Research on the Governance Structure of Urban Commerce Zone Based on Life Cycle Evolution

Jian Zhang School of Economics and

Management of Tongji University

Shanghai, 200092 e-mail:

tongjizhangjian@vip.sina.com

Chen Wang Shanghai institute of foreign

trade Shanghai, 201620

e-mail: wangchen1230@163.com

Ying-lan Dong School of Economics and

Management of Tongji University

Shanghai, 200092 e-mail: sssasss@sina.com

Abstract-The structure of urban commerce zone is

usually complicated and hard to be governed. Therefore, this paper analyzes every development process of the commerce zone from the view of life cycle evolution, and then determines the governance structure of urban commerce zone from the view of transaction cost of property. Finally the paper makes some relevant proposals.

Key Words-Urban Commerce Zone; Life Cycle; Governance

. Introduction Commercial outlets are usually located in the urban

commerce zone which is not only the shopping center for the urban residents, but also the sightseeing center for the foreign visitors. At present many cities have made their unique commerce zone in our country, such as Wang Fujing and Da Shilan in Beijing, Nanjing Road and Huaihai Road in Shanghai, and QuanYe Bazaar in TianJin. Commerce zone is the focal area of urban economic activities, where gather many business, finance, insurance, management, service and information institutes.

Generally, the construction and operation of urban commerce zone are involved in the government, the developer, the retail enterprises and the consumers. The development of urban commerce zone can be regarded as a specialization and cooperation process by the participants to finish the transaction, related to a series of continuous transaction and decision sections. Because commerce zone has gathered so many institutes, the difficulties of coordination and management are bound to be great. And the governance problems will be highlighted with the scale explosion and the function enhanced. This paper analyzes the evolution process of urban commerce zone in every stage from the view of life cycle evolution, and makes some governance suggestions.

. Life cycle evolution process of urban commerce zone Referring to ecology, the development of urban

commerce zone will go through certain life cycle. Here we call them as development period, lease period and operation period. According to the three periods, there are three sections: land tenure transaction, shop lease and retail transaction. The relationships of the participants in the development process can be seen in Fig.1.

Development Lease Operation

Government Developer Retailer

Land transactions

Consumer

Shop Lease Retail transactions

Fig.1 Life cycle evolution of urban commerce zone and the relationship between the participants

From Fig.1, we find that the evolution of urban commerce zone integrates two industry value chains of the real estate development and retail business, goes through three stages: development, lease and operation, and in which the key section for the commerce zone to be operated smoothly is the third one. At the first section, the government organizes the land development and housing demolition, which can supply the business service for the local people on the one hand, and on the other hand the government can get some taxes; at the second section, the developers sell or lease the office properties to realize value; the third section is the common business operation process, in this section, the retailers sell the productions to the consumers and finally gain the profits.

In the process of life cycle evolution, the developers connect the two sides and make the two industry value chains relevant and interactive. Land tenure transactions occur between the government and the developers in the development period; the transactions between the

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developers and the retailers occur in the lease period, the commodity transactions are between the retailers and consumers in the operation period. In the three periods, the development period and lease period are supported by the operation period, and the developers are the key of the total value chain because they integrate the investors, operators, finance, business service enterprises, and realize the value-added process. In fact the experiences demonstrate if the developers and retailers are to be two in one in the second and third period, it is more easier to realize the above mentioned value chain, so many large retail enterprises act as the developers to expand the market.

(1) Development Period In the development period, the transactions are mainly

between the local government and the developers for land tenure. In our country, all the lands in the commerce zone belong to the country, the land tenure is assigned by the local government, and the land usages are stipulated by the planning department.

There are two ways for the developers to get the land tenure: one is renting the land, and the other is buying the land tenure. Renting the land means that the developers rent the land to build up temporary business property and pay the rents to the land lessor regularly. The period for land renting could be short or long, short for 3 to 5 years or long for 20 years. Because the business properties built on the renting land have not the property rights as temporary buildings, if other developers buy the land tenure or the country asks for the requisition of land in the rental period, the buildings will be in the danger of being demolished. However, on the other hand, the mode of renting land still has some advantages, such as less approval processes, shorter development period and convenient operation, so it is a common mode.

Buying the land tenure is different with renting the land, because the former is commodity house with property rights and can be sold in the market, the latter is temporary building without property rights and couldn’t be sold. The investors who buy the land tenure to develop commercial real estate can sell the property to get higher profits in a short period and also can rent the property to gain the investment benefits in the long run.

