Jonathan Unger1

The Rise of Private Business in a Rural Chinese District:

The Emerging Characteristics of Entrepreneurship in the PRC 2

Working Paper No. 90

January 1999

The views presented in this paper are those of the author(s) and do not necessarily reflect those of the Asia Research Centre or Murdoch University.

© Copyright is held by the author(s) of each working paper: No part of this publication may be republished, reprinted or reproduced in any form without the permission of the paper’s author(s). National Library of Australia.

ISBN: 0-86905-676-X ISSN: 1037-4612

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As private businesses re-emerge in China today, are they similar in nature to the family

firms that prevail in Chinese communities elsewhere in the world? The question is not only of

academic interest; it also is important for any discussion of the likely shape of China's economy

and society in the decades to come. Although, as yet, only a relatively small share of China's

industry has been established by private entrepreneurs, that share has been growing rapidly in

recent years,3 and it can be assumed that private industry will occupy an increasingly substantial

place in China in the decades ahead.

This paper will explore the characteristics of such entrepreneurship by describing the

private industrial activity that has arisen in one part of the Chinese countryside -- a rural district

that has already witnessed an extraordinary flowering of small and medium-scale private

business activity. In marked contrast to much of the rest of China, in parts of the Pearl River

delta in Guangdong Province local private entrepreneurs have been instrumental in industrial

development for the past decade and a half. Xiqiao Township, a former commune of 135,000

native residents located in the heart of the delta at the edge of Nanhai County,4 epitomises this.

Almost entirely agrarian until one and a half decades ago, it today boasts well over 2,000

factories, including more than 1,600 textile manufacturing firms. The vast bulk of the factories in

Xiqiao, and every one of the textile factories, are privately owned by local people.

My examination of this phenomenon will be two-pronged. First, the paper will explore

why some local people in Xiqiao have been successful as businesspeople and others have not. In

investigating this, it will be asked whether there is something culturally "Chinese" about the

ways in which the successful small entrepreneurs have proceeded, and a comparison will be

made with the rapid development of small and medium-sized private industrial enterprises in

Taiwan a few decades ago. Second, the paper will explore the locational advantages of the type

of specialization that has been achieved in Xiqiao -- why, as a group, the entrepreneurs of this

one small district have outcompeted the rest of China in one specific industrial sector.

To examine these two issues, during the spring of 1997 intensive interviewing was

undertaken in Xiqiao township on the origins and attributes of the private entrepreneurship there.

[A separate Working Paper (No.89, 1998) published by the Asian Research Center focuses on

the shape of state-society relations in this township.] During my stay in Xiqiao, it was possible to

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wander the township unimpeded and unsupervised, going into villages and factories and homes

to discuss, in private, the experiences and attitudes of local factory owners and other residents.

Township and village officials were also interviewed under more formal arrangements, as well

as the top officials of the two local business associations. One of these business associations

kindly mailed a questionnaire on my behalf to its members inquiring about their backgrounds

and present circumstances, and the responses that were received will be used to supplement the

information obtained from interviews.

A BRIEF HISTORICAL BACKGROUND

The fact that Xiqiao villagers have ventured into textile manufacture is not a matter of simple

happenstance. Many of them already had at least a rudimentary knowledge of textile weaving. In

imperial times, the rice farmers of Xiqiao had supplemented their incomes by raising mulberry

trees and silkworms, and from this, in turn, an intensive local cottage industry of silk spinning

and weaving had developed some hundreds of years ago. A local merchant with a strong

mechanical bent named Chen Qiyuan revolutionized this in the early 1860s by inventing steam-

driven silk spinning machinery. He erected a factory in his home village in Xiqiao in 1872 -- in

the process becoming the earliest native modern industrialist in China.5 In the decades that

followed, the silk-spinning and weaving industries boomed in the township, even though the

district remained rural in nature.

This local industry was ultimately devastated by the world economic depression of the

1930s and then by the war with Japan, and by the time the Communist Party's armies swept into

Guangdong in 1949, only some ten small factories remained in business. When collectives were

established in the latter half of the 1950s, these factories were amalgamated by the new

government into four publicly-owned factories, and by the 1970s they each employed some 300

personnel: a spinning enterprise located in the market town and three textile-weaving factories

located in two nearby villages. Alongside this industry, spinning and weaving on wooden hand

looms continued at home as collectively-run efforts of agricultural production teams. Indeed, the

state required the teams to fulfill production quotas for silk thread and also for fabric.

