Local politics and foreign ventures in China's transitional economy: the political economy of Singaporean investments in China

Political Geography 19 (2000) 809–840
www.elsevier.com/locate/polgeo
Local politics and foreign ventures in China’s
transitional economy: the political economy of
Singaporean investments in China
Henry Wai-chung Yeung *
Department of Geography, National University of Singapore, 1 Arts Link, Singapore 117570
Abstract
The re-articulation of China into the global economy since December 1978 has led to a
tremendous influx of foreign capital during the past two decades. Constrained by the limited
domestic market and encouraged by home-country government, transnational corporations
from Singapore are regionalising increasingly into the Asia Pacific region. To date, a significant
amount of Singaporean investments abroad has gone to China. Based on personal interviews
with parent companies in Singapore and their subsidiaries and/or affiliates in China, this paper
aims to examine the political economy of Singaporean investments in China. Specifically, I
argue that successful cross-border operations of Singaporean firms are embedded in dense
networks of social and political relationships. These relationships provide the political leverage
and strategic resources to enable the establishment of Singaporean firms in China. This estab-
lishment, however, is contingent on blending with local politics in China through which foreign
firms use leverage on the partnership advantage of local governments (difang zhengfu), their
enterprises, and business activities. This rise of local corporatism is a key institutional conse-
quence of the recent rescaling of China’s political economy. Case studies of ventures by Singa-
porean firms in China are presented to support my arguments. Taken together, these empirical
materials shed light on the importance of understanding the role of politics at different spatial
scales in influencing transnational corporations and their international business operations. ©
2000 Elsevier Science Ltd. All rights reserved.
Keywords: Spatial scales; Political economy; Local politics; Foreign direct investment; Singapore; China
* Tel.:
+65-874-6810;
fax:
+65-777-3091;
homepage:
http://courses.nus.edu.sg/course/
geoywc/henry.htm.
E-mail address: geoywc@nus.edu.sg (H.W.-c. Yeung).
0962-6298/00/$ - see front matter © 2000 Elsevier Science Ltd. All rights reserved.
PII: S 0 9 6 2 - 6 2 9 8 ( 0 0 ) 0 0 0 2 7 - 5

---

810
H.W.-c. Yeung / Political Geography 19 (2000) 809–840
Introduction
Accelerated globalisation and growing global competition have driven more
national firms into international production. Many developing countries have now
succumbed to the global economy and welcome international operations by foreign
transnational corporations (TNCs). In the Asia Pacific region, the re-articulation of
China into the global economy since December 1978 has led to a tremendous influx
of foreign capital during the past two decades. In 1998, China was the largest recipi-
ent of total foreign direct investments (FDIs) to all developing countries. The
UNCTAD (1999) estimates that at US$45 billion in 1998, inward FDI to China
accounted for 7% of total global FDI (US$644 billion) and 27% of total FDI into
developing countries (US$166 billion). China has now attracted more than US$50
billion investments by ethnic Chinese abroad, accounting for about 80% of total
realised FDIs in China. These ethnic Chinese have formed more than 100,000 joint
ventures in China (Weidenbaum & Hughes, 1996, p. 27). Penetrating into China’s
huge domestic market, however, is never an easy task, as is evident in the tremendous
problems faced by most foreign firms in China. A study by a management consulting
company, A. T. Kearney, in April 1999 reported that almost a quarter of foreign
companies in China have pulled out at least one venture since entering the country
(The Straits Times, 28 April 1999). Only 40% of its sample foreign firms reported
profitability from their ventures in China. What then are the reasons for the success
or failure of foreign investments in China? There are at least three general
approaches: (1) neoclassical economic explanations; (2) culturalist explanations; and
(3) political economic factors. From the neoclassical economics perspective, many
earlier studies have paid significant attention to the role of production costs and
market access as the key determinants of foreign investments in China (e.g. Kamath,
1990; Pearson, 1991; Pomfret, 1991; Zhang & Ow, 1996). The spatial variations in
these factor costs and market potential are correlated with the entry and success rates
of foreign ventures in China. The geography of foreign investments in China
becomes the independent variable in explaining the empirical outcome of these ven-
tures in China.
On the other hand, an emerging culturalist discourse, particularly in the popular
press and media, has produced a “Greater Chinese sphere” myth. This discourse
assumes that ethnic Chinese from Hong Kong, Taiwan, Singapore, and elsewhere in
Southeast Asia can conduct a seamless web of businesses through regional trade and
investment linkages in China based upon a common culture and heritage (e.g. Chang,
1995; Lever-Tracy, Ip & Tracy, 1996; Weidenbaum & Hughes, 1996; Brown, 1998;
Douw, Huang & Godley, 1999). This culturalist discourse identifies vague regu-
lations, unscrupulous officials, and arbitrary corporate partners as the main barriers
to doing business in China. Cultural affinity between ethnic Chinese abroad and
mainland business partners becomes a convenient explanation for the relative success
of ethnic Chinese investments in overcoming these operational difficulties in South-
ern China.
The third approach in the recent political economy literature argues that foreign