Besides the land section, in the total operation process of urban commerce zone, it is necessary for the government to participate inordinately. Though the commerce zone is developed and constructed by the real estate agency or the retailers, or by both of them, but usually the zone scale is great, such as tracts of land, so it is not only business development strategy or mode, but the important part of urban development strategy or mode. Meanwhile, it is also involved in the issues to supply package comprehensive business service and improve the quality of life and service. Therefore, the development of urban commerce zone is bound to be highly valued, and it is usually coordinated by the local government and business organizations.

(2) Leasing period In this period, there are two transactions for the

development of urban commerce zone: one is the transaction for business building ownership, and one is transaction for the business building license. From the view of developers, the buildings can be sold or rented, or they could cooperate with the other institutes and get the gain sharing. Different way faces different risks and gains differently.

Specifically speaking, business property sale can be divided as forward housing delivery, completed apartment sale and preowned house sale. Also the developers can rent the buildings to get stable rents, in theory; rents are made up of all the costs and appropriate profits. But actually they are always determined by the market demand relevant to the position, operation subject, and hardware conditions. Co-development is another mode that the developers don’t receive the rents, but the dividends of the operation profits.

It is worth notice that the lease mode directly influences the management mode in operation period, for example, the developers manage alone, or decentralized owners manage, or the developers authorize the third party to manage professionally.

(3) Operation period The transaction scale of urban commerce zone is the

main criteria for measuring the performance, and it is related to the former two periods. The land transaction section in development period determines the geographic position, the area scale and the targeted people. Shop transaction section in leasing period determines the possibility of the scale of commerce zone, because good production combination and retail bands can guarantee the purchasing power.

There are many types of transactions in the operation period. According to the commodity category, commodity elements include shopping, dining, entertainment, bank, post office, hospital, hotel, repair shops, laundry and other apportions. In every kind of consumption goods, clothing is more vigorous because it can absorb more consumers with great capacity, and it is usually the core in the commerce zone. Dining element can supply people many kind of food and it is the important part of the shopping center. Culture and entertainment elements are also the important parts of shopping center because it can enhance the incorporating ability to the consumers in larger degree.

. The transaction governance structure of urban commerce zone

The total life cycle of commerce zone is related to the three transaction sections. To facilitate analysis, this paper introduces transaction cost theory, abstracting the life cycle of commerce zone to be three transaction sections: land tenure, shop lease and retail transaction, which are interactive. In the detail analysis, the paper matches different transaction properties with different sections from the view of three dimensions: Asset specificity, uncertainty and transaction frequency, then we get the governance structure of urban commerce zone, see Tab.1.

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Tab.1 Governance structure of urban commerce zone in three periods

Investment feature Non-exclusive mixed special

occasional Market governance (operation

period)

Three parties governance (development period)

Transaction frequency

usual Classical contract

Two parties governance

(lease period)

United governance

(lease period)

(1) Governance for land transaction section in development period

It is usually easy to govern in the development period in foreign countries. The basic mode is three parties governance. If the developers want to get the land, they not only need to trade with the land owners, but also need to get the license for business building. However, it is very complicated to operate in our country, because of the specialty of land system. This section is related to the participation of local government that is not only counterparty, but also supervisor. Therefore, we need to consider many factors for the relevant governance structure and contracts; furthermore, considering semi-public goods attribute of land, it will be difficult to keep away ex post opportunism. At present we carry out the land system of “Bid, auction and listing”, but it is worth to notice that local government participates as counterparty, ignoring the role of supervisor. And to promote economic growth, there are many large and inappropriate programs, so that repetitional constructions become more common.

(2) Governance for shop lease section in lease period The relationship between the developers and retailers

is mainly embodied in this period. Because of the non-standardized feature of transaction, the two parties need to maintain a stable and persistent relation; furthermore, repetitive transactions can guarantee the profits to make up the cost for building up special governance structure. Special governance could be bilateral governance or integration, which means that the developers and retailers may be long cooperative relation, or belong to different department in an organization. The shop transactions are very professional because they involve special information; more complete the information about targeted consumers, higher efficiency of the transaction. On the other hand, special information can be shared in the integration enterprises, under the circumstances, vertical integration can be adopted, that is, one party buys out the other party and control the entire transaction and bear on all the responsibilities. In fact, it is common that retailers buy out forward to guarantee the transaction efficiency. The advantages of this mode lie that there are not losses of special information and could adjust to the changes of the

environment with a consistent way all the time to implement the maximum profits. Integration governance is common for the large retailers. In addition, bilateral governance is also common, that is, the developers and retailers keep up long term rental agreements. But under this circumstance, it is necessary to create reliable terms to both parties that can help maintain the long relation. Order mode made by Wanda Group is a good example for bilateral governance. The problems of most failure program in our country usually occurred in lease period, because they didn’t adopt special governance structure, but market governance that lead to great losses of asset specificity and influenced the transaction frequency in the operation period.

