China's Foreign Sector and its Managers

China's foreign business sector appeared first during the late 1970s and became established as an important force in the economy in the mid-1980s. Whereas the Maoist government had long rejected the idea that foreign businesses should be allowed to operate and profit on Chinese soil, the post-Mao reformers actively encouraged such activities, hoping that foreign businesses would bring in not only capital but also technology and managerial skills. Since the late 1970s, foreign-backed companies have been established across a wide range of industries in China, including manufacture of computers, chemicals, pharmaceuticals, automobiles, consumer goods (notably toys, bicycles, televisions, and textiles), together with trading companies and, in the early 1990s, financial services and real estate. Although the growth of foreign investment in China was small in the early 1980s, and erratic in the mid- and late 1980s, dramatic growth began in the first half of the 1990s. (See appendix I.) Total pledged foreign investment was reported to be nearly $400 billion (in more than 258,000 enterprises) by the end of 1995.^[18]

Foreign-sector businesses take several forms, the three most common of which house the elite of foreign-sector managers examined in this study.^[19] First, Sino-foreign joint ventures (JVs), of both the equity and contractual varieties, represented approximately 85% of the total num-

[18] Note that all dollar figures in the text refer to U.S. dollars. It is likely that this fig ure is inflated, reflecting a channeling of PRC funds through Hong Kong and back into China in an effort to gain the privileges of foreign investors. (For more on such "false" joint ventures, see appendix 2.) Nonetheless, it is beyond dispute that there has been a significant increase in investment during the 1990s. For an analysis of foreign investment trends in the 1980s and early 1990s, see Pearson (1991), pp. 69-78; Pearson (1994); and Lardy (1995).

[19] Joint oil development projects were a large source of foreign capital early in the 1980s, but their importance as a percentage of foreign capital has since declined. This study does not consider managers who work in these enterprises.

ber of foreign direct investments (and 75% of the total pledged value) by the early 1990s.^[20] Second, wholly foreign-owned enterprises (WFOEs) involve no Chinese investment and are often preferred by foreign investors because they can maintain a greater degree of control over their operations and technology. The number of WFOEs has grown dramatically since the mid-1980s, yet they represent just under 15% of all foreign direct investment. In all, there were approximately 70,000 JVs and WFOEs registered in China by the end of 1992.^[21] The third type of foreign-sector businesses included in this study are representative offices (ROs). These are not technically direct investments but, rather, operate as agents for large foreign companies, and tend to be located in Beijing and Shanghai. There were an estimated 13,000 ROs in China as of mid-1993.^[22]

Members of China's business elite who are employed in the foreign sector are PRC nationals who work alongside expatriates. Many foreign-owned enterprises have hired Western and Asian managers, often from Hong Kong. By doing so, these enterprises have attempted both to inject Western managerial methods into their operations and to maintain some level of foreign control. The lack of access to a supply of trained Chinese managers—due to the upheaval of the education system during the Cultural Revolution, to poor labor mobility, and to political disincentives for Chinese managers' taking responsibility for foreign-backed enterprises—has discouraged extensive use of Chinese managers in many foreign-funded enterprises. Yet both Chinese and foreign participants in these businesses have preferred to promote high-quality PRC nationals to middle- and senior-management levels. The presence of expatriates, who tend to hold high positions and who make much higher salaries than their Chinese counterparts, causes tensions within companies.^[23] Many Chinese officials and managers are also sensitive to the circumstance that extensive foreign control recalls experiences of foreign imperialism of the nineteenth and early-twentieth centuries.

[20] Equity JVs are limited liability companies established by two or more firms that each contribute assets to be owned by a new legal entity. Contractual JVs are similar to partnerships in which no separate legal entity is formed. In both forms, the foreign partner usually contributes capital, technology, and perhaps some equipment, and the Chinese partner generally contributes land, facilities, and some equipment. Equity JVs make up approximately 70% of the number of all JVs.

[21] FBIS-CHI-93-094 (18 May 1993), p. 37.

[22] "Over 13,000 Foreign Enterprises Established" (1993).

[23] Local managers' salaries run between 25% and 100% of expatriate salaries. The average is about 50%. See Frisbie and Brecher (1992), p. 25.