---

H.W.-c. Yeung / Political Geography 19 (2000) 809–840
811
investors in China are subject to “differential levering”1 by relevant state officials,
in part because of corruption (see Levy, 1995). Different foreign investors are found
to experience different levels of political intervention that in turn is a function of
their ongoing patron–client relationships with the investors. Those really “foreign”
investors from the US, Japan, and Europe tend to suffer from more stringent obli-
gations and tighter monitoring in areas of technology transfer and working conditions
than ethnic Chinese from Hong Kong, Taiwan, and Southeast Asia. This differential
levering results in highly differentiated outcomes of investment ventures by firms
from different countries and/or regions of origin (see also Walsh, Wang & Xin, 1999;
Weldon & Vanhonacker, 1999).
What is missing in these three popular explanations of the success and failure of
foreign investments in China is the critical role of politics at different spatial scales.
Many existing studies of China’s political economy have shown that one important
aspect of its economic reform is the power shift of central–local politics in favour
of local governments,2 local collectives, and local enterprises (see next section). Few
studies, however, have examined specifically how this newly rescaled spatiality of
politics in China and the coping strategies of foreign firms can significantly influence
the investment outcomes of these foreign firms. Reporting an empirical study of
Singaporean investments in China, this paper is situated in the theoretical context
of the recent resurgence of geographical studies addressing the rescaling of politics
in urban and regional governance (e.g. Storper, 1997; Brenner, 1998; Cox, 1998;
Scott, 1998; DeFilippis, 1999; MacLeod & Goodwin, 1999a). This rescaling process
is defined by the continuous reconfiguration of state power and capacity at different
spatial scales (supra-national, national, regional, and local) that results in the loss of
a relatively privileged scale (e.g. national) in which the global economy is governed.
In this paper, I argue that it is important to understand the rescaling of politics
in China’s political economy. This is because the emergence of local politics in
China’s transitional economy implies that neither the ownership advantages of
foreign firms nor the macro-geography of foreign investments in China per se can
explain their success or failure. Local politics here refer to the political commitment
and patronage of local officials, and cadre/business elites in an era of economic
reform and decentralisation of decision making to the local level. Rather, successful
transnational operations of foreign firms in China are embedded in dense local net-
works of social and political relationships. These local relationships provide the polit-
ical leverage and strategic resources to enable the smooth establishment of foreign
firms in China. This process of establishment, however, is highly contingent on
blending with local politics in China through which foreign firms use leverage on the
partnership advantage of local governments, their enterprises, and business activities.
The empirical material in this paper sheds light on the role of rescaled politics in
1 I would like to thank a Political Geography referee for pointing out this approach.
2 Local governments (difang zhengfu) in China are defined as government and quasi-government insti-
tutions whose official authority rests below provincial governments. These local governments typically
include city municipalities (except for four centrally administered municipalities), county and township
authorities.

