Economic Transition and Management Skills: The Case of China


Xue Bai

and

Peter Enderwick*
Department of Marketing and International Management
University of Waikato
Private Bag 3105
Hamilton
New Zealand

ph +64 7 8562889 ext 8644
fax +64 7 8384352
e-mail ipe@waikato.ac.nz

· Contact author







Paper prepared for and presented at the Business Education and Emerging Market
Economies: Trends and Prospects Conference, Technology Square, Atlanta, Georgia,
USA, November 7, 2003


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Economic Transition and Management Skills: The Case of China



Abstract

A secondary effect of China’s economic transition will be increased demand for
management personnel, particularly those with a strong appreciation of managing in a
market-based economy. Traditional Chinese management approaches have been
primarily shaped by experience under a centrally planned economy. We argue this has
led to a lack of understanding of market-oriented management approaches. As the
Chinese economy has evolved and developed, the shortage of management personnel
able to understand and master Western management skills in marketing, financial
management, inventory control, human resources, and international business rules has
become increasingly evident. This paper presents an assessment of likely skill
deficiencies within four key sectors: the SOE sector; the private sector; foreign-owned
and joint venture firms; and the emerging ‘high technology’ sector. The assessment
identifies the most deficient skills as effective HRM, financial management,
intellectual property management, marketing and strategic planning. Potential sources
of the supply of management skills are discussed. The paper concludes with some
implications of the analysis for international business educators.










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I Introduction

For any economy to grow and develop, key resources and capabilities are essential.
Research over many years has highlighted the importance of land, labor, capital and
entrepreneurship. A modern complex economy places increasing demand on the key
factors of information and skilled labor. Since such economies depend critically on
market processes, current development emphasizes the creation of appropriate market
institutions (including legal, financial, and regulatory) and high levels of
organizational ability. Indeed, there is growing recognition of the importance of so-
called ‘soft’ technologies, organizational and management skills, over traditional hard
technologies such as scientific and engineering know-how. A high level of
technological know-how is of very little value if it cannot be translated into
commercial value.

Since the start of economic reform in 1978, the Chinese economy has enjoyed
dramatic growth. In 1993, China’s economy was the worlds third largest and if recent
growth rates are sustained, China is expected to surpass the USA and Japan to become
the world’s largest economy within this decade (Child & Lu 1996). An important by-
product of economic reform is the growing demand for management personnel to
manage an increasingly diverse, sophisticated and complex economy.

International competition has forced transition for many economies while others are
trying to catch up in the process of structural adjustment to open-type market policies.
China chose a “pragmatic” transition approach to economic reform from its centrally
planned economy to a market economy, nevertheless an accelerated one compared
with economic evolution in the West. China’s specific “socialist market economy” is
a capitalist economic system and an autocratic, communist political system.

As the Chinese economy has evolved and developed as a market system, the shortage
of management personnel able to relate to Western management skills in marketing,
financial management, inventory control, human resources, and international business
rules has become increasingly evident. Furthermore, this shortage is intensified with
China’s accession to the World Trade Organization (WTO) at the end of 2001.


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For anyone involved in the study and teaching of international business, meeting the
management needs of China is both a significant conceptual and practical issue. The
aim of this paper is to explore these issues and to develop implications for the field of
international business.

The paper presents a conceptually based assessment of emerging management needs
and skill deficiencies in China drawing upon three key concepts. These are illustrated
in Figure 1. As Figure 1 shows, there are three sets of inter-related forces driving
change in the Chinese economy. The first set of factors is those linked to the process
of industrialization. This concept draws on the so-called ‘convergence hypothesis’
(Kerr et al 1973) which suggests that industrialization brings inevitable changes in
economic and social life as industrialization proceeds. The alleged ‘convergence’
refers to increasing similarity between industrialized societies. For Kerr et. al. and for
Bell (1973) the primary driver of change is technology and the growth in economic
and social differentiation that this brings. Changes in the structure of industries
(growth of larger, more complex organizations) necessitate a more elaborate division
of labour, including the growing professionalism and specialization of management.
This, in turn, creates increased pressures for skill development and a rational
allocation of skilled labour.

The second part of Figure 1 highlights the reality of industrialization within China is
occurring within the context of a global economy. This means that economic
development is not occurring in isolation – China is significantly impacted by
international considerations. Key among these are the forces of liberalization and
globalization as well as policy and regulatory prescriptions emanating from
international institutions. The key influences on China in the near future are likely to
result from membership of the WTO.

