pp. 19. 33. Taiwan Shoe Manufacturer Association, Thirty Years of Taiwan's Shoe Industry, 1989, p. 16. 34. Taiwan Shoe Manufacturer Association, Thirty Years of Taiwan's Shoe Industry, 1989, p. 19. 35. In 1987, the exchange rate of the Taiwanese dollar appreciated 24.34% against the U.S. dollar in one year, marking the biggest annual nominal surge in Taiwan's financial history. 36. The continuously rising exchange rate between the Taiwanese dollar and the U.S. dollar forced Taiwanese shoemakers to take as many orders as possible before the exchange rate became too high to bear.

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37. Taiwan Shoe Manufacturer Association, Thirty Years of Taiwan's Shoe Industry, 1989, p. 19. 38. Industrial Technology Research Institute and Industry Bureau, Ministry of Economy, Research Report of Technological Upgrading of Traditional industries in Taiwan—the Shoe Industry, 1988, p. 23. 39. China interview B-l. 40. Lasts for final manufacturing are made of aluminum. Wooden lasts are used for sample production because it is easier to make small adjustment with wood products. 41. But for the upper made with synthetic leather, there is no need to use small pieces because synthetic leather is much less expensive. If a style has to be made in two batches, one using genuine and the other synthetic leather for the upper, the cheapest method is to use the same set of cutting dies and to cut the synthetic leather into smaller pieces for the upper as well. 42. China interview B-l. 43. The cost of mass-produced parts, such as insoles and soles, is less critical than that of custom-made parts like cutting dies and lasts. The production of soles, which are made of PU or PVC, is largely automated with sole injection-moldingmachines (although soles of pumps arc produced on cutting machines instead of injection machines, thus less automated). Molds of soles are handmade by shoemaker masters, so the cost of molds is still high and there is also a minimum size for an order of soles. If the order is too small, an old set of molds will be used. Insole boards have a smaller variation in shapes, therefore it is easier to reach economies of scale in insole board production. However, the entire insole is made of layers of foam, fabric and paper lining, and metal shanks; and the binding around the edge of the insole has to match the material and design of the upper. All these are again specified by the buyer and therefore have to be custom-made. 44. There are also suppliers of fabrics (for uppers and linings), foams (for linings), small hand tools, box and packaging materials, cement, glue, paints, metal components, ornamental components, cardboard, nails, polishing oil, rubber bands, and elastic bands, printing firms (for price tags and shoe boxes), and so on. This section discusses only the major material suppliers. 45. Taiwan Industry Bureau of the Ministry of Economics and Taiwan Industrial Technology Research Institute, Report on the Survey of Technology Upgrading of Traditional Industries in Taiwan: The Shoe Industry. Taipei, 1988, p. 72. 46. China interview H-1. 47. Shieh's (1992) work, "Boss" Island: The Subcontracting Network andMicroEntrepreneurship in Taiwan's Development, has been one of the most insightful analyses to date of the very complex subcontracting system in Taiwan. Shich has successfully presented Taiwan's subcontracting network as dynamic production processes rather than a static institution. He suggested that, in order to understand the persistence, not just the genesis, of the export-oriented industrialization in East Asia, one ought to "creep into the hidden abode of the production system to uncover its internal dynamics"; and this is what the state-centered arguments have failed to achieve. 48. One of the reasons for the concentration is that South Korea has specialized in producing a large volume of brand-name athletic footwear, which have a more direct route from production to marketing (Gereffi and Korzeniewicz, 1990:60). 49. In the formal contract, the manufacturer is fully responsible for the loss caused by buyers' rejection of a deliver)'. Yet, if a delivery is rejected, the trading

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company will usually assist the manufacturer by either finding another buyer or negotiating with the original buyer, as a way to gain the trust of the partner manufacturer for a longer-term collaboration. 50. China interview B-4. 51. But manufacturers are still responsible for most of the complex international trading procedures, such as shipping, storage, delivery, insurance, freight handling, and custom procedures. 52. For example, trading companies will ask the buyer to provide a preliminary order so that the manufacturer can start ordering materials earlier. While the manufacturer is waiting for the materials to arrive, the buyer will prepare a formal, detailed order. Therefore, when the formal order is issued, the materials will already be with the manufacturer. The final production can start immediately without having to wait another one or two weeks for the materials. When there is a major delay in the delivery of material, trading companies have to negotiate with the buyer to postpone the final delivery dates. 53. According to a trading company's quality inspector, staying in the factory all day can be extremely boring and is one of the reasons why many export company inspectors leave their original jobs in factories and work for export companies (China interview B-4). 54. The capacity for catching up with the fashion trend and developing new styles is critical to the competitiveness of trading companies. New styles are commercial secrets. The sample room of a trading company is not open to other competing trading companies and factories, and the sample room is usually located far back in the office. I met the boss of a trading company when he was visiting his partner factories. The first place he visited in each factory was the sample room. He checked the kind of shoes the factory was producing for other export companies as a way to keep up with market trends and to get "inspiration." On average 10-30% of the styles provided by trading companies are accepted by foreign buyers, so the trading company has to develop a large number of styles in order to capture a sufficient number of orders. 55. China interview E-2. 56. China interview A-l. 5 7. China interview A-1. 58. China interview A-1. 59. China interview B-4. 60. Rejects also have been part of Taiwan's export manufacturing-based culture. In Taiwan, vendors of rejected export clothes and shoes in the night markets have become part of the underground economy. It is also part of urban nightlife to go shopping in the evening in streets filled with vendors selling rejected export clothes in the commercial districts in front of department stores. There are also special stores that sell rejected export clothes and shoes at low prices. 61. For example, a Taiwanese manufacturer had a joint venture with the Bureau of Economic and Trading Development in a county near Guangzhou. There were 60 enterprises under the control of the Bureau. The Taiwanese factory itself belonged to a business group that had three shoe manufacturing establishments in the Guangzhou area. The total scale of production was large enough for the Taiwanese investors to cultivate local subcontractors. The investors linked up with one of the 60 factories under the bureau that used to produce cotton towels, and subsequently, farmed out the heel wrapping job to this factory. They provided the Chinese towel factory with equipment and machinery and sent Taiwanese technicians

198

Notes

to the factory to supervise the production. The Taiwanese investors also farmed out some simple upper stitching jobs to local private enterprises through local brokers. 62. Some polyvinyl chloride and polyurethane sheet producers have moved part of the production to China. However, Taiwan's largest petrochemical company, Formosa Plastic Group, which provided the raw materials for polyvinyl chloride and polyurethane producers, has not moved. 63. China interviews A-l, A-2, B-2, D-l, D-6, E-l, E-2, F-l, F-3, H-5. 64. There has been major regional variations in Taiwanese investors' connections with local industries. Subcontracting arrangements between Taiwanese manufacturers and Chinese industries were more prevalent in the region where private enterprises were dominant, such as Wenzhou in Zhejiang Province. Many of these enterprises were nominally collective enterprises but have been leased to private individual entrepreneurs. This was a way to take advantage of the tax breaks and loans available for collective enterprises while, at the same time, maintain flexibility in daily operation as a privately-owned enterprise. These entrepreneurs had the autonomy to make major decisions in running the factory, and therefore could be more flexible when dealing with Taiwanese export manufacturers. 65. Spatial agglomeration of Taiwan's shoe factories is also evident before the trend of moving to southern China. The central city, Taichung, on the west coast of Taiwan was the center of shoe manufacturers, suppliers, and subcontractors. Spatial proximity is especially important for those who are directly and closely involved in product development. 66. China interviews A-l, A-2, B-2, C-l, D-l, E-l. 67. This strategy is very similar to the one adopted by the Japanese electronics firms in Singapore and other Southeast Asian production sites (Lim and Pang, 1982). The Japanese production networks in Southeast Asia have been very exclusive, with limited local production linkages and technology transfer until only recently, after the rapid appreciation of yen in the early 1990s (Ernst, 1994). 68. China interviews A-l, B-2, B-3, E-l, H-3, H-4. 69. The prevalence of family-based enterprises in Taiwan does not seem to stabilize the firm's organization for two reasons. One is that since nonfamily members in family-based companies have little chance to be promoted to the key positions, they tend to change companies more frequently as a way to move up the ladder. Also, a major strategy in Taiwan is diversification. As a company or a business group diversifies into various segments in the same industry or different industries, employees can move between different companies within the same business group. For a more detailed analysis of Taiwan's family business, see Greenhalgh, 1988, 1994; Hamilton and Biggart, 1988; Liu, 1990; Shieh, 1992; Chen, 1994. 70. Liu (1991) described the bandi phenomenon as the basis of the "quasifamily" type of organization in Taiwanese small- and medium-sized firms. 71. China interview A-3. 72. China interview A-l. 73. China interview E-l. 74. China interviews A-3, A-4, A-5, A-6, B-4, C-3, D-7. 75. Interpersonal connections did not always get Dali lucrative orders directly, as Wang explained to me. Instead, interpersonal connections means that, if Wang wanted to start a partnership with another trading company, he would invite the manager in charge of order allocation for dinner by issuing the invitation through an old friend who also worked in the trading company. With some follow-up gifts to the manager in the trading company after the dinner, he might then receive a