---

812
H.W.-c. Yeung / Political Geography 19 (2000) 809–840
determining the success or failure of Singaporean investments in China. Since the
establishment of official diplomatic relationships between China and Singapore in
October 1990, Singapore’s FDI into China has increased substantially. From a rela-
tively insignificant destination for outward investment from Singapore throughout
the 1980s, China emerged as almost the largest recipient country of Singaporean
investments by the end of 1997. At a cumulative total of S$8.96 billion or US$5.3
billion, Singapore’s investments in China were only S$14 million or US$8.2 million
behind that in Malaysia (The Straits Times, 8 September 1999). According to Chinese
sources,3 Singapore has a total of US$7.9 billion cumulative realised FDI in China
between 1979 and 1998, and ranks fifth after Hong Kong (US$110.3 billion), Taiwan
(US$16.3 billion), the United States (US$16.3 billion), and Japan (US$8.2 billion).
This is significant since Singapore is a relatively small economy compared to Taiwan,
the US, and Japan.
Although several studies have directly or indirectly examined the motives of Sin-
gaporean investments in China (e.g. Cartier, 1995; Lu & Zhu, 1995; Tan, 1995),
most of them are based upon macro-economic statistics rather than detailed firm-
level investigation. They are also less concerned with the intricate relationships
between business and politics as manifested in the material processes of Singaporean
investments in China. Through selective case studies, this paper shows how a fuller
understanding and appropriation of rescaled politics in China can enable smoother
cross-border operations by Singaporean firms in China, irrespective of whether these
Singaporean firms have strong home-country government support (e.g. government-
linked companies). This aspect of localising global investments is critical because
many initiatives spearheaded by the Singapore government in China have focused
their negotiations and agreements at a different spatial scale with the central or
national government. Little effort is made by these government-linked companies
to address the concern and agenda of local governments in China. This is not surpris-
ing because the developmental state in Singapore is used to the lack of scale differen-
tiation between the national and the local in governing a city-state. The Singapore
government and its affiliated companies have little experience in dealing with local
states in other countries. Their projects in China subsequently face implementation
problems because this mismatch of scaled politics results in conflicts of interests
with local authorities and officials. On the other hand, private firms from Singapore
are able to resolve this problem of mismatch through their flexibility in incorporating
guanxi (or relationship) politics as argued in the culturalist explanation above. These
private firms are therefore able to use leverage on local politics to sustain their
operations in China. The case studies analysed in this paper are based on established
ventures by Singaporean firms as well as those ventures facing major problems.
The paper is divided into four parts. The first part (Section 2) develops a theoretical
framework of scale politics to explain the success and/or failure of international flow
3 These data are calculated by summing the cumulative realised FDI values between 1979 and 1996
(Sun, 1998, Appendix A) and in 1997 and 1998 (Ministry of Foreign Trade and Economic Cooperation,
1998, pp. 626–629; 1999, pp. 705–708).

---

H.W.-c. Yeung / Political Geography 19 (2000) 809–840
813
of capital, people, and so on. The next part (Section 3) offers an overview of the
nature and organisation of Singaporean firms in China. The third part (Section 4)
examines in detail the political economy of Singaporean investments in China. Based
on personal interviews in Singapore and China, three specific case studies are
presented to illustrate my arguments concerning the role of host country politics in
explaining the success (and failure) of China operations established by government-
linked companies and private sector firms from Singapore. The concluding part
(Section 5) describes some implications about the future of foreign firms in China.
The political geography of international investments: states and firms in
global competition
Towards a theoretical framework of scale politics in governing international
investments
The contemporary rescaling of political economy has received significant attention
in recent geographic literature (reviewed in MacLeod & Goodwin, 1999b). This
literature shows that the nation state is being increasingly reconfigured along local,
regional, national, and supra-national scales. State power is no longer exclusively
restricted to the national scale. This relativisation of scale (see Jessop, 1999) and
the “rescaling” of state power has important implications for the governance of urban
and regional development. Understanding national developmental trajectory requires
us to examine not only the local politics of development but also the complex ways
through which local politics are spatialised (i.e. how they interact with and are
mediated by actors of different spatial scales—global, international, national, region,
and so on). The literature offers some preliminary evidence in support of an emerging
theory of local and, in some cases, regional states in determining trajectories of
economic development and political governance in today’s global economy.
Bypassing the nation state, these rescaled local and regional states have promoted
their direct territorial and functional transnational linkages with other cities and
regions through inter-urban and inter-regional flows of capital and people. These
flows may not always occur within the same country, as in the case of foreign direct
investments and international migration.
When these latter cross-border flows of capital and people occur in the context
of the contemporary rescaling of political economy, it raises all kinds of governance
issues that significantly shape the outcomes of these flows. Some of these issues are
schematically presented in Fig. 1. FDI is embodied in the international operations
of TNCs. The success and/or failure of cross-border investments in different host
regions/countries may well be related to the extent to which TNCs are fitted into
the institutional agenda of rescaled local and/or regional states in the host countries
(e.g. see Phelps & Tewdwr-Jones, 1998; Phelps, Lovering & Morgan, 1998). While
they may matter in determining the success of FDI by providing the economic con-
texts for TNC operations, cost factors and business strategies are not sufficient in
explaining the actual outcome of these operations. This is particularly the case in

