Economy & Finance

Facing Constraints to Growth? Overseas Chinese Entrepreneurs and Traditional Business Practices in East Asia

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Overseas Chinese entrepreneurs in East Asia have achieved notable success in a number of traditional, slow growth industries. This success has been ascribed to distinctive aspects of Chinese business culture that favor alacrity, adaptability,
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  Asia Pacific Journal of Management, 21, 263–285, 2004c  2004 Kluwer Academic Publishers. Manufactured in The Netherlands. Facing Constraints to Growth? Overseas ChineseEntrepreneurs and Traditional Business Practicesin East Asia DAVID AHLSTROM ∗ ahlstrom@baf.msmail.cuhk.edu.hk MICHAEL N. YOUNG michaely@baf.msmail.cuhk.edu.hk   Associate Professor of Management, The Chinese University of Hong Kong, Shatin, NT Hong Kong EUNICE S. CHAN eunice.chan@cgey.com Senior Consultant, Cap Gemini Ernst & Young, 7/F., Devon House, Taikoo Place, 979 King’s Road,Quarry Bay, Hong Kong GARRY D. BRUTON G.Bruton@tcu.edu  Associate Professor of Management, Texas Christian University, M.J. Neeley School of Business,Fort Worth, Texas, USA Abstract.  OverseasChineseentrepreneursinEastAsiahaveachievednotablesuccessinanumberoftraditional,slow growth industries. This success has been ascribed to distinctive aspects of Chinese business culture that favoralacrity, adaptability, networking, and close control of firm operations. Recently, some have suggested that thesame characteristics that have promoted these firms’ success in slower growth sectors may hinder firm success infastergrowthsectorsoftheeconomy.Toexplorethisproposition,weconductedin-depthinterviewswithforty-oneentrepreneurs, venture capitalists, and government officials all working with fast growth entrepreneurial firms inEast Asia. The results suggest that, in general, Overseas Chinese entrepreneurial firms also follow many of thetraditional business practices associated with Overseas Chinese firms. Most venture capitalists and governmentofficials in the sample expressed concern that these practices are hindering the building of firms that can be takenpublic and experience the high growth consistent with vibrant entrepreneurial firms. The results also showedthat the Overseas Chinese entrepreneurs sampled are aware that some of these characteristics may be creatingconstraintstofastergrowthand,atthebehestofventurecapitalistsandgovernmentofficials,aresometimesmakingthe changes thought necessary to create faster growth firms. Keywords:  entrepreneurship, Overseas Chinese, Asia, culture Introduction Much economic activity in East Asia from Taiwan and Hong Kong to Singapore, Thailandand Indonesia srcinates with the commercial activities of a single ethnic group livingoutside of their ancestral homeland—the Overseas Chinese (Backman, 1995; Chua, 2003;Weidenbaum and Hughes, 1996). Overseas Chinese entrepreneurs have created a numberofsuccessfulfirmsinseveralindustriessuchaslightmanufacturing,realestate,trading,and ∗ To whom correspondence should be addressed.  264  AHLSTROM ET AL. commodities (Yeung and Olds, 1999). Overseas Chinese firms typically are characterizedbyfamilyownershipandcontrol,asimpleorganizationalstructurewithcentralizeddecisionmaking,internalfinancing,andlittleornospendingonresearchanddevelopment(R&D)oradvertising (Carney, 1998; Chen, 2001; Weidenbaum and Hughes, 1996; Yeung, 1999). In the manufacturing sector, these firms’ production is often contract manufacturing, based onthe designs and brands of the contracting firm. Overseas Chinese manufacturers typicallyfocus on producing low cost inputs for others with simple value chains (Carney, 1998).A number of legendary fortunes have been created by the founders of these firms, leadingsomeobserverstodeclarethatmorefirmsshouldemulateOverseasChinesebusinesspeople,particularlyinthedevelopingworld(Rowher,1995;WeidenbaumandHughes,1996;Weiss,1989).There is little doubt that much wealth, as well as a fascinating commercial culture hasbeencreatedbythesefirmsinthedecadesafterWorldWarII.Recently,however,researchersandpolicymakersinEastAsiahaveraisedconcernsovertheregion’sconservativefirmsandheavy reliance on slow growth industries (e.g. Backman, 