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small trial order from the trading company. He then would use the opportunity to impress both the trading company and its U.S. buyer with high-quality products and punctual delivery. Wang stressed that good interpersonal connections helped to bring customers to the door, but only good-quality shoes and punctual delivery help a company maintain a stable source of orders (China interview A-l). 76. Jie-shuen Chen's (1991) research on Taiwan's small- and medium-sized enterprises describes the culture of payment collection (Chen, 1991:199). The representative of the supplier firm had to visit the manufacturing firm many times before he could collect the check. He might be given all kinds of excuses for delayed payment, such as the company accountant was sick, the check required the signature of the president of the firm, who happened to be in the United States and would not be back until next month; or the company found out that the materials had some defects so it could not pay the full amount—maybe 15% less. After all the trouble and delays, the actual payment was rarely the exact amount that was originally agreed upon by the two parties. 77. For example, a quality inspector of a trading company complained to me that ever since his boss had invested in one of their partner manufacturers, the manufacturing firm had become rather uncooperative and reluctant to accept his suggestions on quality improvement. Once, the quality inspector refused to sign the quality approval paper of an order that did not meet the quality standards. The owner of the manufacturing firm threatened to call the inspector's boss, claiming a loss to the manufacturer would also be a loss to the trader. The relationship between the trading company and the manufacturer has been damaged ever since (China interview B-3). 78. Maintaining the balance between a trading company and its manufacturing partners is a tricky game. A trading company usually has more than 10 partner manufacturers. To win the support and trust of all partner manufacturing firms, it is very important for the trading company to appear fair to every partner manufacturer. Being fair means that the trading company will not favor a particular manufacturing firm by allocating orders of higher prices or larger volume to the firm. If a trading company is a shareholder in one of the partner manufacturing firms, other partner manufacturers will inevitably suspect: the trading company is being biased, and their trust in the trading company will be shaken. The reputation of being unfair will weaken a trading company's capacity to mobilize and coordinate manufacturers. Consequently, it will be more difficult for the trading company to handle rush orders, respond quickly to the changes of design specifications, and deliver highquality products on time. Furthermore, trading companies have to maintain connections with factories with expertise in various kinds of shoes in order to widen the range of products that they can deliver. To be too close to a specific manufacturer will constrain a trading company's chances to expand the scope of business. On the other hand, trading companies still need a number of reliable manufacturers. During the peak season when most factories tend to receive more orders than they can handle, or when there are rush orders, it takes more than a "balanced" relationship for a trading company to get the production priority in partner factories. The strategy to solve the dilemma of maintaining universal distance with all partners and establishing special partnerships is to keep a limited number of core partner manufacturers in the inner circle of the network. The importance for a trading company to avoid being seen as favoring a particular manufacturer and maintaining a well-balanced relationship with all partner manufacturers also holds true the other way round. A manufacturer usually has more than one partner trading company. If

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Notes

a manufacturer is a shareholder in a trading company, other trading companies will suspect that the manufacturer gives the production priority to the partner trading company's rush orders and does not make the same effort for other trading companies. Consequently, other trading companies lose confidence in this manufacturer and will be reluctant to give profitable orders to the company. The fact that trading companies and manufacturers are financially involved with one another makes it more difficult for either side to establish good relationships with other manufacturers or trading companies in the networks.

Chapter 3. Chinese Workers and Taiwanese Competitiveness 1. China interview A-1. 2. China interviews A-2, C-1, F-1. 3. In addition, the ideology that the Taiwanese have grown up with, that is, one should never trust the communists, did not help the Taiwanese investors to make a long-term commitment in China. 4. He also commented that Taiwanese entrepreneurs were very action-oriented and that they tended to implement a project before any thorough feasibility study was done; they also had a tendency to go along with trends—that is, if other factories expanded, they would also expand without a solid assessment of the market situation (China interview B-l). 5. China interview F-l. 6. China interview A-1. 7. China interviews F-l, H-l. 8. China interview A-2. 9. OEM of shoes designed and marketed by large foreign firms. OEM has been the most popular type of export manufacturing in Taiwan, due to the lack of design and marketing capability of Taiwanese shoe manufacturers. In Taiwan's shoe industry, there were only a few companies that produced for the high-end market internationally with their own brand names; Hongsong International is one of them. 10. Not the real name of the company. 11. China interview B-l. 12. For general discussions of labor conditions in China in the postreform era, see Phyllis Andors (1988), Lisa Rofel (1989), Leslie Sklair (1990), Flemming Christiansen (1992), Josephine Smart (1993), C. K. Lee (1994). 13. China interviews G-l, H-2. 14. China interview A-1. 15. China interviews G-2, C-l. 16. China interview K-2. 17. But the education level of the woman operators should not be too high. Some managers thought that high-school or college graduates were too difficult to control (China interview G-2). 18. China interview A-4. 19. China interview E-2. 20. The Taiwanese manager told me that, because there were so many applicants, each interview would last less than three minutes. He would ask simple math questions just to sec if the applicant could respond quickly enough (China interview F-l). 21. China interview F-1. 22. China interview E-1.

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13. China interview A-1. 24. China interview G-6. 25. A Taiwanese manager emphasized that it was not the fines management cared about but the discipline it imposed on workers. All the fines were collected as funds for workers' benefits, such as buying birthday cakes each month for the workers, " . . . so the workers will not think that we are exploiting them" (China interview D-4). However, in a factory I visited, the general manager decided to use the fines to pay for repairing the washroom drainage. 26. China interview K-1. 27. China interview G-5. 28. China interview G-6. 29. China interview A-2. 30. China interview K-13. Overtime has been a common practice in other foreign-invested factories in the region. In some cases in Shenzhen Special Economic Zone, workers who failed to comply with the excessive overtime experienced penalties of various types (withdrawal of bonus, for example) (Sklair, 1991: 205). 31. China interview A-1. 32. China interview K-ll. 33. China interview K-9. 34. China interviews K-ll, K-12. 35. China interview D-4.

Chapter 4. Culture and Labor Discipline 1. Shoes made of synthetic leather are made using different-sized cutting dies than those made of genuine leather because of the varying elasticity of the materials. 2. For detailed analysis of material supplies in the shoe industry, see Gary Gereffi and Miguel Korzeniewicz, 1990:45-68. 3. For each order there is a different sheet of piece-rate standard based on the unit price of the order in question. See chapter 3 for details of wage calculation. 4. Fifty-four percent of the materials and 75% of the machinery used by Taiwanese manufacturing companies in China are imported from Taiwan (Kao, et al., 1995:179). Another survey on the shoe industry shows that 97% of Taiwanese shoe manufacturers in China imported major materials from Taiwan (Yu, et al., 1990). 5. Pretax profits in the industry fell from 60-100% in the late 1970s and early 1980s to 10-20% in the late 1980s (China interviews A-l, B-l, B-2, F-l, G-5). 6. China interviews K-5, K-6, K-7, K-8, K-9, K-10. 7. China interview A-l. 8. The training also included the tricks of doing business. For example, at a daily shopfloor job assignment meeting I attended in one of the factories in the Pearl River Delta, a Taiwanese line manager told a section foreman that trading company A's quality inspector was coming to visit their factory to check on the progress of the orders. But the factory was trying to complete a rush order for company B. In order not to offend company A, the Taiwanese manager told the foremen to switch the shoe on the assembly lines when the inspector from the company A arrived. After the inspector left, the lasts, upper pieces, and other components were to be switched back for the order of company B. The Taiwanese manager said to me, "It is so easy to explain all these subtle tricks to a Chinese foreman—just a few words, no need to tell the whole story, we Chinese understand what this is all about" (China interview A-l).

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Notes

9. China interviews A-l, A-2, A-3, B-2, C-l, D-4, F-l, G-2, G-3, H-3. This finding is confirmed by a survey cited in Chiu and Chung, 1992. Among the 97 surveyed Taiwanese investors in China, 82% saw similar language and culture to be an important factor for their move to China, only next to the most important factor "low-wage labor"(95.8%). Again the low-wage labor here included both lowwage operators as well as managers. 10. China interview F-l. 11. In Smart's (1993) work on the relationship between Hong Kong investors and their Chinese employees, she also found differences between Chinese operators and Chinese managers in their attitude toward the boss. The latter identified more with their Taiwanese employers than the former. 12. China interview K-6. 13. China interview G-l. 14. China interview F-4. 15. China interview K-9. 16. However, in most cases, their earnings were not sufficient for substantial savings. Outside the factories, on the payday of each month, there were vendors selling clothes, stockings, accessories, and so on which were a major attraction to the country girls who had little free time from their demanding jobs nor the courage to go downtown for shopping; and there were also vendors selling snacks in the evenings to supplement the poor-quality meals that the factory provided. In some factories, the meals were not free and cost each workers 50 yuan per month, about 15-20% of their monthly salaries. 17. The paternalistic mode of management was presented in various circumstances. A trading company hired a new Chinese quality inspector during my visit. It is customary for employers in Taiwanese trading companies to have English names, because they have to deal with English-speaking buyers who usually have little patience with Chinese names. One Chinese quality inspector did not have an English name. As a way to show his sonly respect to the boss, he asked the boss to give him an English name. The boss then decided that his new employee was to be named Roy. 18. In his research on Japanese enterprises, Mark Fruin (1983) concluded that family-style management was created and consciously crafted as a strategy by the management after the turmoil of Great Strike of 1927-1928 (Fruin, 1983:214). A similar argument can be made in the case of the management style of Taiwanese firms. 19. Familialism was often mentioned as one principle of firm organization in the developing economies. In his research on Taiwan's small- and medium-sized enterprises, Liu (1990) has suggested that in the case of Taiwanese business, it is in fact quasi-familialism rather than straight familialism that sets the tone of the firm's organization. He defines "quasi-familialism" as a principle that goes beyond the actual genealogical basis of ownership and the management of the firm. It also includes an extended set of social relations, including regional affinity, classmates, and family friends, as the basis of necessary trust within the high-rank managerial circle in the firm. In the Taiwanese factories in China, quasi-familialism has been expanded into the arena of the labor-management relationship in the form of paternalism as a way of securing worker compliance. 20. China interview A-2. 21. Ch i n a interview G - 7. 22. China interview G-6.