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Before and just after the accession of the Communist government, almost all of the

weaving had been done by men, but in the 1950s, after the introduction of agricultural

collectives, the men were assigned to farmwork and it was the women who took up the hand-

loom weaving. Due to this cottage industry, during the three and a half decades of the Maoist

period most local women gained some knowledge of what textile weaving entailed. Herein lay

one of Xiqiao's comparative advantages once China again opened the door to private rural

factories. In a great many of today's family-owned factories, it is the wife who oversees loom

production.

In 1984, as China and particularly Guangdong began to "open up" under Deng, several

adventuresome technicians and workers from the three collective textile factories quit their jobs

and struck out on their own, starting up small factories containing a few electric looms apiece.

During the previous decades, the production of cloth had not kept up with consumer demand.

One consequence was that up until the previous year, 1983, everyone in China, in the cities and

countryside alike, had to be issued a strictly limited number of cloth coupons each year. With

cloth still in very short supply, whatever the tiny new factories produced was snapped up by

customers. Seeing the quick profits to be made and using the new little private factories as their

model, people in Xiqiao who had no personal experience with electric looms began to open their

own small enterprises. At that time they did not need to know much about doing business, for

whatever they could manufacture got sold.

According to a factory owner who was interviewed in Minle village (where two of the

three original commune-owned textile factories had been located), more than two thirds of the

families in the village invested in such factories during the mid to late 1980s. In Lianxin, the

other village that contained a commune-owned textile weaving factory, during the height of the

rush in the late 1980s some 450 households, about half of all the families in the village, were

operating factories. Even today, when the least capable of the firms in Lianxin village have been

weeded out, more than 300 of the 920 families there still own textile factories, employing some

6,000 migrant workers. According to the official records of the village government, between

1986 and 1996 the value of production in the private enterprises leaped by 3,374 percent.

By contrast, in Jiancun, the native village of the original 19th century

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inventor/industrialist Chen Qiyuan, silk-spinning had continued to predominate through the first

half of this century and thus fewer families knew how to weave. Today, the village contains only

40 textile factories, plus 20 factories in other lines of production. Still, even here, this amounts to

one private textile factory for every 17 village families.

Xiqiao Township quickly began to specialize. It soon no longer manufactured any silk

cloth at all: for rising labor costs and pollution curtailed and finally halted the production of silk-

worm cocoons. Some of the first little factories had started off manufacturing artificial silk

fabrics, and very soon the factories in the township had switched to using other man-made fibres

along the lines of nylon and rayon. Within a few years every textile factory in the township was

concentrating on making such cloth for China's domestic clothing market. By the early 1990s

production had grown to such an extent that Xiqiao township had emerged as one of the most

important manufacturing centres in China of cloth from man-made fibres.

THREE CASE STUDIES

Among the residents who opened factories, some have developed very profitable businesses that

are continuing to expand, some are making quite decent livelihoods but have found it difficult to

expand in the face of increasingly stiff competition, and some have ultimately been forced out of

business. What are the reasons for these differences: what types of personal and family attributes

have contributed to success or failure?

As an introduction, three brief case studies can serve to illustrate where some of the

essential factors may lie. For this purpose, I have selected examples of i) a moderate success

story, ii) an ultimate failure, and iii) a high achiever:

i) The case of a moderate success. Almost a decade and a half ago, in August of 1986, I had an

opportunity to visit the township for several days in the company of Anita Chan, and a former

production-team head, a man in his thirties, took time out to guide us around. In 1984 he had

been among the first to see the potential of the small private factories that had just started up, and

he had rushed to establish one with his brother-in-law and four other partners. None of the

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partners (all men) had any experience in the trade; they needed to rely upon the hands-on

knowledge of the sister of one of them and my host's wife, both of whom had had experience as

weavers in one of the commune's collective textile factories. The six partners pooled 90,000

yuan and obtained a bank loan for another 150,000 yuan (at the time, the banks had been

directed by the Guangdong government to make preferential loans to get such private enterprises

started). With these funds they bought sixteen new looms and were in business.

When I visited their factory in 1986, it had expanded and was operating non-stop, with

eighty young women in their teens and twenties working the looms in three 8-hour shifts. The

plant had been highly profitable from the first, but the factory building was still a make-shift

affair -- deliberately so, to make it easy to disassemble so the building materials could be sold

overnight if need be. The partners were prepared for the day when government policy might

suddenly reverse and directives might come down to confiscate private businesses. So, too, as of

1986 our host's wife had retained her job as a full-time loom worker at one of the three

commune-owned textile factories. It was not for the pay, which they did not really need any

longer; rather, it was to retain a secure job just in case the regime shifted course, as had occurred

so often in socialist China's history.