1999; Carney, 1998; Krugman, 1994). This is especially true in the light of increased emphasis on knowledge-based firmsin the global economy (Ang et al., 2000; Yeung, 1999). The Asian financial crisis of the late1990s amplified the calls for East Asian economies to increase investment in indigenoustechnology and human capital, and to encourage firms to enter faster cycle markets ( The Economist  ,2000,2001).Inresponse,manycountriesintheregionhaveattemptedtodevelophome grown, fast-growth companies by establishing government agencies to finance, work with, and incubate entrepreneurial firms (Yeung and Olds, 1999). For example, Malaysia,Singapore, Taiwan and Thailand have implemented major initiatives to spur high technol-ogy. Even traditionally laissez-faire Hong Kong has promoted a Cyberport and SciencePark projects in conjunction with successful foreign entrepreneurial firms in an attempt toseed new industrial clusters. Official policies in these economies now aim to support fastgrowth entrepreneurial firms with the potential to become publicly listed and to competeglobally.There are, however, uncertainties as to the eventual success of these initiatives. MajorchangestakingplaceintheglobaleconomyandhavecreatedtensionsbetweenthetraditionalcommercialcultureofOverseasChinesefirmsandtheneweconomicenvironment(Carney,1998; Yeung, 1999; Young, Ahlstrom and Bruton, 2004). Globalization, the importance of brand building, an increased reliance on R&D, and international investors demandingmore transparent corporate governance structures have created unprecedented demandson the East Asian Overseas Chinese business community (Ang et al., 2000; Low, 2002;Yeung and Olds, 1999; Young, Ahlstrom and Bruton, 2004). It may be the case that certain characteristics of Overseas Chinese firms that were assets in the slower growth industriesmay prove to be liabilities for firms that seek rapid growth (Carney, 1998), particularlyunder the conditions of the new competitive landscape unfolding worldwide (Bettis andHitt, 1995; Peng, 2000).Thus, this article examines the characteristics of Overseas Chinese firms and exploresthe proposition that the characteristics of these firms that have reportedly promoted successin slower growth sectors (Kao, 1993; Weidenbaum and Hughes, 1996) may actually limitsuccess in the faster growth sectors. Characteristics that can accommodate rapid growth are  OVERSEAS CHINESE ENTREPRENEURS IN EAST ASIA  265factors such as decentralized organizational structures, transparent corporate governance,and acceptance of outside capital that requires the ceding of ownership and control (Bettisand Hitt, 1995; Chandler, 1990; Hamel, 2000). Yet it is unclear if Overseas Chinese en- trepreneurial firms are willing to depart from traditional practices and adopt structures thatfacilitate the fast growth expected by venture capitalists, outside investors, and governmentofficials (Carney, 1998; Scott, 2002; Timmons and Olin, 1999). This article is structured as follows. We first review the factors seen as having promotedthesuccessofOverseasChinesefirmsinEastAsia.Academics,consultantsandgovernmentpolicymakers have developed extensive accounts of Chinese culture and its impact on firmsin East Asia (e.g. Backman, 1995; Carney, 1998; Chen, 2001; Redding, 1990; Weidenbaum and Hughes, 1996). We synthesize these accounts into six key firm characteristics. Second,we summarize the views of Overseas Chinese entrepreneurs on firm operations, structure,growth and financing in East Asia. Third, we present information gathered from inter-views with venture capitalists and government policymakers in Hong Kong, Singaporeand Taiwan. These interviews also examined their positions on the practices of OverseasChinese entrepreneurs and the resulting impact on creating fast growth, venture fundedfirms. The findings are compared to the views held by the Overseas Chinese businesspeople and the predominant nature of Overseas Chinese business in East Asia. Finally wediscusstheimplicationsofourresultsforentrepreneurs,policymakers,andoutsidefirmsandinvestors. Common characteristics of Overseas Chinese firms The Overseas Chinese are individuals of Chinese ancestry, who live outside of the People’sRepublic of China. Historically, such individuals have