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23. China interview G-1. 24. China interview G-7. 25. China interview A-3. 26. China interviews K-6, K-12. 27. One of the reported beating incidents, which happened in Xiamen in June 1992, revealed the intensity of the problem. Three Taiwanese managers of a shoe factory were arrested by public security officers in Xiamen for beating a woman operator. The incident started with the woman operator's refusal of an order given by her Chinese foreman to switch to another job. The latter decided to punish the operator for her disobedience by giving her a monetary penalty. The two got into an argument. A Taiwanese manager intervened and decided to dismiss the operator. In her fury, the operator slapped the Chinese foreman in the face and hurt his face with a pair of scissors. The Taiwanese manager then slapped the operator and hit the operator's head with a plastic container. The operator hurt the Taiwanese manager as they fought. Three other Taiwanese managers came. The operator was surrounded by four male managers and was beaten and kicked. Then she was dragged by the managers downstairs to the courtyard and the managers decided to discipline her in front of other workers. It was reported that the operator was dragged on the ground by her hair for several meters. 28. China interview K-11. 29. China interview G-2. 30. Although it was forbidden by the provincial government to recruit workers from other provinces, non-Cantonese workers composed the majority of the labor force in all Taiwanese-owned factories I visited in the Pearl River Delta—as mentioned before, mainly because non-Cantonese workers are cheaper and easier to control. In the factory, non-Cantonese employees often complain about their Cantonese coworkers for avoiding harder work and for excluding non-Cantonese from their social circles. 31. China interview E-l. 32. China interview G-7. 33. A personal experience revealed the gap between Taiwanese and Chinese in the Delta well: after an interview in a Taiwanese factory in a village, I was going back to the city together with Wu (not the real name), a Chinese quality inspector of a Taiwanese trading company. As we walked out of the factory building, Wu saw that a Taiwanese visitor from another company was also leaving the factory for the city and that he had a taxi waiting for him at the front gate. Wu suggested that we might get a ride from the Taiwanese visitor. I went to talk to this Taiwanese visitor, whom I had never met before. A Taiwanese manager I had just interviewed was with the visitor. To help me to get the ride, the Taiwanese manager introduced me to this visitor by saying, "She's from Taiwan." And I got a ride back to the city for Wu and myself. Later, Wu told me that he would never be able to get a ride like that if he was not with a Taiwanese person. "In fact," he said, "I would not even dare to ask for a ride" (China interview B-8). 34. China interview G-6. 35. China interview D-4. 36. China interview F-l. 37. China interview A-2. 38. Between 1992 and 1993, the wage level of Chinese workers in the joint ventures increased by an average of 22%. In Shanghai, it increased 33.5%; Beijing, 33.3%; Guangzhou, 28.6%, see China, Market, no. 50, July 1994.

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Notes Chapter 5. Autonomy in Local China

1. "Central government" here refers to the state council and its commissions, ministries, and leadership groups in Beijing, and the party Politburo, Secretariat, and the organs of the Central Committee. "Local government" refers to provincial and subprovincial party and government authorities at the city and county levels, as well as those under the city and county governments, including the district (under the city), township, xiang (under the county), and village (under the xiang or the township). The county is the lowest local government unit with five groups of authorities. The five groups are: the party committee, the disciplinary committee, the government, the National People's Congress, and the Political Consultative Conference. However, as long as the four major groups of authorities are in place (party committee, the government, the National People's Congress, and the Political Consultative Conference), as is the case with the district government, a complete set of government organizations is formed that can function as an independent legislative and administrative organ to make laws and policies. 2. China interviews M-8, M-16. 3. The increasing autonomy of local government is not simply a result of the post-1978 reform. The important role of small enterprises and the multilevel planning system in China's industrial and administrative structure in the pre-1978 period have set the basic tone of decentralization. The extremely large number of industrial enterprises has been one of the characteristics of China's industrial structure. At the end of 1984, there were 437,200 enterprises, including a 25% increase in the collective sector since the reform began. Even though this number excluded most enterprises in the rural sector, it was extremely large compared to the socialist economies in Eastern Europe. In addition, only 0.6% of these enterprises had more than 243 workers, compared to 65.1% in Hungary and 33.5% in Yugoslavia. The share of output from small plants has grown steadily from 45% of gross value of industrial output in 1970 to about 55% in 1988. The growth of small collective enterprises and rapid industrialization at the local level began in the mid-1960s and 1970s. It soon became impossible to incorporate all of them into the central planning structure. A multilevel regionally based system was created, and much of the responsibility for planning and coordination devolved to the local government level (Wong, 1988:97). However, the pre-1978 multilevel planning system provided local governments with a certain degree of administrative autonomy without sufficient financial means or incentive to undertake major local economic development initiatives. The central government claimed almost all the surplus generated from industrial profits and taxes, which composed 90% of all government revenue. Local governments were able to retain only a portion of the profits from selected local enterprises (Wong, 1992:197). 4. In 1987, enterprises also entered into a "contract responsibility system" with their supervisory agencies. After the profit quota was met, the enterprise could retain a certain percentage of the profits within the enterprise. 5. World Journal, March 27, 1993. 6. Real Estate Association of Guangzhou, 1994, "Guanyu guangzkoushi fanjjdickan haifa jingyinj} shuefei wenti de diaoyan baogao" (A report on the problems of lax and fee in Guangzhou's real estate development), (Southern Real Estate), no. 7, pp. 30-32. 7. Vancouver interview V-l, November 15, 1995. 8. Vancouver interviews V-2, V-8, November 16, 1995.

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9. Payments from Guangdong were lower than from northern industrial cities because of the evaluation of industrial assets, an important revenue component (Vogel, 1989:89-90). 10. However, the situation has not been as straightforward as it seemed. The central government and Guangdong have been constantly negotiating outside the contract. According to Jiajian Zhu (1992), an economist based in Zhongshang University in Guangzhou, the central government's investment in Guangdong has been limited, and Guangdong's contribution to the central government has been much larger than the "fixed amount." Zhu reported that from 1979 to 1988, the percentage of central fixed capital investment was very small in Guangdong: 6% for bridge building, 13.6% for electricity supply, and 0.7% for education. One-third of Guangdong's construction funds came from abroad by 1989. On the other hand, Guangdong's contribution from 1979 to 1990 to the central government increased from more than RMB 800 million to over RMB 5.2 billion (including customs duties collected by Guangdong), or multiplied by 6.5 times. The enterprise, customs institutions, and banks subordinated to the central government increased their tax profit contributions to the state from less than RMB 500 million to more than RMB 10 billion, or mul tip lied by 21 times. In the 11 years up to 1989, Guangdong turned over a total of more than US$17.4 billion in foreign exchange to the central government (p. 103). 11. Barry Naughton (1995b) found that large municipalities in China, including Guangzhou, the capital city of Guangdong Province, have been chief funding sources for the Chinese central government, especially before the mid-1980s (p. 69). 12. Interest rates of China's banks were often lower than the inflation rates in the second half of 1980s, so the bank loans were virtually free (Wang, 1994:100). 13. According to a case study of a township enterprise in Jiangsu Province, a loan application by the enterprise to the local branch of People's Construction Bank had to be approved by the township industrial corporation and the township agricultural, industrial and commercial corporation, then went up to the committee of economic development and the committee of economic planning at the county level. If the size of the loan was larger than RMB 500,000 yuan, the application had to be reviewed by the committee of economic development and the committee of economic planning at the city level (Shi et al., 1994:364). 14. Because of the serious shortage of affordable housing in the housing markets, the majority of the people still heavily rely on housing provided by the public sector, either the local government or the work unit, or both. Housing-related issues are one of the major themes around which social relationships are constructed. Favors are asked and given around the subject of housing. In this sense, housing in China, even in the process of "marketization of land and housing," is still not a commodity, but a social currency that one can use to exchange for other objects. 15. Township government provides township enterprises with the most important resource, that is, the use of the governments' credibility. Because of their close association with township governments, township enterprises enjoy greater privileges and higher status in the eyes of local bank branch managers (Song and Du, 1990). The local government usually sides with the enterprises that are directly under the control of the government bureaus. 16. Total debt exceeded 70-80% of total assets of most township enterprises in the area. Enterprise directors would wine and dine the bank directors. For each shot of liquor that the enterprise director drank, the bank director promised him a