Today, the firm has expanded into two solidly built new premises with a total of 48

looms. Secure in the prospects for private enterprise, the partners have been reinvesting heavily

in more advanced looms costing Y120,000 apiece. Rather than taking out bank loans for this

purpose, they have frugally retained much of their past profits for reinvestment in the company.

What is unusual about the firm is that the partnership has held together; for reasons that

will be observed below, most partnerships in Xiqiao dissolve within a few years. What keeps this

partnership afloat is a strict division of responsibilities among the partners. Our host of 1986

travels the country seeking out customers (he has been to every province except Tibet); another

partner sits all day in the firm's sales outlet in Xiqiao's market town, negotiating with the

wholesalers and purchasing agents who come to Xiqiao to buy in bulk; and other partners are in

charge of various aspects of production and finance. But precisely because they operate as a

partnership, they find it necessary to avoid anything that smacks of a family business. As a prime

example, my host has made no attempt to place his sons in the firm, even though the eldest is

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glumly unemployed.

ii) An ultimate failure. In 1987, a man from Jiancun village who was 65 at the time took the

plunge and opened a small make-shift textile enterprise. His daughter and son-in-law from Minle

village (where two of the commune-owned textile mills were located) had started a factory the

previous year, were doing very well, and taught him the ropes. By then, the boom in new textile

factories was in full swing, and the banks were no longer making loans to newcomers. However,

the man, his son, and a partner were determined to jump onto the bandwagon, and they invested

20,000 yuan of their own funds and borrowed another 10,000 yuan from friends. They erected a

large shed-like structure in the old man's courtyard and bought four used electric looms at

Y4,000 apiece. They manufactured cloth as subcontractors to the son-in-law in Minle, who for

the time being had more orders than he could fill. Out of the profits that poured in, the old man

and his partner were able to buy a new loom every couple of months; and within just a year's

time they owned ten looms, operated by twenty migrant women from poorer districts and

provinces on 12-hour shifts. These workers slept in the loft of the old farm house and the old

man took charge of cooking for his extended family and the workforce.

Those first years, the new enterprise was pulling in up to Y10,000 in net profits each

month. But as new producers started up across China, the seller's market in textiles drew to an

end. Continued profits increasingly depended upon a savvy sense of the cloth trade. This he

lacked, and his son-in-law no longer could provide him with subcontracting work. His son-in-

law confides that "my father-in-law's problem is that he and his son just continued to manage the

factory and paid no attention to the market, and therefore had no knowledge about market

trends". As profits dwindled, the son and the son's wife learned how to operate looms in order to

help cut down on the numbers of workers needed. But by 1994 the business was no longer

turning a profit, and in 1996 the partner, eager to get out, "cheated us" of all of the business'

remaining capital. Late in 1996 the old man and his son went insolvent. As of 1997, they were

hoping to recoup their fortunes by opening commercial fish ponds. But they also renewed their

factory's license against the day they could resume production. When we visited him in 1997 his

outdated looms were still lying idle in the dingy shed, ready for that hoped-for day. Fellow

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villagers scoffed at his expectations, though, in light of the man's track record.

iii) A high achiever. The chair of Xiqiao's Chamber of Commerce holds that post in recognition

of his extraordinary present success. He and his wife operate one of the largest and most

profitable textile establishments in the township. But they achieved this only after a series of

rocky starts.

Their sole initial advantage was that they already had a knowledge of weaving. Both of

his parents, in fact, had worked in one of the commune-owned textile factories. After poverty

forced him to drop out of school in third grade, he himself became a weaver on a hand loom in a

tiny agricultural-production-team workshop at age 14 before ultimately acquiring a job alongside

his future wife in a commune textile factory.

In 1983 he joined with five partners who pooled their personal savings to purchase 15

new looms, becoming one of the first private textile ventures. However, the enterprise collapsed

in disarray within a year: one of the partners had over-spent their funds and the enterprise had

become entangled in legal complications. In 1987 he became involved in a second attempt with

four partners, but this time the firm collapsed in just half a year. He started all over again in

1988, again pooling what little capital he had in a partnership. This time around, having been

burnt twice, he took charge of the finances. Yet in the end this only served to increase his

personal liability -- and when the firm folded he found himself personally responsible for

Y200,000 in debts.