---

814
H.W.-c. Yeung / Political Geography 19 (2000) 809–840
Fig. 1.
A theoretical framework of scale politics in governing international investments.
developing countries in which the rules of the game are not transparent and well
enforced. The “institutional fit” of TNCs into the needs and requirements of local and
regional states becomes a highly important determinant of their operational outcome.
Organisation studies have shown that TNCs are firmly embedded in their home-
country institutional environments such that they remain national firms with inter-
national operations and bear some key institutional characteristics of their home
countries (Hu, 1992; Dicken, Forsgren & Malmberg, 1994; Pauly & Reich, 1997;
Doremus, Keller, Pauly & Reich, 1998; Yeung, 1998a). It is therefore possible that
TNCs from different institutional environments and home countries may behave dif-

---

H.W.-c. Yeung / Political Geography 19 (2000) 809–840
815
ferently and have a different extent of “institutional fit” with the agenda of host
localities. As shown in Fig. 1, if incoming TNCs achieve a significant extent of
“institutional fit” with the agenda of local and regional states, it is likely that their
ventures will be successful. On the contrary, if these TNCs contradict the agenda or
even challenge the institutional power of local and regional states, they are likely to
face significantly more problems and difficulties in their transnational operations.
What then is the key factor in explaining these different configurations of “fitting”
relationships between different TNCs and host localities? I argue that it is local
politics that shapes the necessary causal relationships between states and TNCs.
Although the internationalisation of capital (or TNCs) requires the necessary inter-
nationalisation of the nation state (Murray, 1971; Picciotto, 1991; Glassman, 1999),
the empirical outcome of such internationalisation processes is highly contingent
upon the conditions of specific localities in which these processes take place.
Although the business and management literature argues that the existence of certain
ownership, internalisation, and locational advantages is necessary to explain the rai-
son d’eˆtre of TNCs (Dunning 1988, 1993), they are not sufficient to determine the
outcome of their transnational operations. In particular, the realisation of these
advantages in the host countries is highly contingent upon local factors. On the one
hand, some local factors may be formidable obstacles to international production.
For example, the existence of intricate webs of local social and political relationships
in many developing countries may pose a major location-specific disadvantage to
foreign firms. In fact, these relationships among local firms and local government
authorities may rival foreign firms and thereby significantly increase their transaction
costs of entering into the host countries.
However, the same set of local factors may be turned into key strategic advantages
for foreign TNCs that are capable of tapping into these local networks and relation-
ships. To do so, many foreign firms need to localise their global operations in the
host countries and to collaborate with local states for mutual gains. Through this
process of global localisation, many foreign firms are able to build up their political
leverage and, very often, their dominant position in the host locality. These differen-
tial configurations of state–TNC relationships become an important nexus in
explaining the empirical outcome of TNC operations in the host localities. Before I
move on to explain the success and failure of Singaporean firms in China, it is
necessary to understand the rescaling of political processes in both China and Singa-
pore, and the mismatch of these scale politics in the context of certain government-
led investments in China.
Unravelling scale politics in China’s political economy
As a socialist economy, China has experienced tremendous transformations during
the past two decades. These transformations result primarily from economic reform
in China since December 1978. The ways in which this economic dynamic is unle-
ashed in China are contingent upon the continuous rescaling of central–local politics
(cf. Walder, 1995). Much has now been written on China’s economic reform, and
its implications for political governance and economic development. It is therefore