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loan. Thus, the more shots consumed by the enterprise director, the greater level of financing obtained by the enterprise (China interview M-46). 17. The interest rates were so high that, during my visit to Guangzhou in September 1995, a local friend advised me to transfer some funds from Vancouver to a savings account in a local bank in Guangzhou. 18. Another reason for the capital flows from other provinces to Guangdong was that Guangdong's enterprises offered greater commissions to the staff in the inland banks in charge of the loans (Tan, 1994). 19. Dalufangdichanjinfujjuan shanshan (Real estates shine like gold in China), World Journal, December 9, 1992. 20. China interview M-51, deputy director, Beijing Institute of City Planning, April 20, 1995. 21. China interview P-12. September 1995. 22. China interview P-9, P-10. Vancouver interviews V-2, V-3, V-4. 23. China Times Weekly, no. 36, September 1992, pp. 8-10. 24. World Journal, December 23, 1992. 25. World Journal, December 29, 1992. 26. Waizi buduan yunjjjingzhuzhonj/i Quonyue dichanre(foreign capital pouring in to accelerate the real estate rush in Guangdong), World Journal, December 23, 1992. 27. China Times Weekly, no. 58, February 1993, pp. 64-65. 28. This is somewhat similar to the days in early 1990s when the East European communist bloc disintegrated and the establishment of the new republics made it difficult to update one's world map. 29. Xiamen jjungdicban jianjie (Introduction to Xiamen's real estate market), zbonggwotong (China Market), no. 3, p. 23. 30. Zheng Wenbin, 1994, Dichanshan touzi retu—Xiamen (Xiamen, the real estate investors' paradise), China Market, April, pp. 20-23. 31. Two major periods of decentralization before the current reform were 1958-1960 and 1971-1973. 32. The official guideline is that provinces are permitted to retain 20% of the previous year's earnings from the export of locally produced but centrally controlled commodities, and 40% for commodities under the control of local jurisdiction; but the actual rates of foreign exchange retention varied from place to place. 33. The province could establish a foreign trade contract with the central government under which its export cost rate would be fixed, and any export loss above the 1978 baseline would be shouldered by the province. 34. Andrew Walder (1994, 1995) has provided a thorough discussion of the changing relationship between local governments and the industrial enterprises in China. He argued that the government's monitoring capacity of enterprise was stronger at the lower level (e.g., county, township, and village), because of the direct connection between the performance of the collective enterprises and the government revenue. In his works, the enterprise and the government were treated as two separate entities. Walder's approach helps to clarify the institutional mechanism of the interaction between local governments and enterprises. In my analysis of the bureaucratic entrepreneurs I do not separate the government and the enterprise at the individual unit level, and look at local officials' dual roles in various types of corporations established and run by the local governments. 35. China interview M-16. 36. Vancouver interviews V-3, V-4, V-8.

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37. Vancouver interview V-3. 38. Vancouver interviews V-8, V-4. 39. There were usually four deputy governors and deputy party secretaries in each town, each in charge of different sectors such as industrial development, foreign trade and investment, financial, city construction, and culture and education. 40. China interview M-42. 41. China interviews P-14, V-5, P-5. 42. Vivienne Shue's (1995) research on a city of the population of 600,000 in Hubei Province, a relatively slow-growing region, showed that between 1979 and 1989, the number of state employees almost doubled from 4538 to 8702 (p. 107). From 1985 to 1990, the newly established governmental agencies included standards and measure bureau, external economic affair committee, land bureau, structure reform office, public sanitation office, investigation bureau, real estate management bureau, local gazetteer compiler's office, Shenzhen liaison station, machine and building material company, chemical company, light industries and textile company, tobacco grading, pricing and sales bureau, border region trade company, and so on (p. 109). However, during a recent discussion with Kam Wing Chan, he pointed out that in some prosperous areas the size of local governments has shrunk (December 14, 1995, Vancouver). 43. China Times Weekly, no. 56/67. January 1993, pp. 68-69. 44. Not all development zones were successful and many of the development zone corporations went bankrupt after a while. However, the increase of government institutions was still significant. 45. Hong Yung Lee (1992) suggested that the economic reforms called for new organizations to facilitate the flows of technology and information, as well as to coordinate the work of various agencies, and therefore contributed to the expansion of bureaucracy (p. 61). 46. The policy is to "differentiate revenues and expenditures, divide responsibility between every level of administration" (huafen shouzhi fenji baogan). 47. China interviews M-12, M-15. 48. China interview M-47. 49. For those "state cadres" (cadres at the township level), pay rates are determined at the national level and are included in the national budget; the "local cadres" (cadres at the village and team level) are paid from extrabudgetary funds (Ho, 1994:224). 50. China interviews M-45, M-53. See also Ho, 1994:224-226. 51. China interviews M-46, P-10, P-8. See also Chen and Li, 1996. 52. China interview M-16. 53. China interview M-46. 54. China interview M-ll. Vancouver interviews V-6, V-4. 55. Vancouver interview V-6. 56. Discussion with Yang Jianjue on his thesis research in Hunan and Guangdong Provinces, January 1996. 57. In her comparison of the local autonomy of Shanghai and Guangdong, Zhilan Li (1995b) has proposed a typology of five "autonomous behaviors of local government": bargaining with the central government for a more favorable investment policy package; negotiation with the central government for a greater budget allocation, central government's investment, and higher investment ceilings; flexible implementation of centrally imposed policies; expansion of nonstate sector and extrabudgetary revenues; and diversification of access to capital by attracting for-

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eign investment. Shanghai's form of fiscal autonomy mostly falls in the first two categories, which are still subject to the central government's scrutiny. Guangdong, on the other hand, has been more active in the areas outside the direct control of the central government, especially in types four and five (pp. 36-38). 58. That is, to take advantage of the new policies before they are stripped away again, as had happened after the decentralization periods after the Great Leap Forward and the Cultural Revolution. 59. Jean Oi (1986) refers to these new bureaucrats as middlemen (p. 10). 60. A Chinese sociologist at the Academy of Social Sciences in Shanghai, Lu Hanlong, used this term during our discussion in Shanghai, April 1995.

Chapter 6 Reform Coalitions and Blood Connections 1. Aihua Ong (1987) argued that while culture highlights core social values, there is no direct relationship between values and behavior independent of institutional contexts. 2. In some cases, Taiwanese investors also supply Chinese enterprises with machinery or equipment, in which case the cost of the equipment is deducted from the fee installments. China interviews H-3, E-l. Also see Ho and Huenemann, 1984:29; Ye, 1991:278; and Lin, 1992:144. 3. Another "two ends remain outside" type of arrangement was called compensation trade (buchanjj ma-oyi). In compensation trade, Taiwanese firms provided Chinese partners with machinery, equipment, and materials. The Taiwanese firm received products, which might or might not be produced by the machinery supplied by the firm, in installments as compensation for the machinery costs. The title of the equipment passed to the Chinese enterprise once it arrived in China (Ho and Huenemann, 1984:29; Lin, 1992:144). 4. There were two kinds of joint ventures: the cooperative venture (hezuo jinjjyin0) and the equity joint venture (bezijingying). Cooperative ventures included joint projects that do not strictly follow China's joint venture law. The liabilities, rights, and obligations of both parties, including details on how output, earnings, or profits were to be shared, are all stipulated in the contract. Usually the Chinese partner contributed land, building, and some equipment, and the Taiwanese supplies capital, technology, and materials. At the end of the contract period, if both parties decided to end the cooperative relationship, they could take back what they originally invested. The contribution of Taiwanese investors was considered a loan and was repaid in installments from the venture's depreciation fund (Ho and Huenemann, 1984:30; Ye, 1991:277; Lin, 1992:126; China interviews B-3, D-2). For Taiwanese firms, the advantage of this arrangement was that it was more flexible and involved less risk. The life of the joint project was short and the return was faster. Under Chinese law, equity joint ventures between Chinese and foreign investors must be in the form of a limited liability company with a board of directors composed of representatives selected by the participants. Usually the Taiwanese contribution was in the form of foreign exchange and technology (machinery); the Chinese contribution was in the form of land, buildings, and equipment (in some cases). Chinese partners also took care of bureaucratic processes such as acquiring land leases, business permits, and marketing permits; applying for electricity, water supplies, and telephone installation; clarifying taxation rules; and so on. The company was managed jointly and the profits and losses were distributed in proportion to the participants' equity shares in the venture. According to the law on joint veil-