Undaunted, he started off on a new venture. He understood by now the various facets of

the textile industry -- and in particular had gained a feel for the national market. He turned his

hand to wholesaling textiles in 1988, traveling to factories throughout China to take orders for

cloth, and by 1990 managed to pay off the entire Y200,000 debt. That year, he took up

manufacturing yet again -- this time, more cautiously, just with his elder brother, with only

enough money to purchase four looms. But he found his brother to be incompetent, and they

parted ways within three months, each taking two of the looms to start out yet again.

His recent travels as a wholesaler had alerted him to a growing demand for higher-quality

synthetic-fibre shirt fabric than China then produced. He began subcontracting orders to other

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factories in Xiqiao, with he and his wife rigorously overseeing quality. By 1993 he was filling

orders on some 200 looms, while also expanding his own production. He erected a new factory

that year, another new factory in 1995, and another shortly thereafter. Soon after expanding his

own production he stopped sub-contracting to other factories, so that he could oversee the

quality of the cloth even more tightly -- and keep private his knowledge of the market niche. By

1997 he owned 168 new looms, 68 of which were of a very advanced model. He was employing

more than 400 workers in 12-hour shifts, and had as many orders on his books as he could

handle.

He and his wife work very long hours. She in particular circulates the shopfloors to keep

a personal watch over production. But as the business has grown they have also had to hire five

management personnel, all of them with higher degrees. They also temporarily hired his wife's

brother, but then thought better of it:

Private operations have to go for capability, not guanxi (personal connections). In state

enterprises, those with guanxi don't have capabilities, and those who are capable don't

have guanxi. Even with my wife's brother, I told him to go home. I don't take people

because of guanxi. ... I have to build up my reputation, but for that it's quality that's most

important. I don't even use guanxi to obtain business orders. Treating others to meals isn't

useful to me. The Communists can do this kind of thing, not me. I put my energy into

management and quality.

But he is aware that his prospects for major future expansion in a rapidly modernizing industry

are limited by his lack of education: "Just having money today isn't enough. You can easily be

pushed aside. Lack of knowledge is a big limitation. I can think but I can't write." The

moderately successful businessman who had hosted me in 1986 expresses a similar sentiment:

that he himself, and the entrepreneurs of Xiqiao district as a whole, are constrained by their

rudimentary formal educations; and that a competitive edge in production will depend in the near

future upon computerized looms and a more sophisticated financial approach to business that is

beyond their capacity.

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THE INGREDIENTS OF SUCCESS

These three personal accounts touch upon several key elements in the establishment of private

firms in Xiqiao. One common ingredient that is found in all three stories is that, in order to

amass sufficient capital to establish a manufacturing enterprise, a very common initial step has

been to form a partnership. In two of these accounts, the partnerships persisted even after the

firm was on its feet, but this seems to be true only for a minority of enterprises. More often, even

when successful, the partnership is likely to splinter into small family firms once the enterprise

contains enough machines to make separate operations viable. This parting of ways is often

taken to be part of an expected cycle. The old man's son-in-law, for instance, had first opened an

enterprise as one of six partners, which had dissolved in 1986, and he notes, "This was natural,

as people want to start businesses by themselves when they reach a certain stage". In most

circumstances, one's immediate family takes precedence: in cooperation and in trust and in a

desire to bring one's own children into the business. The stories of the ultimate failure in

business and the high achiever both serve as cautionary tales in this respect: initial partnerships

that could not surmount the problems of trust and cooperation at times of adversity. Partnerships

among brothers seem more likely to last, but even so, most apparently dissolve over time.

Yet at the same time, some of the successful enterprises in Xiqiao do retain the form of

partnerships. Like my host, these are people who are able to break the mold of a familistic

approach to business. Interestingly, this non-family-bound approach seems to prevail more

commonly among the most successful of the entrepreneurs than among the township's business

population as a whole.

The responses to a questionnaire mailed to the Xiqiao-based members of the Nanhai

County Textile Chamber of Commerce (Nanhai shi fangzhi tongye shanghui) bears out this

impression. The county government, which helped to select the members, deliberately kept the

Chamber of Commerce membership exclusive.6 In the entire county only 53 of the most

successful owners of textile firms were admitted. 38 of these members (all males)7 live in

Xiqiao, and a questionnaire was mailed to each of these 38. Only eight of the businesspeople

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responded, 21% of the total, and so their replies can only be taken as indicative. Interestingly,

though, four of these eight successful businessmen are still members of partnership firms, a rate

that appears to be considerably higher than the rate for Xiqiao's textile firms at large.