Management by local personnel is also desirable for effective communications within the firm. The recent rapid growth in numbers of foreign-backed enterprises has intensified the demand for talented indigenous managers. Thus, early on, efforts were made in JVs to set up management structures that paired Chinese and foreign managers at equal levels in so-called "shadow" management structures. Explicit efforts at management training, both inside and outside of China, have also been made.^[24]

The foreign sector has three types of managers, only one of which can be considered part of the business "elite." The first type of manager was dominant in foreign-sector companies in the first part of the 1980s. These are "old-line" managers who work in medium and large joint ventures, most of which have been formed with Western or Japanese partners. Such managers most often have been transferred to JVs from the Chinese state-owned parent company. They often have many years of on-the-job experience (and hence seniority) and tend to be in their late forties or fifties. They generally have not received either university degrees or schooling in Western managerial methods except, perhaps, for traveling to the foreign parent company for short-term technical training.^[25] Rather, they have obtained their position in the foreign-sector enterprise because of their status in the parent Chinese company, through personal tics with others involved in the venture, or by virtue of their political "reliability" or their ability to offer good connections on behalf of the enterprise. Their political "reliability" and lack of formal managerial training too often has meant that they are unwilling to take bold initiatives or accept responsibilities that might contravene standard practice in state-owned enterprises.^[26] Because of these problems, foreign participants often have been dissatisfied with their performance. Increasingly, these "old-line" managers have been eased aside or have transformed themselves into more effective managers.

The second type of manager in the foreign sector is clustered in the majority of Hong Kong- and Taiwan-funded investments. Most of these investments are small factories involved in value-added manufacturing

[24] Many JV contracts specify that foreign partners are responsible for training Chinese managers, and explicitly require the sinification of management. See Pearson (1991), pp. 177-182.

[25] These managers generally survived earlier campaigns and shifts in management models to be able to gain a privileged position in the foreign sector in the 1980s. On the background of the older of these managers, see Schurmann (1968). On the lack of extensive management training for this group, see Vermeer (1988); Brown and Jackson (1991).

[26] These characteristics also are common to managers in state owned enterprises. See Child (1994).

or processing, or in producing goods using fairly low-level technologies. Their managers tend to be recruited through family or clan networks rather than through merit-based processes.^[27] Anecdotal evidence suggests that their salaries are lower than in Western- and Japanese-funded enterprises, and that their status is not as high. This characterization does not diminish the importance of Hong Kong and Taiwanese investments in China's economic development; both Hong Kong and Taiwan firms have contributed enormously to China's export capacity and to rural industrialization, and much of the success of these factories can be attributed to the entrepreneurial behavior of their Chinese managers. Yet despite their success, these factories are not the major source of the foreign sector's new business elite.

A third type of manager forms the core of the foreign-sector business elite. Consistent with the meaning of "elite," the number of foreign-sector managers in this category is quite small—not more than 50,000 as of the mid-1990s.^[28] In contrast to the overall profile of the origin of foreign capital, in which more than half the reported foreign investment in the PRC has come from Hong Kong investors, members of the foreign-sector business elite are disproportionately concentrated in Western and Japanese firms.^[29] These firms offer managers the highest salaries and status, and tend to hire at their middle and upper tiers managers with the highest educational credentials.^[30] Because investments by Western and Japanese firms are more likely to incorporate advanced

[27] Redding (1995).

[28] This figure is estimated as follows: there were an estimated three foreign-sector managers (FSMs) at senior- and middle-management levels in each of the approximately 70,000 equity and contractual JVs and WFOEs actually registered by the end of 1992, and in the estimated 13,000 in KOs set up by mid-1993. This totals 250,000 FSMs in all three types of firms. Members of the foreign-sector business elite tend to be found in the Western and Japanese enterprises that make up about 20% of the overall number of foreign-sector firms, generating the figure of 50,000 elite managers. Although the fact that a portion of managers in Western and Japanese firms are "old line" would reduce this figure, this gap is compensated for by the fact that (a) there may be more than 3 FSMs in the largest Western and Japanese investments, and (b) some members of the foreign-sector elite are found in Hong Kong and Taiwan firms.

[29] In 1994, Hong Kong and Macao firms made up 60% of all actual foreign investment funds, and Taiwan firms invested another 10%, significantly more than investment from the U.S. (7.3%), Japan (6.1%), and Europe (estimated at 5%). Other countries that contributed significant amounts of investment (at least 2% of the total) included Singapore and South Korea. Percentages are calculated from data in "$82.68 Billion Foreign Investments Approved Last Year" (1995).