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tures, the president of the joint venture had to be from the Chinese side; this requisite was abolished in 1989. 5. China interviews A-l, A-2, E-l, F-l. 6. According to a survey of 319 Taiwanese firms in China in 1991, 68% of the products were sold in the markets outside Taiwan and China (Kao, Lee, and Lin, 1992:132). This has changed since the early 1990s. An increasing number of overseas investors from Taiwan and Hong Kong began to explore the Chinese markets, which is, in fact, one of the main reasons for their investment in China. 7. China interview L-6. 8. While joint ventures had the flexibility of the share of domestic sales, the sole proprietorships had to maintain their domestic sales under 30% of their total production. China interviews A-l, C-l, D-l. 9. According to a survey of 225 Taiwanese enterprises that have invested in China, 40.9% claimed that the major drive of their move was China's domestic market. Low production costs and the abundant supply of labor were the second (27.1%) and the third (24.9%) most important reasons. The rapid growth of China's consumer market has been impressive. With individual savings ballooning to nearly RMB 1.2 trillion (US$224 billion) in 1992, the demand for consumer commodities has increased rapidly. In the case of shoes, a survey of China's shoe market in 1990 showed that the average sales of shoes in 10 Chinese selected counties increased by 3.9% in one year. The projected increase from 1990 to 1991 was 6.1%. The survey also suggested that the consumption pattern of shoes in China has been more fashion and season sensitive. The sale of athletic shoes increased 8.5% between 1990 and 1991. On the other hand, the demand for low-quality plastic shoes decreased by 2.3% in the same period. The total demand in absolute numbers is more impressive. The average number of pairs of leather shoes per person in urban China was 0.75 pair, 0.4 pair in rural areas. That means that China's leather shoe market was as big as 599 million pairs, and with the 6.1% increase of sales in 1991, this means a total of 37 million more pairs of shoes were needed in the Chinese market. As a comparison, in 1986, the total number of pairs of shoes Taiwanese manufacturers sold to the world market was 842 million. The United States, the largest market for Taiwanese shoes, absorbed 509 million pairs. Japan, the second largest market for Taiwanese shoes, absorbed 41 million pairs. Germany, the third largest market, absorbed 29 million pairs (Liu, 1990:55). The size of the Chinese market for shoes is bigger than any other export market Taiwan's shoemakers have ever had. 10. China interview E-l. 11. China interview D-1. 12. For example, a manufacturer told me that southern Chinese prefer more fashionable shoes than northerners. The much drier and colder weather of the north also requires a different way of treating leather and glues (China interview F-l). 13. Custom controlled the tax-free imported materials for export products. 14. A large shoe factory has managed to maintain good relationships with local custom officials. Once every few months this large company would reserve an entire karaoke bar to entertain their friends in the customs office. As a result, the containers of the company's imported materials have never been opened and inspected. The story abovit smuggling is even more stunning. Because of the frequent rotation of customs officers from station to station, a broker might ship the goods to one port this week and to another port the next week so to follow a particular customs officer who is a "friend" and will help to make sure the containers go through customs quickly without being inspected.

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15. China interviews A-l, A-2, A-3, B-2, C-l, D-4, F-l, G-2, G-3, H-3. This finding is confirmed by a survey cited in Chiu and Chung, 1992:7. Among 97 Taiwanese investors surveyed in China, 82% agreed that linguistic and cultural affinity is an important factor for their move to China, only next to the most important factor "low wage labor"(95.8%). The survey presented in chapter 1, Table 1-7 also shows the same results. 16. For historical analysis of the tradition of Chinese bureaucrats, see Sterba, 1978; Chang, 1963; Chu, 1962; Watt, 1972; and Mann, 1987. 17. China interview M-ll. 18. China interview M-52. 19. China interview D-l. 20. China interview E-l. 21. China interviews G-7, H-l, H-7, E-l. 22. See chapter 5 on local bureaucrats' access to capital for details. 23. In some of the writings on gift economy, interpersonal relations and gift exchange were considered as part of an underdeveloped form of economy existing before "formal" economic institutions are established. In this chapter, I take Granovetter's (1985) approach and see personal and social relations as an integrated part of economic systems that do not by themselves define the level of development of the economic system. 24. China interview H-3. 25. Marshall Sahlins (1972:12) has discussed in length the use value of a gift. 26. China interviews, J-ll, F-3. Vancouver interview V-5. 27. China interview M-16. 28. China interview M-24. 29. China interview F-l. 30. China interview J-17. 31. China interview L-15. 32. China interview L-6. 33. China interview N-6. 34. Vancouver interview V-4. 35. Vancouver interview V-3. 36. For a detailed account of the relationship between jjuanxi (interpersonal relationship) and mianzi (face) in the Chinese culture, see Huang, 1988, pp. 24-32; and Hu, 1988. 37. China interview J-17. 38. China interview L-12. 39. In recent years, a favorable conclusion ofyanjiu requires gifts that are more valuable than cigarettes and liquor. 40. China interview J-6. 41. Vancouver interview V-3.

Chapter 7. Global Networks and Local Development 1. See Jean Oi's work (1989b) on the relationship between the state and peasants in China. 2. Waldcr suggested that in the Chinese case, state and collective enterprises differ in the extent to which they arc regulated by higher level government, especially the central government. The state enterprises are under close scrutiny by the central state (the budgetary system), the collective ones by the local government.

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The lower level (such as village) government is treated by the higher level (such as township) government as a private enterprise (Walder, 1995:270-280). 3. Or, according to Kornai (1992), bargaining has always been a part of the command economy in general (p. 487). 4. See, for example, the case of Romania analyzed by Adrian Campbell (1995). After the local election in 1992, most of the major towns in Romania had mayors and councillors from the opposition parties, including the Democratic Convention, as opposed to the government party, the National Democratic Salvation Front. This has resulted in the reluctance of the central government to decentralize the financial structure. 5. China interviews A-l, A-2, C-l, D-l, E-l, E-2, G-l, G-3, H-2, H-4, H-ll. 6. According to Pearson (1991b), the average size of Hong Kong investment (which also includes Taiwanese capital, because most Taiwanese investing firms are registered in Hong Kong) was around US$2 million at the end of 1980s, compared to US$9 million (West Europe) and US$4 million (the United States) (p. 191). 7. Including the state-owned and the Kuomintang (KMT) party-owned enterprises (Y. Lin, 1993). 8. Also see articles in Cross-Strait Economy and Trade Monthly (liangan jingmao), Taipei. For example, "Zhonghua Motor Vehicle setting up plant in Fujian province," no. 48, December 1995, p. 21; "Taiwan's computer industry setting up industrial zone in Jiangsu Province," no. 49, January 1996, p. 26; "Formosa Plastic investing in power plant in Zhangzhou, Fujian Province," no. 49, January 1996, p. 25; "Investment experiences of Hwashin-Lihwa Cable Wire Group," no. 49, January 1996, p. 37. And Lianetnguanxi dimi, daqiye buweiju (Big business not worrying about downturn of Taiwan/China relationship), World Journal (Vancouver), February 5, 1995. 9. For example, Ruan used questionnaires with measurable variables in her comparative study of guanxi in Chinese and American societies (1993), and suggested that Chinese tend to rely on the gift exchange-based interpersonal relationships more than Americans. 10. The Chinese collective entrepreneurship is based on networks of family firms. Chinese family firms are not individual firms, but are organized in networks of many family firms. Hamilton suggested that such a characteristic makes Chinese family firms different from Western family firms. 11. In my fieldwork in China, I also had to exercise identity shifts. My Taiwanese background helped me to set up interviews with Taiwanese investors and managers; the fact that my parents are from mainland China and that my Mandarin does not have a strong Taiwanese accent cleared the way for me when I talked with Chinese officials. With those Chinese still concerned with my Taiwanese citizenship, regardless of my family background, my Canadian residency and affiliation with a Canadian university convinced them to agree to the interviews. 12. "The overseas Chinese: A driving force," The Economist, July 18, 1992. pp. 21-24. 13. "The overseas Chinese: A driving force," The Economist, July 18, 1992, pp. 21-24. 14. For example, Liem Sieo-liong, the leader of the Indonesia-based Salim Group, has established close relationships with other leading ethnic Chinese entrepreneurs and groups within Indonesia and in other parts of Asia. In Indonesia, Mochtar Riady (Li Mo Tie) managed Salim's Bank of Central Asia from 1975 until

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1990 in addition to building his own growing regional financial empire; Ciputra Group (Chia Ching Hwa) is closely linked to Liem's real estate interests; Malaysian Robert Kuok provided the management expertise for Salim's flour and sugar mills, and the Koo family in Taiwan provided expertise in cement (East Asia Analytical Unit, 1995:172-173). 15. Singapore interview N-7. 16. China Interview G-3. 17. Taiwan interview L-28. 18. China interview M-54. 19. China-Market, February 1992, p. 138. 20. Liangan jingmao, (Cross-Strait Economy and Trade Monthly) Taipei, no. 48, December 1995, p. 24. 21. The fourth convention is to be held in 1997 in Vancouver. 22. Singapore interview N-7. 23. By the end of 1993, there were 3,544 foreign firms registered in Hong Kong, a 10% increase from 1992 when the new wave of foreign direct investment in China was at the peak. See " Vfaishang kanhao Xianggang touzi buanjing (Foreign investors are optimistic about the investment climate in Hong Kong)," China Times Weekly, no. 111/112, 1994, Feb. 13-26, p. 42. 24. Chinese companies would buy an empty shell listed company in Hong Kong to raise funds in the stock market, rather than going through the lengthy process of going public themselves. Because of the increasing demand, the price of an empty shell listed company in Hong Kong rose from HK$20 million in the beginning of 1993 to HK$170 million by the end of the year. See "Ma-ike shangshi suowei helai (why are they buying the shells?)," Zhongshi zhoukan, China Times Weekly, No. 79, July 4-10, 1993. By 1992, there were 2,000 to 3,000 Chinese enterprises registered in Hong Kong, including state-owned and collective enterprises established by local governments at provincial, municipal, and county levels (Maruya, 1992: 139), injecting more than US$10-20 billion in Hong Kong. 25. Forbes (Chinese edition), December 1993, pp. 22-24. 26. Also see, for example, "Shenzhen tanguan renren ziwei (Corrupt officials in Shenzhen feeling the threat)," Asian Times Weekly, August 14, 1994; "Jiangxi yenda gelei fanzni huodong (Jiangxi province attacking crimes)," World Journal, February 4, 1993; "jjaojjan shengcai youmendao (High rank officials know ways of getting rich)," World Journal, February 23, 1993. 27. China- Times Weekly, no. 56/57, January 1993, pp. 68-69. 28. In land lease regulation, any parcel that is larger than 1,000 mu has to be approved by the State Council. Yet in the case of Guangdong, Shangdong, and Jiangsu Provinces, most of the projects were directly handled and approved by provincial or subprovincial governments. In addition, many projects used a larger area of land than they applied for (China Times Weekly, No. 56/57, January 1993). 29. China Times Weekly, 110. 56/57, January 1993, pp. 68—69. 30. World Journal, February 23, 1993. 31. World Journal, February 13, 1993. 32. World Journal, February 20, 1993; China. Daily, February 19, 1993. 33. The gap between the pledged capital and the realized capital was alarming. Among the total capital of RMB 6 billion that was invested in property development, foreign capital accounted for only 4.7% (China Times Weekly, no. 58, February 1993, pp. 64-65. The problem with undeveloped land was so severe that the city government of Xiamen, Fujian Province, decided to charge 10% of the total