(3) Governance for retail section in operation period We know that the retail section in operation period is

high standardized transaction, because the consumers can determine to whether keep on the transaction relation or transfer to find a new trading partner with minimum cost easily with their experiences. Furthermore, because of standard transaction, it is easier to find another partner. Therefore, even lasting trading relation can be maintained by a series of short contracts, as for occasional non-special transaction, though the two parties could not prevent the opportunism with their experiences, they can also refer to the business credit or the other consumers’ experiences on the same commodity.

. Proposals for the governance of urban commerce zone

Based on the above analysis, from the view of transaction cost theory, we identify the appropriate governance structure of urban commerce zone in the life cycle evolution process. Hereby we make some relevant governance proposals.

(1) Boosting the legal institution building actively Pointing to the inappropriate commerce layout, we

should manage the operation layout of commerce zone from the view of macro perspective, determining the quantity, scale, grade and format in the planning period to reduce blind and random competition. Japanese "Big Store Low" and French "Commercial and Handicraft Guide Law" have made detail stipulations on all shops. Our country should make relevant shops laws as soon as possible. We can determine different grade of business scale and volume matching with different grade of city according to the regional economic situation and population density. When the buildings of retail commerce zone satisfy the control standard, local government and relevant business management department should organize public hearing, and invite industry self-regulatory organizations, local consumer representatives, business research experts and other experts from urban planning, traffic, and environmental protection to join. The relevant functional departments make some adjustments or determine whether to approve according to the opinions from the public hearings.

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(2) Developing diverse functions of local government in the life cycle of urban commerce zone

The function of local government in the life cycle of commerce zone is not replacing the market, but giving due responses to the market failures, for example, the government should develop the function of regulation for the monopoly and excessive competition. At present we carry out the land system of “Bid, auction and listing”, but it is worth to notice that local government participates as counterparty, ignoring the role of supervisor. And to promote economic growth, there are many large and inappropriate programs, so that repetitional constructions become more common. Therefore, the local government should perform two roles well, in which the law building is more indispensible. We can refer to the law constraints on business facilities in developed countries, supporting law basis for the local government playing the role of supervisor, and making certain constraints when the local government performs as the party of land tenure transaction. Thus this way can build up a fair competition business environment to guarantee the appropriate scale of the business service facilities. Now many cities in our country have made similar exploration. Dalian is the first city that makes legislation on urban commodity outlets planning, and Beijing. Shanghai, Qingdao and Tianjin also launch the urban commodity outlets planning one after another.

(3) Speeding up the process of completion and transparency of special information

Special information means the parameters for determining the business volume, including the population quantity in the commerce zone, consumption level, consumption structure and existed business facilities. The information makes different sense to different party, local government may use the special information to determine whether offer the business facility approval, the developers can make the decision for building area according to the information, and the retailers could make the combination of shop and commodity. However, the cost of disposing of the special information is the same high as the gaining cost. It is necessary to employ professional researchers to investigate and get the primary data, and analyzing the data with relevant theory model. Great manpower, material and financial resources are needed, which are usually organized and invested by the developers and retailers.

Fully analyzed, the development of urban commerce zone can go through three stages: development period, lease period and operation period, mapping with three sections: the land tenure transaction, shop lease and retail transaction. Only when we adopt the targeted governance mode according to the different development stage, can we promote the development of urban commerce zone better.

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Jinan University Press, 2004, P219. [3] Mulligan, G. F. Central Place Populations: Some Implications of Consumer Shopping Behavior. Annals of the Association of American Geographers, 1984, 74:44-56. [4] Han Yadong. Operation mode and application of commercial real estate in China[D]. Ocean University of China, 2008(6). [5] Guan Chiming, Cui Gonghao. A Probe into the new Commercial Space in Chinese Cities and its Mechanism [J]. Urban Planning Forum, 2003 ( 6) . [6] Li Xiaohu. Study on Commerce Network Planning Under the background of urbanization in China[D]. Tianjin University, 2007(6).

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