---

816
H.W.-c. Yeung / Political Geography 19 (2000) 809–840
not my intention here to repeat the main arguments and observations about the
reform. Rather, I intend to focus on one specific aspect of China’s economic reform
to contextualise my institutional explanations of Singaporean ventures in China. The
rescaling of central–local politics in post-Mao Chinese economic governance towards
the local scale (in favour of local governments, local collectives, and local
enterprises) has very important implications for understanding the success and failure
of foreign investments in China. In particular, the key process in China’s economic
reform has been the decentralisation of “many decisions to the firm level, or at least
to the local government level” (Gordon & Li, 1991, p. 202). These decisions are
related to output, production technology, and the timing of production. Many state-
owned enterprises (SOEs) have become much more profit-oriented, although large-
scale SOEs continue to be monitored closely by the state (Guthrie, 1997; Nolan &
Wang, 1999).
The implementation of self-responsibility policies and other aspects of hardening
budgeting constraints has compelled these Maoist SOEs “to consider business
decisions that make the most economic sense” (Guthrie, 1998, p. 267). The manage-
ment of SOEs has also been transformed into one in which these former economic
units are no longer just factories under central government’s planning, but also are
profit-making and market-driven enterprises (Child, 1994). A new system of indus-
trial governance has been implemented through the Director Responsibility System
(DRS) and Contract Responsibility System (CRS). Under the DRS, the party commit-
tee no longer serves as the leading organ of the SOE; its director is no longer a
mere executor of party decisions. According to the Enterprise Law of 1988, the
director of an SOE is “fully responsible for the material and spiritual development
of the enterprise” (quoted in Child, 1994, p. 68). Under the CRS, the responsibility
of attaining agreed targets and the formulation of appropriate business plans are
passed down to the management of the enterprises. These new systems have virtually
revolutionised China’s industrial organisation and economic governance.
The economic restructuring of the state sector has also contributed to the rise of
local economic elites and cadre entrepreneurs who were former party secretaries in
charge of SOEs and local governments (see Pearson, 1997). Economic reform in
China has now made it much easier for local governments, collectives, and individ-
uals to set up their own enterprises outside of the state planning structure, leading
to the emergence of town and village enterprises (TVEs) set up in various townships
and villages. Since 1985, we have witnessed a new diversity in organisational forms
and a plurality of property rights in China (Nee, 1992; Naughton 1994, 1995; Guthrie,
1997; Peng, 1997). The new fiscal system introduced in 1985 allowed the local
government treasury to retain all profit taxes from locally controlled private firms
and some state enterprises. Other tax payments, such as product tax and value-added
tax, were still shared with the central government. By the late-1980s, over 50% of
China’s state budget was in the hands of local governments (Nee, 1992, p. 1; see
also Walder, 1995; Oi, 1999). Another key dimension to China’s tax reform is the
growth of extra-budgetary revenues that are not shared with higher levels of govern-
ment. These revenues include non-tax levies (e.g. local fees and surcharges) on local
and newly established enterprises. By the end of the 1980s, extra-budgetary funds

---

H.W.-c. Yeung / Political Geography 19 (2000) 809–840
817
grew to equal the national budget (Walder, 1995, p. 280). These funds also helped
local governments to survive austerity measures introduced by the central govern-
ment to curb inflation during the 1980s and early 1990s (Huang, 1996).
This new fiscal system has significantly encouraged a “gold rush” phenomenon
in which almost all local governments rush into setting up TVEs and other forms
of business undertakings in order to “break away” financially from the central
government. This phenomenon of the rise of local corporatism has led to two
important outcomes at the local level. First, direct and indirect competition between
local governments becomes a core attribute of rescaled politics in China’s transitional
economy. The relaxation of planning and coordination at the level of the central
government implies that any local government can engage in commercial activities
that are perceived as positively contributing to their local revenue bases. This is the
case even though these activities (e.g. investment in more profitable processing
sectors) may not fit into the overall economic plan of the central state that promotes
such strategic sectors as energy, infrastructure, and raw materials (Huang, 1996;
Guthrie, 1997). Moreover, resources accessible through plans of the central govern-
ment during the reform era have become rather limited as local enterprises and TVEs
fall outside these plans. As a consequence, we find many local governments trying
to establish all sorts of industrial parks or economic zones to attract foreign invest-
ments; many also enter into cooperative joint ventures with foreign firms to tap into
foreign capital, technology, and market access (see case studies below). By the end
of 1998, these non-state-owned enterprises constituted 98.2% (7.8 million units) of
China’s industrial enterprises, and accounted for some 86.2% (RMB$10.3 trillion or
US$1.3 trillion) of total industrial production, of which 38.4% (RMB$4.6 trillion or
US$575 billion) came from collective-owned enterprises (State Statistical Bureau,
1999, Table 13-1). This compares favourably to the mere 23% contribution to total
output value by these collective enterprises prior to 1978.
Second, local governments are increasingly in control of their own resources and
firms, and depend much less on the central government for financial support. This
reduced dependence on the central government not only increases the political power
of key local party members (cadre entrepreneurs), but also encourages indirectly
their enthusiasm in China’s distinctive mode of socialist capitalism.4 Indeed, local
governments may actually place higher priority on assisting TVEs and other local
enterprises than SOEs located in their jurisdiction. State policies are often interpreted
selectively and implemented strategically in different ways by these local cadres and
officials. Even Jiang Zemin, China’s President, admitted in 1996 that “protectionism
in some local governments and departments has become a serious problem as many
pretend to comply but oppose covertly” (quoted in Lu & Tang, 1997, pp. 95–96).
These deviant practices are subsequently tolerated by the central government as de
facto policies with a local twist so long as they contribute to local economic develop-
4 For example, in Wenzhou, a township located in Zhejiang, exceptional local coherence and solidarity
among party cadres and peasants since 1949 has enabled them to resist state-imposed collectivisation and
to protect local economic activities. It also explains why Wenzhou is the first township in China to achieve
a predominance of private firms (Liu, 1992; Unger & Chan, 1999; cf. Wuhan in Solinger, 1996).