At the same time, the third component of Figure 1 illustrates that China is also
involved in transition from a planned to a more market-based economy. As the role of
market agents and institutions increases, the demand for specialist professional
personnel also increases. This part of Figure 1 incorporates the unique transition path
that China has adopted and the influence of cultural factors on the industrialization
process.

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Figure 1 Conceptualization of Forces Driving Economic Change in China

Logic of
industrialization
External and global
Transition from
system pressures
planned to
market system





It is important to clarify the methodology which underpins this assessment. Using the
above conceptual framework we hypothesize the likely areas of skill deficiency
through a comparative assessment of the expected demands of an increasingly
sophisticated and complex Chinese economy placing greater reliance on market forces
and processes, and the stock of skills likely to exist under a centrally planned system.
Two limitations follow from this approach. The first is that, at this stage, these are
potential, not actual deficiencies. Empirical work is required to substantiate these
expectations. Our contribution is to provide a foundation for subsequent work. Second,
our discussion is limited to the area of skills. We do not consider knowledge, abilities
and other characteristics that are germane to successful management practice. It is
also important to note that we are not advocating the uncritical adoption of Western

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style management approaches within China. Rather we suggest that the changing
nature of the Chinese economy will make such approaches increasingly necessary and
that China’s integration within the global economy means that their influence, albeit
limited in some areas, is inevitable. We accept that the most beneficial outcome may
be some adaptation of these approaches to local conditions and culture.


The paper is organized around five substantive sections. We begin in section II by
providing a comparison of management skills likely to exist in a former planned
economy such as China and those necessary in a modern Western-style market
economy. Section III surveys the evolution of the Chinese economy and the
implications of this for changing management needs. An important contribution of the
discussion is the recognition of differences in likely existing management skills and
emerging needs in four distinct sectors: the state-owned enterprise (SOE) sector;
private firms; foreign-owned and joint-venture businesses; and the emerging high-
technology and ‘new economy’ sector. This section also provides a skill assessment
by sector. Given the gaps in management skills, section IV outlines the main ways in
which skill deficiencies can be overcome and the relative contribution of these to the
Chinese transition. The final section develops some important implications of the
preceding discussion for international business practitioners as well as offering
concluding thoughts.


II Chinese and Western Management Systems and Skills

This section describes the main characteristics of a centrally planned economy such as
China and identifies the main differences between a centrally planned economy and a
market economy.


Management in a Centrally Planned Chinese Economy

In 1953 China introduced its First Five-Year Plan and created a centrally planned
economy in that the State Planning Commission allotted productive resources

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(including the human resource) and controlled the production, distribution, and
consumption of all goods. In the Chinese centrally planned economy, the planning
authority (a group of economic planners) controlled all physical productive resources,
including land, machinery, and other capital goods (Chan 1996). It controlled all
sources of supply of inputs and assigned production targets for each factory and farm
(Chow 1985). So, directly and indirectly, the planning authority controlled all
factories, farms, and firms. The supplies of all consumer goods were under the control
of the planning authority. On the human resource side, the worker’s job was assigned
by a government labor bureau and a farmer could be assigned to work in a different
farm. It is obvious that the need for market-oriented management personnel was
virtually non-existent in China’s centrally planned economy because the planning
authority controlled nearly all flows and decisions.

By contrast, in a market economy all flows go through markets. In a market economy,
consumers decide what to buy. Enterprises in different fields compete to satisfy
consumers’ demands. The government does not directly participate in the majority of
economic activities (Chow 1985). Child and Lu (1996) demonstrate the key
differences between the Chinese management approaches under a centrally planned
economy and typical Western management approaches under a market economy
(Table 1). In their description, Chinese management is mainly shaped by the pre-
reform centrally planned economy, even though Chinese cultural values do influence
management approaches.

It is apparent from Table 1 that there are marked differences between the two systems.
This is clear from areas such as managerial autonomy, procedural formalization,
information flows and reward policies. It is also clear that as the Chinese business
environment has changed, existing practices have become increasingly less
appropriate. In a turbulent and changing environment, managers must be given greater
autonomy, it is not clear that they can be expected to simultaneously meet economic,
political and social obligations. Similarly, vertical information flows and the absence
of performance-related incentives may be acceptable in a stable or incrementally
evolving environment, but this is no longer the case in China.


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Table 1 also highlights the interrelationships between these practices. If one wishes to
emphasize improved performance then organizational performance goals need to be
carefully formulated, procedures need to reflect this new reality and appropriate
management incentives be devised. Partial change involving one or two concepts is
unlikely to bring success.