played important, if not dominantroles,intheeconomiesofIndonesia,Malaysia,ThePhilippines,Singapore,Thailand,HongKong, Macau, Taiwan, and Burma (Chua, 2003; Kao, 1993; Seagrave, 1995). There are an estimated 50 million Overseas Chinese living in East Asia alone, and their economiccontribution is substantial. Excluding Taiwan, whose economy is the 13th largest in theworld, Overseas Chinese account for an annual economic output of about US$500 billion.This is equal to about 40 percent of the gross domestic product (GDP) of the Peoples’Republic of China (PRC), which has twenty-five times the population (Backman, 1999;Zutshi, 1997). In Singapore, Taiwan and Hong Kong, Overseas Chinese form the majoritypopulation, and their control of the economy would not be unexpected. 1 However, in manyother East Asian countries, Overseas Chinese form a distinct minority and are still ableto exert significant if not dominant influence over these economies. To illustrate, in thePhilippines, ethnic Chinese are just 1% of the population, yet control 60% of its wealth(Chua, 2003). In Thailand, ethnic Chinese make up about 10% of population, but controlabout eighty percent of listed firms by market capitalization (Vatikiotis, 1998). The figuresare quite similar in Indonesia (Zutshi, 1997).Two of the best-known analyses of Overseas Chinese firms were done by MurrayWeidenbaum (Weidenbaum, 1996; Weidenbaum and Hughes, 1996) and Michael Backman(1995). Weidenbaum argued that five primary characteristics of Overseas Chinese busi-nesseshelptoexplainmuchoftheirsuccess.Similarly,Backmanlistedeightcharacteristics,  266  AHLSTROM ET AL. all of which but one overlapped with those of Weidenbaum and Hughes (1996). Backman(1995) added more detail in the areas of branding, governance, which augmented similardimensions of advertising and information control discussed by Weidenbaum and Hughes(1996). Backman (1995) also added the emphasis on internal financing. Closely relatedcharacteristics such as branding and advertising, and governance and decision-making,were combined in this list. The resulting six main characteristics of Overseas Chinese firmsare thus summarized:1.  Familycontrol :Chinesebusinessesaretypicallyfamilyownedandoperated.Thisistrueeven in cases where the firm is publicly traded and quite large in size; family membersalmost always maintain controlling interest in the firm. Thus, the board of directors istypically weak as a control mechanism (c.f. Lang and Young, 2000). Also, it is oftenthe case that only close relatives fill strategic positions in the firm. Outsiders are notcommonly admitted to top management ranks.2.  Simple organizational structures, networks and information control : Because OverseasChinese businesses are typically centered around a family patriarch, the organizationsthemselves tend to be simple structures designed to maximize the efficiency of a centralbusiness unit, from which the patriarch can direct that (and other) divisions). The firmmay operate through a network of businesses that is difficult for outsiders to grasp butis easy for the founding family to control. Information tends to remain inside the firm;operations and finance are typically opaque to outsiders.3.  Centralized governance and decision-making : The family control means that thedecision-making in the firm is centralized—often through a patriarchal owner at thetop of the organization. In addition, there is little delegation of authority, as even minordecisions often must be approved by top management. Many transactions are informaland have little or no paper trail.4.  Internal financing : The reliance on family members and distrust of outsiders meansthat often Asian firms rely on internal financing; they obtain only very limited amountsof long term debt (if any). This is often a constraint on growth, as we will explorefurther.5.  Lack of advertising and branding : Overseas Chinese firms rarely rely on branding tomarket their products, thus they rarely interact directly with consumers. They eschewadvertising and modern promotion to maintain a low profile while typically acting assuppliers to others. The value chain is simple and easy to maintain and control.6.  