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land price for the first year, 40% for the second year if the land was acquired without follow-up investment. The government will take the land back if the development project has not been implemented two years after the developer acquired the lease (World Journal, February 20, 1993). 34. World Journal, March 3,1993. This is further confirmed by Yang Jianjue's (University of British Columbia) dissertation fieldwork in the mountain regions of Hunan and Guangdong Provinces in September 1995-January 1996. One of the reasons for the miscalculation of sale prices is that the official's performance is evaluated by the number of projects attracted to the locality rather than the actual contribution to local revenues. Also, the "public interest" is sacrificed for the personal gains of the officials who are involved in the sales of land leases. In fact corruption related to the sale of land leases has been so severe that the central government had to launch an anticorruption campaign along with the ban on development zones in mid-199 3. Finally, in many cases local peasants were forced to pay extra taxes and fees for the infrastructure, such as roads, for the development zones, which they do not necessarily benefit from (China interviews P-7, P-10, P-16). 35. China interviews P-7, P-8. 36. China interviews P-7, P-16. 37. World Journal, February 26, 1993. 38. World Journal, March 10, 1993, March 25, 1993. 39. See Smil (1993) for the tremendous environmental crises caused by the loss of large areas of farmland. The land development rush also happens in the cities, creating substantial social problems of massive displacement of inner-city residents (Olds, 1995), and an even more urgent problem of a shortage of affordable housing for local residents (China interviews P-9, P-14). 40. China interviews, P-6, M-46, M-51. 41. Between 1992 and 1993, the wage level of Chinese workers in the joint ventures increased by 22%, in Shanghai it was 33.5%, Beijing, 33.3%, Guangzhou, 28.6% (China Market, no. 50, July 1994, p. 100). 42. The Chinese State Council passed the draft of the labor law in January 1994, effective in January 1995; see "laodonjjfa.jjaibia.nle touzi huanjing (Labor law changed the investment environment)," China- Times Weekly, no. 111/112, February 1994; and "dalu taishanjj bianzou biankan laodongfa (Taiwanese investors in China watching the labor law as they move)," China Times Weekly, no. 152, November 27, 1994. In the same month, Guangdong passed new regulations stipulating fire prevention, ventilation, and other safety standards. The Ministry of Labor and the All China Federation of Trade Unions also took actions, such as conducting inspection tour of foreign-invested enterprises in the South on labor practices and so on; see "Labor Laments," China Business Monthly, June 1994, pp. 32-34. The impact of such governmental actions on labor conditions is yet to be seen. But the fact that Taiwanese investors in China began to discuss seriously the changing labor situation ill China indicates that the pressure is mounting. 43. " Waishangzaidalu weixiajje shiji bodou (Foreign investors fighting for the next century in China)," and editorial, China Times Weekly, no. 152, November 27, 1994. In spite of the package of austerity measures announced by Beijing in early 1993, the first half of 1994 saw an increase of actual foreign investment by 55% from the same period in 1993. 44. See Hsing, 1995, which describes the Taiwanese small investors in China operating as guerrillas in the 1980s. They achieved a high level of flexibility by

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drawing short-term investment plans; negotiating with local officials at the lowest possible level in order to bypass bureaucratic holdups and to avoid constraints of formal regulations; and concentrating in the rural towns rather than large cities. Some of these characteristics still hold in the 1990s, but the nature of the competition in China has made it more difficult for small players to continue with such games. 45. Also see "xinsanjiao jyuanxi (New triangle relations)," Common Wealth (Taipei), no. 151, December 1993; "guoji jjongsi Kuaha-i Aenglu (International companies cross the ocean and land in China)," China Times Weekly, no. 96, October 31, 1993; "sanzi qiye Jian^gsu fashao (Joint ventures heated in Jiangsu)," China Times Weekly, no. 99. November 21, 1993. 46. Pamela Yatsko, "Employers paradise: China has no shortage of skilled workers—yet," Far Eastern Economic Review, September 29, 1994, p. 69. 47. Yet the size of the domestic market is not determined solely by the size of population but also the purchasing power of the population. This, in turn, is affected by the distribution situation, which again is related to wage levels of workers in the host country. 48. Although the Chinese government stipulates a formal commitment to nine years of compulsory schooling, in 1985 one-third of the cohort failed to make the transition from primary to junior-high schools. Of those who did, over 30% failed to complete the cycle. Thus, by the end of the first year of junior-high, less than 50% of a cohort are enrolled. About 40% of primary and secondary teachers and 70% of junior-high teachers are unqualified (Lewin, 1988:180). In the early 1990s, 220 million Chinese were illiterate, accounting for one-fifth of the total population, and the years of school education averaged less than five nationally; see "ertong qixne xianxiang yanzhong (Problem of dropouts is severe)," China Times Weekly, no. 87, August 29, 1993, pp. 66-67.

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Index

Agriculture Development Bank, 112 Asian General Taiwanese Chamber of Commerce, 153 Association of Southeast Asian Nations (ASEAN), 3, 145 Associations, of Chinese entrepreneurs in overseas Chinese communities, 153 It, 72 Bank of China, 112, 116 Bank of Communication, 112 Banks, local governments and, 11214,205nn.12-16, 206nn. 17-18 Bargaining, 147 Bass Company, 82 Beijing, 23 Brazil, shoe industry in, 44, 56, 64, 73 Brotherhood, Taiwan trading companies and, 77 Bureaucracy. See Local governments Bureaucratic entrepreneurs, 118-27, 128, 206n. 34, 207nn. 42, 4445, 49, 57. See also Interpersonal relations (guanxi) Business groups, 99, 195n. 28 Capital, access of local governments to, 112-14, 205nn. 12-16, 206nn.17-18 Castclls, Manuel, 183ii. 8

Chambers of commerce, associations of Chinese entrepreneurs formed by, 153 China contract labor system in, 34-35, 38, 189n. 50, 190n. 65, 68-69 Cultural Revolution and, 187n. 24 education in, 159, 214n. 48 ethnicity-based capitalism in, 8-10, 183n.9 Hong Kong and transnational investors in, 12, 20, 27-28, 3034, 188nn. 37, 42-43, 45 interregional brain drain and, 3637, 38, 189nn. 58-59, 190n. 62 migration of labor to south in, 3439, 189nn. 50-51, 58 overseas capitalism and, 147-55, 21 Inn. 10, 14, 212nn. 23-24 South Korean investors in, 12-13 Taiwanese investors in, 12-13, 1527,149,150,151-52, 159, 185nn. 11-14, 17, 186nn. 18, 20-21 (see also unAer Taiwanese shoe industry in China) Tiananmen massacre and, 17-18, 25, 185n. 14 wage levels in, 13, 159, 213n. 41 Collective discussion, private and public involvement in, 139 Collective entrepreneurship, 151, 211n.10

24.?