Table 1 A Comparison of Chinese and Western Approaches to Management


Concepts and practices
Chinese management
Western management
under a centrally
under a market economy
planned economy
Decision-making authority Industrial bureaus or
Boards of directors and
ministries
CEOs
Managerial autonomy
Little before the reform,
CEO enjoys autonomy
much improved now
under the board
Organizational
Multiple rationality-
Economic rationality,
performance criteria
economic, political and
tempered by social
social obligations
responsibility
Degree of procedural
Low formalization but
Highly formalized and
formalization
highly personalized
relatively impersonal
process
Information
Mainly vertical; little
Multi-directional
communication
horizontal flow
Management training and
Not emphasized before
Highly emphasized
development
mid-1980s
Reward policies and
Rewards dependent on age Performance-related
incentives systems
and long service;
incentives not closely
related to performance


Source: Child and Lu (1996), p. 3.


Chinese management approaches have been primarily shaped by experience under a
centrally planned economy. This has led to a lack of understanding of market-oriented
management approaches. However, Chinese cultural values also influence traditional
Chinese management skills. Cultural values such as high power distance, high
uncertainty avoidance, and low individualism, that are dramatically different to

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Western values such as low power distance, low uncertainty avoidance, low
masculinity, and medium individualism, are consistent with a hierarchical planned
economic system. As a result, we would expect traditional Chinese management to
display a number of distinct traits:

· Top-down decision-making: Workers simply follow orders from the upper levels.
Workers lack creative thinking on feedback, because the reward system in a
centrally planned economy depends on age and service time, not performance.
This results in a considerable separation of manual and intellectual labor.

· Vertical communication: There is lack of flexible communication between
different layers. In addition, the feed back from the bottom takes a long time as
the vertical organizational structure has many layers. Vertical communication is
not only present in SOEs; it is firmly entrenched in the whole Chinese economic
system.

· Focus on production: In order to achieve production targets allocated by the
planning authority, managers focus on production. Achieving production targets is
a primary criterion for evaluation of managers’ performance in the Chinese
centrally planned economy. As a result, managers focus on production and have
limited understanding of many aspects of ‘soft’ knowledge (management skills)
such as advertising, HRM, inventory control, accounting, and financing.


The traditional management skills required within a largely administratively planned
economy suggest a number of hypotheses. We would hypothesise that Chinese
managers are unlikely to have much experience in:

· The appreciation and management of risk. The nature of a planned economy is to
encourage risk averse attitudes since it is unlikely that risk takers will participate
in rewards. In contrast, risk taking attitudes and experience are of critical
importance in the development of private sector firms;


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· The linking of pay and performance. In most Chinese enterprises, managers are
political appointees, they are not selected for their potential performance, nor does
their employment security depend on performance. For these reasons there are few
incentives to link pay and performance. Such arrangements are far more common
in the private sector and, in particular, in new high technology ventures;

· Financial management skills. Most Chinese managers operate along budgeting
lines; there are few incentives to adhere to such budgets (‘soft budget constraints’)
or to innovate in financial management. Chinese enterprise managers are likely to
have little experience with sophisticated financial tools such as derivatives or
concepts such as financial gearing. Similar weaknesses exist in related areas
including dividend policy, foreign exchange management and hedging.

· Marketing activities. The underlying rationale of a planned economy is production
or a supply focus. The disposal of output is an issue for planners not the individual
enterprise. For this reason, managers invest little in the way of marketing
resources such as marketing research, branding, and distribution networks or after
sales servicing. In a competitive market economy, particularly one that permits
overseas competition, marketing becomes a fundamental locus of competition.

· Investment in the creation and maintenance of competitive advantage. Again,
where the company focus is on supply not demand and competition is deliberately
restricted, there are few incentives to understand and create competitive advantage.
However, in a competitive market economy, differentiation may become an
essential means of survival and successful managers will be those that have
experience with the wide range of advantages that can be developed;

· Corporate governance and leadership skills. In a planned economy, plans replace
governance and political acumen substitutes for corporate leadership. If Chinese
managers are to build and lead internationally competitive businesses, they will
need to develop the appropriate higher level skills;


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Document Outline

• Contact author
• Paper prepared for and presented at the Business Education and Emerging Market Economies: Trends and Prospects Conference, Technology Square, Atlanta, Georgia, USA, November 7, 2003
• Economic Transition and Management Skills: The Case of China
• Abstract
• Table 1 A Comparison of Chinese and Western Approaches to Management
  • Implications for Management skills

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