[30] Managers in some Asian firms—such as sophisticated Hong Kong investment firms—do have a small presence in the business elite, but do not form the core of the group (Redding [1995]). See appendix 2 for a further discussion of the issue of firm nationality.

technology and appropriate management skills, these firms tend to be most interested in hiring managers with advanced training. Such training occurs in a variety of venues. The most advanced management training is in Western-style M.B.A. programs located in China or abroad. Despite strong interest in M.B.A. degrees in China, government quotas on the number of M.B.A. degrees have kept the number awarded by foreign-run programs at 60 per year, and the number awarded by Chinese programs at 150^[31]

The number of Chinese students enrolled in M.B.A. programs located overseas is increasing. Yet, although some of these students return to China to work in foreign companies because of the emerging work opportunities as well as for family reasons, the number overall remains small. Management training for most members of the elite foreign-sector managers is therefore provided in Chinese-government-run universities, particularly those sponsored by the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), or in special training centers (such as those established in Shekou and Wuxi) that are financed by foreign governments or universities or by the World Bank.^[32] Alternatively, many large foreign companies choose to recruit directly from China's premier universities (though there are some government restrictions on this practice), and then provide in-house management training either in or outside of China.^[33] In part as a result of their training, members of the business elite tend to be less cautious in their management style compared to their "old-line' counterparts.^[34]

[31] These programs have been set up in conjunction with, and with financial support from, foreign governments. For example, the School of Management at the Dalian University of Technology was established with aid from the U.S. Department of Commerce, and the China-EC Management Institute was established with aid from the European Community. These programs have been vulnerable to the foreign origin of their funding, as many of them were closed following the government crackdown of 1989. In 1991, the Chinese government approved domestic M.B.A. programs on a trial basis in nine universities. See Borgonjon and Vanhonacker (1992); "China Pledges Reform to Join GATT" (1993); and Treacy (1988). Reflecting the educational bias of the system, even those trained in "modern management" tend to be more oriented toward "hard" knowledge (e.g., quantitative techniques based on engineering approaches) rather than "soft" concepts (e.g., marketing and organizational behavior).

[32] MOFTEC is the former Ministry of Foreign Economic Relations and Trade (MOFERT). On these Chinese and foreign-sponsored training programs, see Borgonjon and Vanhonacker (1992.), pp. 15, 18; Vermeer (1988); Treacy (1988), p. 40; and Dalton (1990).

[33] For example, the Motorola JV's "Cadre 2000" program rotates senior management recruits through the firm's operations worldwide. See Engardio (1993).

[34] Bjorkman (1992).

Employees of Western and Japanese businesses are the highest tier of foreign-sector managers in terms of status as well. This is in large part a result of the international prestige of many of their firms. It is also a result of the higher salaries they are paid, particularly for managers who work in the U.S. financial and other professional services offices that began operating in the early 1990s.^[35] According to one survey, managers in joint ventures and wholly foreign-owned enterprises earned about 850 yuan ($160) per month (including pay, bonuses, and subsidies) in 1992. Chinese managers in representative offices earned even more, generally making between 1,000 and 3,500 yuan ($190 to $670) per month, plus benefits, in the early 1990s.^[36] These salaries compare favorably with other typical salaries, including those of managers in state-owned companies. In some cases, the salaries of RO managers are astronomical by Chinese standards; the manager of a U.S. financial house located in Shanghai reportedly earned $60,000 to $80,000 per year. In Shanghai, Chinese JV managers were ranked fourth among categories of the "richest people," after private entrepreneurs, entertainers (actors and singers), and government bond traders.^[37]

The foreign sector's elite managers are a self-selecting group. They have striven to reach beyond the rigidly prescribed stations of socialist society to apply for highly competitive schools, perhaps abroad or in some distant location within China. They are attracted to jobs in the foreign sector because these positions allow them to use their skills and to have more responsibility at a younger age. Indeed, being young can present a problem in a society that respects age and seniority. Talented young people often have difficulty finding positions in state enterprises commensurate with their skills and ambition, where promotion to management positions is more often based on seniority and personal ties than skill. Young managers without firmly established contacts in state enterprises or government see foreign companies as offering them more

[35] According to one study, JVs with European or U.S. partners or WFOEs (the top choice) are viewed as more favorable places to work in terms of wages, benefits, and opportunities than are Sino-Japanese joint ventures, although the latter ranked higher in terms of job stability. See Ling Wenli et al. (1993).

[36] In JVs, some of the salary goes to the Chinese JV partner or to the government, or is fed into special welfare funds in the JV. Still, the take-home pay remains higher than it would be in a comparable Chinese enterprise. On IV and WFOE salaries, see Frisbie and Brecher (1992.). On RO salaries, see McGregor (1991). See also Bulman (1994).

[37] "Shanghai's Richest" (1993). The rankings following JV managers were: man agers of township and village enterprises, managers of new companies, managers of profitable state-owned enterprises, tour guides for foreigners, and taxi drivers.

chance for upward mobility.^[38] Many are attracted, moreover, by the opportunity to gain international experience and travel abroad. Working for a foreign company may enhance their chances for emigration, although this does not appear to be a primary motive for taking a job in the foreign sector. As we shall see, young people's risk-taking nature has tended to accompany a more independent attitude about the state and a willingness to break the bonds that tie them to it. At the same time, many find in the foreign sector the opportunity to escape the "politics" that pervades jobs in government and state enterprises.