244

Index

Commodity circulation, local governments and, 118 Compensation trade, 208n. 3 Construction Bank, 113 Contract labor system, of China, 3435, 189n. 50 Cooperative ventures, 208ii. 4 Corruption, interpersonal relations and, 132, 209n. 14 Credit access of local governments to, 11214,205nn.12-16, 206nn. 17-18 Taiwanese shoe industry in China and, 75-76, 199n. 76 Cultural Revolution, 187n. 24 Culture, transnational investment networks and, 3-4 Chinese capitalism and, 8-10, 183n. 9 Hong Kong and China and, 32-33, 18 811. 45 Taiwanese investors in China and, 19, 151 Taiwanese shoe industry in China and, 70, 92, 97, 98, 104-6, 201n. 8,202n. 9 See also Interpersonal relations (guanxi) Dali Shoe Company, 74-75, 198n. 75 Decentralization, 108. See also Local governments Delivery, Taiwanese shoe industry and, 63-64, 197nn. 51-52 Deng Xiaoping, 115, 124, 159 Division of labor, Taiwanese shoe industry in China and, 67-69, 80-81, 84-85, 92, 100, 175-77 Drinking, interpersonal relations and, 136 East Asia transnational investors from, 11-21 wage level in, 12 Economic and Trade Committee, 5 Economic development zones, 120, 156-57, 207n. 44 Economies of scale and scope, Taiwanese shoe industry and, 6466

Electronics, Taiwanese industry in China and, 159 Enterprise mortality and fertility, Taiwanese shoe industry and, 71, 73-75, 198n. 75 Enterprise networks, 5 Entrepreneurs, Chinese bureaucratic, 118-27, 128, 206n. 34, 207nn. 42, 44-45, 49, 57 transnational networks of, 147-55, 21 Inn. 10, 14, 212nn. 23-24 See also Interpersonal relations (guanxi) Equity joint venture, 208n. 4 Evans, Peter, 8 Exploitation of labor, Taiwanese shoe industry in China and, 78, 83-91, 200nn."l7, 20, 201nn. 25, 30 Export-processing arrangement, 129, 130, 208n. 2-3, 209n. 6 Export Trade Responsibility System, 117 Familialism, Taiwanese shoe industry in China and, 99, 100-103, 202nn. 18-19 Family business, in Taiwan, 198n. 69 Feng-skui, Hong Kong and Chinese transnational investments and, 188n. 45 Firing, Taiwanese shoe industry in China and, 86-87, 180-81 Flexible deals, between Taiwanese investors and Chinese officials, 130, 132-35 Fok, Henry, 154 Ford, Henry, 40 Foreign exchange, local governments and, 116-17, 206nn. 32-33 Foreign trade, local governments and, 116-17, 206nn. 32-33 Fujian Light and Textile Industrial Company, 5 Fujian Province, 133 autonomy of, 109 bureaucratic entrepreneurs in, 124 fiscal policy of, 111-12 foreign exchange and, 117 foreign trade and, 117 growth in, 23, 24, 25, 26-27, 28, 29, 186n.23

245

Index labor migration to, 35 land development in, 116, 158 language and, 141 overseas Chinese capital and, 148 Taiwanese investors in, 21, 22, 23 Giddens, Anthony, 7 Gift exchange, 9, 134-43, 150, 15152, 184n. 10, 210n. 23, 211n. 9 Global commodity chains, 183n. 7 Globalization, of transnational investment networks, 7-8, 183n. 8 Global networks. See Local governments, global networks and Greater China Economic Circle, 8 Guangdong Province autonomy of, 109, 207n. 57 bureaucratic entrepreneurs in, 12427, 207n. 57, 208nn. 58-60 commodity circulation and, 118 financial responsibilities of, 121, 123, 124 fiscal policy of, 111, 113-14, 205n. 10, 206n. 18 flexible business deals and, 133 foreign exchange and, 117 foreign trade and, 117 global networks and, 147 growth in, 23-26, 187nn. 25, 28, 31,33,35 Hong Kong and transnational investments in, 27, 28, 30, 31, 32-34, 188nn. 37, 45 labor migration to, 35-36, 38 land development in, 114-16, 156, 157, 158,212n, 28 language and, 141 overseas Chinese capital and, 148 Taiwanese investors in, 21, 22, 23 Guanxi. See Interpersonal relations (guanxi)

Haikuo, 115 Hainan Province land development in, 115, 156, 157 Taiwanese investors in, 22, 23 Hiring, Taiwanese shoe industry in China and, 84-86, 200n. 20

Hong Kong, 117 change in exchange rates of, 14 Chinese entrepreneurs and, 149, 154,212n. 24 Chinese transnational investments and, 20, 27-28, 30-34, 188nn. 37, 42-43, 45 gift exchange and, 184n. 10 Guangdong Province and, 125, 126 transnational investors from, 11-12,

13,20, 184n. 2

triangular trade and, 16-17, 18 wage level in, 13 Hong Kong Chinese General Chamber of Commerce, 154 Hongsong International, 200n. 9 Housing, local governments and, 112, 205n. 14 Hubei Province bureaucratic entrepreneurs in, 119, 207n. 42 land leases in, 155 Hunan Province autonomy of, 126 economic development zones in, 156 Imitation, Taiwanese shoe industry and, 52-53 Import and Export Credit Bank, 112 Indonesia economic growth of, 14-15 Singaporean investors in, 12 Taiwanese investors in, 15, 16 Taiwanese shoe industry in, 51, 94 wage level in, 13 Industry and Commerce Bank, 112 In-house production, Taiwanese shoe industry in China and, 79-81, 83, 92 Interest rates, of Chinese banks, 112, 205n.12 International subcontracting, 183n. 7 Interpersonal relations (jjuanxi), 9, 128-43, 149-50, 152-53 corruption and, 132 culture and, 128, 129, 132, 134, I51,208n. l,210n. 15 flexibility and, 130, 132-35

246

Index

Interpersonal relations (continued) gift exchange and, 134-43, 150, 151-52, 210n. 23, 211n. 9 linguistic affinity and, 128, 132, 141-43, 151, 210n. 15, 211n. 11 loans and, 112 profitability and, 130 public versus private domain and, 138-41 Taiwanese investors in China and, 151-52 Investment strategies, Taiwanese shoe industry in China and, 78-83, 200nn. 3-4, 9 Italy, shoe industry in, 44, 194nn. 8-9 Japan shoe industry in, 47-48, 195n. 18 trading companies and, 77 transnational investors from, 12, 13 Jiangsu Province bureaucratic entrepreneurs in, 119 economic development zones in, 156 financial responsibilities of, 121, 122, 124, 125 growth in, 23 land development in, 115, 155, 212n. 28 loans and, 113, 205n. 13 Taiwanese investors in, 23, 25 Jituangongsi (business group), 6 Job-hopping, Taiwanese shoe industry in China and, 71, 72-73, 198nn. 69-70 Johor-Singapore-Riau growth triangle,

8

Joint ventures, 129, 208n. 4, 209n. 8 private and public involvement in, 139 Taiwanese shoe industry and, 106, 131,203n. 38 Korzeniewicz, Miguel, 183n. 7 Labor contracts/agreements, Taiwanese shoe industry in China and, 83, 179-81 Labor disciplinary schemes, 9-10

Labor exploitation, Taiwanese shoe industry in China and, 78, 83-91, 200nn. 17, 20, 201nn. 25, 30 Labor, foreign investment and, 158-60. See also Taiwanese shoe industry in China, labor and Lam Pong Loi, 154 Land development, local governments and, 114-16, 155-60, 212nn. 23, 33,213nn. 34,39,42-43, 214nn.44,46-48 Land leases, foreign investment through, 155-57, 212nn. 28, 33, 213n.34 Language interpersonal relations and, 128, 132, 141-43, 151,210n. 15, 21In. 11 Taiwanese investors in China and, 151-52 Laoning Province, 156 Lee Kuan Yew, 154 Legal contracts, public and private involvement in, 140 Light and Textile Industrial Bureau, 5 Li Kai-shing, 154 Li Peng, 157 Loans, local governments and, 11214,205nn.12-16, 206nn. 1718 Local governments, 6, 108-27, 204nn. 1, 3 access to capital and, 112-14, 205nn.12-16, 206nn. 17-18 bureaucratic entrepreneurs in, 11827, 128, 206n. 34, 207nn. 42, 44-45, 49, 57, 208nn. 58-60 (see also Interpersonal relations (jjuanxi) commodity circulation and, 118 financial responsibilities of, 121-24, 125, 207nn. 46, 49 foreign exchange, foreign trade and foreign investment and, 116-17, 206nn.32-33 land development and, 114-16 material allocation and, 117-18 revenue sharing and, 109—12, 204n. 4, 205nn. 9-11 small investors dealing with, 4

Index transnational investment networks and, 7, 9 See also Fujian Province; Guangdong Province Local governments, global networks and,144-60 bargaining and, 146-47 foreign investment and land development and, 155-60, 212nn. 28, 33, 213nn. 34, 39, 42-43, 214nn. 44, 46-48 labor and, 158-60 networks of state-based powers and, 146-47, 210n. 2, 211nn. 3-4 transnational networks of Chinese entrepreneurs and, 147-55, 211nn. 10, 14, 212nn. 23-24 Macao, 117 Malaysia Chinese entrepreneurs in, 149, 150, 153 East Asian investors in, 12, 13 economic growth of, 14-15 Singaporean investors in, 12 Taiwanese investors in, 15, 16, 51 wage level in, 13 Management, Taiwanese shoe industry in China and, 92-104, 106-7, 201n.8,202nn.9,11,17-19 Mao Zedong, 144 Material allocation, local governments and, 117-18 Metro Trading Company, 75 Military-like management, Taiwanese shoe industry in China and, 85, 103-4, 107, 203n. 27 Ministry of Foreign Economic Relations and Trade (MOFERT), 6,116-17 Mitsubishi, 195n. 18 Multinational corporations, 6-8, 183n.7 Mutual investment, Taiwanese shoe industry in China and, 76-77, 199nn. 77-78 Nanjing Municipality, 119 Nanping City People's Political Consultative Conference, 5