Little or no Research and Development   (  R&D ): Overseas Chinese firms spend relativelylittle on activities not directly related to the economic success of the business. Thus,only limited resources are devoted to activities such as staff training and research anddevelopment.These six overall characteristics of successful Overseas Chinese firms are rooted inChinesecultureandrelatedinstitutions(Backman,1995;Bond,1996;Chen,2001;Redding,1990;Weidenbaum,1996).Forexample,thestressonfamilybusinessreflectstheemphasison the role of the family within Chinese culture. Family is considered to be more importantthan the state in the Confucian-based culture of the Chinese (Chen, 2001). The second  OVERSEAS CHINESE ENTREPRENEURS IN EAST ASIA  267and third points raised above are consistent with the role of patriarchs in Confucian-basedcultures. Patriarchs often have a dominant role in the family and resulting business. Thus,there is often an extension of paternalistic decision-making to the firm. Similarly, suchdecision making is facilitated by a simple organization structure where all key decisions aremade by the patriarch who is located at the center of the structure. Point four highlights thefact that most Overseas Chinese firms rely heavily on internal financing mechanisms. Thismay have been encouraged by political instabilities that Overseas Chinese businesspeoplehavelongfaced,aswellasunderdevelopedfinancialmarkets(Seagrave,1995;WeidenbaumandHughes,1996).But,suchareliancelimitstheabilityofthefirmtosuccessfullyconductmore expensive long-term tasks such as R&D and brand building, as noted in points fiveand six. These activities generally represent large, long term investments not essential tothe production of a given product or service in the short to medium term (Carney, 1998).The context within which Overseas Chinese firms are embedded is by no means static;recent years have seen intense changes occurring in East Asia with significant bearing onentrepreneurialdevelopmentintheregion(Angetal.,2000;Peng,2000,2001).Thestyleof  doingbusinessfoundinthesuccessful,moretraditionalOverseasChinesefirmsinEastAsiamay not be as useful to the newer, indigenous entrepreneurial firms competing in the newcompetitivelandscape(BettisandHitt,1995).Giventheextentofchangeoccurring,coupledwiththeincreasingemphasisonbuildingfastgrowthfirms,thequestionisareentrepreneursin East Asia responding to these changes and what is the view of key observers such asventure capitalists and government officials charged with promoting entrepreneurship? Thenext section details the methods utilized to explore these questions. Methods To examine the characteristics of Overseas Chinese firms and if they are responding tothe imperatives of faster growth, we conducted forty-one semi-structured interviews withentrepreneurs, venture capitalists and government officials working with Overseas Chinesestart-up firms in the East Asian economies of Hong Kong, Singapore and Taiwan. Since wewere studying the very specific phenomenon of entrepreneurial constraints to growth, wechoseapurposivesamplingmethod(Yin,2003).Thus,wesoughttoidentifyleadingventurecapitalists in East Asia active in new firm financing. With their help, we identified the gov-ernment policymakers in the three economies responsible for promoting entrepreneurship.Both of these groups then helped us to put together a sample of entrepreneurial firms. Thefirms identified were validated by the government officials and venture capitalists as beingcandidates for fast growth and possibly an initial public offering. An assumption was thatif the venture capitalists and government officials expressed concern about the behavior of the entrepreneurs, this would threaten their financing and growth. We identified fourteenentrepreneurial firms in the three economies and twenty individuals from those firms wereinterviewed. All but one of those interviewed were founders or cofounders of their firms.Twelve entrepreneurs were based in Hong Kong, four in Singapore and four in Taiwan.Hong Kong, Taiwan and Singapore businesspeople are generally considered to be part of the greater Overseas Chinese business community by researchers (Kao, 1993). All of theprivately held firms in the sample were at an early stage of the venture, on average three
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