---

818
H.W.-c. Yeung / Political Geography 19 (2000) 809–840
ment. As such, the socialist state in China has been characterised as a “sporadic
totalitarian state with strong despotic power but weak infrastructural power” (Liu,
1992, p. 315).
This rescaling of central-local politics in China’s political economy, however,
complicates business transactions and joint ventures (JVs) between local states (via
TVEs) and foreign investors (see Aiello, 1991; Eng & Lin, 1996; Hsing, 1998; Luo,
2000). Most existing studies of foreign joint ventures in China have focused on their
performance in relation to such firm-specific variables as timing of investments, equ-
ity ownership, entry modes, and country of origin (e.g. Yan & Gray, 1994; Pan,
1996; Child, Yan & Lu, 1997; Luo, 1998a). Other studies of JVs in China have
addressed the formation, transformation, and management of JVs, and the problems
experienced (e.g. Shenkar, 1990; Beamish, 1993; Child, 1994; Luo, 1998b). How
then do foreign firms in China seek political leverage to reduce the negative impact
of host country regulation on their operations? A foreign firm can secure political
leverage through its collusion (i.e. mutual dependence and induced cooperation) with
local officials, party cadres, and business people (see earlier discussions). This
phenomenon is an institutional outcome of policy or administrative uncertainty in
China. For example, shifting government policies and the rescaling of politics in
China play an important role in prompting foreign firms to enter into JVs to protect
their interests. The policies of the Chinese government (e.g. regulations, licenses and
favourable treatment) are constantly shifting in response to changing economic and
other circumstances. This policy uncertainty has created a situation in which local
authorities can selectively interpret state-level policies for strategic purposes (e.g.
from legitimate rule-bending in favour of foreign firms to outright coercion of these
firms). For example, a frustrated American businessman complained that “it does
not matter much how the law says but how the person sitting in the [local] govern-
ment office who interprets the law would say” (quoted in Lu & Tang, 1997, p.
86). Local politics therefore plays a tremendously important role in circumventing
regulations imposed by the central government. It also complements the “bent
effects” of guanxi or social relationships in weathering the harsh politics of the cen-
tral government. Does this strategy apply to the experience of Singaporean firms in
China? It depends on whether the Singaporean firm is a private firm or a government-
linked company (GLC). To understand this difference in the role of private firms as
embodiment of guanxi politics and GLCs as embodiment of scale politics, we need
to pay some attention to the political economy of the Singapore end of the equation.
Undifferentiated scale politics in Singapore and the mismatch of politics in China
The political process in Singapore is characterised by its undifferentiated scale
politics. There is virtually no difference between the national and the local scale in
Singapore’s political process because it is a city-state with a long-standing domi-
nation of the Peoples’ Action Party (PAP) in national–local politics (see Yeung,
2000a). Because Singapore is a city-state in its own right, both the national and the
urban/local scales are juxtaposed to explain Singapore’s political economy. In other
words, what happens to Singapore as a nation is also applicable to Singapore as a

---