247

Nanping (NP) Municipal Economic and Trade Committee, 5 Nanping Paper Mill, 5, 6 National Land Agency, 157 Nation-state, 8, 183n. 8 Nike, 45, 194n. 15 Order Marketing Agreement (OMA), 48 Organization for Economic Cooperation and Development (OECD), 3, 145 Overtime, Taiwanese shoe industry in China and, 84, 87, 89, 90, 98, 179 Paternalism, Taiwanese shoe industry in China and, 99, 100-103, 202n. 17 People's Bank of China, 112 People's Construction Bank, 112, 205n. 13 Philippines economic growth of, 14 South Korean investors in, 12-13 Taiwanese investors in, 12-13, 15, 16 Taiwanese shoe industry in, 51, 94 wage level in, 13 Product development, Taiwanese shoe industry and, 54-55, 64, 196nn. 40-41, 197nn. 53-54 Production networks, Taiwanese shoe industry in China and, 70, 198n. 67 Public versus private domain, gift exchange and, 138-41 Public welfare, public and private involvement in, 139-40 Quality, Taiwanese shoe industry and, 62-63, 81-83, 196n. 49 Realized direct investment, from Taiwan to China, 3, 183n. 1 Regionalism, Taiwanese shoe industry in China and, 104-6, 203nn. 30, 33 Revenue sharing, local governments and, 109-12, 204n. 4, 205nn. 911

248

Index

Southeast Asian Growth Triangle, 149 Southern China, world market and, 21-39,187n. 24 South Korea change in exchange rates of, 14 Salary, Taiwanese shoe industry in shoe industry in, 44, 45, 46, 56, 61, China and, 87-89, 179, 202n. 16, 194n. 15, 196n. 48 203n.38 trading companies of, 61 Scale and scope economies, Taiwanese transnational investors from, 11-12, shoe industry and, 64-66 13 Sexual harassment, in Taiwanese shoe wage level in, 13 industry in China, 100-101 Strategic alliance, 183n. 7 Shangdong Province, 212n. 28 Subcontractors, Taiwanese shoe Shanghai industry and, 59-60, 69, 70, financial responsibilities of, 121 196n.47,198nn.64-65 land development in, 115 Suppliers, Taiwanese shoe industry local autonomy of, 207n. 57 and, 56-59, 69-70, 75-77, 196n. Taiwanese investors in, 23 44, 197n. 61, 198nn. 62, 64-65, Shangxi Province, 156 199n. 78 Shenzhen autonomy of, 124 Taiwan bureaucratic entrepreneurs in, 119 change in exchange rates of, 14 Deng Xiaoping's visit to, 115, 124, Chinese investments by, 12-13, 15159 27, 149, 150, 151-152, 159, labor migration to, 37, 38, 190n. 62 185nn. 11-14, 17, 186nn. 18, land development in, 114, 115 Taiwanese investors in, 23 20-21 (see also under Taiwanese shoe industry in China) Zhenzhen shoe company in, 82 family business in, 198n. 69 Shoe industry low-cost labor and, 13-14 of Brazil, 44, 56, 64, 73 overseas Chinese entrepreneurs in, of Italy, 44, 194nn. 8-9 of Japan, 47-48, 195n. 18 149 price competitiveness of, 14-15 of South Korea, 44, 45, 46, 56, 61, transnational investors from, 11-12, 194n. 15, 196n. 48 See also under Taiwanese shoe 13-27, 153, 184n. 6 (see also industry Chinese investments by, above) Shopfloor politics, 9-10 wage level in, 13 Taiwanese shoe industry, 40-67, 161Shunde, 121 Sichuan Province, 115 62, 191n. 1 Brazilian technique and, 64, 73 Singapore change in exchange rates of, 14 business groups and, 49, 195n. 25 Chinese entrepreneurs in, 149, 153, in China (see under Taiwanese shoe 154 industry in China) transnational investors from, 11-12 creative imitation in, 52-53 delivery and, 63-64, 197nn. 51-52 wage level in, 13 Singapore Chinese Chamber of economies of scope and scale and, Commerce and Industry, 154 64-66 Social networks, Taiwanese shoe in Indonesia, 94 industry in China and, 71-77, intcrfirm organization of, 52-67 nature of, 40-44, 191nn. 2, 4, 198nn. 69, 75, 199nn. 76-78 Sole proprietorships, 209n. 8 192nn. 5-6, 194n. 9 Risk sharing, Taiwanese shoe industry and, 66-67, 196n. 60 Romania, 21 In. 4

249

culture and, 92, 97, 98, 104-6, in Philippines, 94 201n. 8, 202n. 9 product development and, 54-55, division of labor and, 6, 67-69, 64,196nn.40-41, 197nn. 53-54 80-81, 84-85, 92, 100, 175-77 production processes of, 175-77 quality control and, 62-63, 196ii. dormitories and, 99-100, 102 familialism and, 99, 100-103, 49 202nn.18-19 quota system and, 48-49, 195n. 25 risk sharing and, 66-67, 197ii. 60 fringe benefits and, 99, 180 subcontractors and, 59-60, 196n. health and safety and, 107, 180 in-house production and, 79-81, 47 83,92 suppliers and, 56-59, 196n. 44 investment strategies and, 78-83, in Thailand, 94 200nn. 3-4, 9 trading companies and, 60-67, job-hopping and, 71, 72-73, 196n. 49, 197nn. 51-54, 60 198nn.60-70 in worldwide shoe industry, 42, 44labor discipline and, 86-87, 92, 98, 51, 53,194nn. 10-12, 14, 16-17, 100, 103-4, 179, 201n. 25, 195nn. 18, 36 203n. 27 Taiwanese shoe industry in China, 51, 67-108 labor exploitation and, 78, 83-91, 200nn. 17, 20, 201nn. 25, 30 China's domestic market and, 130low-skilled workers and, 84-86, 32,209nn.9,12-13 200n.20 corruption and, 132, 209n. 14 management and, 92-104, 106-7, credit and, 75-76, 199n. 76 expansion of, 79-80, 200n. 4 201n. 8, 202nn. 9, 11, 17-19 meals and, 102 flexible deals made by, 130 military-like management and, 85, headquarters of, 94 103-4, 107, 203n. 27 high enterprise mortality and paternalistic management and, 99, fertility and, 71, 73-75, 198n. 75 100-103, 202n. 17 joint ventures and, 83, 106, 131, pay rates and, 87-89, 179, 202n. 179-81, 203n. 38 16, 203n. 38 mutual investment and, 76-77, quality and, 81-83 199nn. 77-78 regionalism and, 104-6, 203nn. 30, networking with local officials and, 33 131-32, 209n. 14 (see also risk sharing and, 88-89 Interpersonal relations (guanxi) sole proprietorships and, 83, 181 organization of, 95, 96, 101-2 training and, 82-83 production networks and, 70, 198n. turnover and, 106 67 women and, 86, 95, 99, 100-101, social networks and, 71-77, 198nn. 102-3, 107, 202n. 16 69,75,199nn.76-78 worker dismissal and, 86-87, 180-81 subcontractors and, 60, 70, 198nn. working hours and, 84, 87, 89-91, 64-65 98, 179 suppliers and, 69-70, 75, 77, Taiwan Shoe City, 131-32 198nn. 62, 64-65, 199n. 78 Taiwan Shoe Manufacturer Taiwanese shoe industry in China, Association, 80, 195n. 25 labor and, 78-107, 159 Thailand cheap and abundant labor and, 81economic growth of, 14 83,92-93 overseas Chinese entrepreneurs in, contracts and agreements and, 83, 148-49 179-81

250

Index

Thailand (continued) South Korean investors in, 12-13 Taiwanese investors in, 12-13, 15, 16 Taiwanese shoe industry in, 51, 94 wage level in, 13 Three-fixes system, commodity circulation and, 118 Tiananmen massacre, 17-18, 25, 185n. 14 Trading companies Japanese, 77 South Korean, 61 Taiwanese shoe industry and, 60-67 Training, Taiwanese shoe industry in China and, 82-83 Transnational capital flow, 128 autonomy of local governments and (see Local governments) export-processing arrangements and, 129, 130, 208n. 2-3,209n. 6 joint ventures for, 129, 208n. 4, 209n. 8 See also Interpersonal relations (guanxi) Transnational investment networks of Chinese entrepreneurs, 147-55, 21 Inn. 10, 14, 212nn. 23-24 culture and, 3-4 ethnicity-based, 8-10, 183n. 9 globalization of, 7-8, 183n. 8

local governments and, 7, 9 multinational corporations and, 6-8, 183n. 7 small investors and, 4 social nature of, 7 territorial nature of, 7 See also under Taiwanese shoe industry in China Triangular trade, between Taiwan and China, 16-17, 18 Triple alliance model, 8, 146 Vietnam, South Korean and Taiwanese investors in, 12-13 Wenji Trading Company, 75 Women, Taiwanese shoe industry in China and, 86, 95, 99, 100-101, 102-3, 107, 202n. 16 World Chinese Entrepreneurs Convention, 153-54 World Taiwanese Entrepreneur Association, 153 Wuxiang County, 121, 122 Wuxi County, 120 Xiamen, 23 Zhejiang Province, 23, 156 Zhenzhen shoe company, 82-83 Zhouhai, 115