This finding could, of course, simply be an artefact of the very small number in this

Chamber of Commerce sample, but other attributes that most of the eight share in common also

seem to differ markedly from the bulk of the broader business population. For instance, although

the great majority of Xiqiao residents do not come from families with prior generations in the

weaving industry, four out of the eight do, and of these four men, three also personally had had

experience in textiles through employment in the commune's collective textile factories. Of the

four respondents who did not have prior family connections with the industry, two had served

during the period of agrarian collectives as supply and marketing agents (gongxiaoyuan) for the

village governments and production teams, giving them an obvious leg up in commercial

experience. In light of the major role played by wives in overseeing production, it should be

noted, too, that half of the eight wives had prior experience as textile factory workers, including

the spouses of both of the former supply and marketing agents.

A further characteristic common to the eight Chamber of Commerce respondents is their

relative youthfulness. As of 1997, the eldest of them was only 43 years of age, after having been

in business for more than a decade. Five of the eight had started a factory for the first time while

still in their twenties, and the other three in their early thirties. They are risk-takers: six of the

eight had first jumped into the business in the first half of the 1980s, when it was still a

politically risky undertaking.

An interesting fact here is that they have no background in the political establishment;

only one of the eight has ever been a member of the Party. This latter attribute may be the case in

Xiqiao more than in the rest of China. Elsewhere, political clout and political connections appear

to have some bearing on private business success.8 But in Xiqiao, with its large and essentially

independent private business community,9 a capacity to perform well in a highly competitive

market, not political access to resources or outlets, is what counts.

To expand their businesses, these businesspeople prefer to resort to a high level of

savings and reinvestment, rather than depend on bank loans. Even though the Xiqiao township

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government provides members of the Chamber of Commerce with priority access to bank

loans,10 only half of the eight have turned to such credit in any meaningful way, and only one of

the eight lists bank loans as a more significant source of new capital than personal savings and

borrowings from relatives and friends. These businesspeople have taken calculated risks at

various stages of their careers, but most of them appear to prefer to do so with their own capital

rather than carry high levels of debt.

A sampling of eight of the township's success stories can, of course, only be suggestive.

However, when I inquired in interviews with local officials and factory proprietors on their own

impressions of the attributes that distinguished the most successful textile entrepreneurs, what

they related conformed, in almost every particular, to the results of the Chamber of Commerce

sample. I was told that the most successful businesspeople in Xiqiao tended to be young at the

time they opened their first factory, were risk-takers who therefore jumped in early,

disproportionately were from families with a heritage in the textile industry, and also tended to

have the advantage of prior personal experience as a textile factory employee or, alternatively,

relevant experience as a cadre in the previous era of agrarian collectives.11

Xiqiao's successful business proprietors also, on the whole, appear to be quite similar to

the Chamber of Commerce sample in preferring to plough their own earnings back into their

businesses rather than turn to bank credit. In keeping with this preference, an ethic of frugality

exists within Xiqiao's business community. Prosperous families build large decent houses for

themselves, but not often on the same grand scale seen in other wealthy parts of the delta. Nor

are there many upmarket restaurants in Xiqiao. Rather than compete among themselves to show

that they can live ostentatious lifestyles, Xiqiao businesspeople instead strive competitively to

position themselves better for the future through upgradings of machinery and plant. Interviews

with local proprietors revealed that many pursue very high rates of reinvestment in their

enterprises, often amounting to well over half of their total earnings.

PARALLELS: THE RISE OF SMALL-SCALE ENTREPRENEURS IN

TAIWAN

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In many respects China's rapid rural industrialization resembles what occurred in earlier decades

in Taiwan. There, too, most of the surge in manufacturing occurred in small-scale industry, and a

great deal of this small-scale industry was dispersed in Taiwan's countryside.12 All of these small

Taiwanese factories were privately owned, and in this regard Xiqiao's experience is unlike much

of rural China today but very much in line with the Taiwanese experience. The private small-

business community in Xiqiao needs to compete successfully against the large-scale factories of

China's state-owned and collective-owned sectors; and parallel to this, a study in Taiwan found

that many of the small establishments there were as productive or more productive than Taiwan's

large firms. The Taiwan study pointed particularly to several industries that included textiles,

Xiqiao's forte.13 In light of these similar circumstances, it becomes feasible to compare the

attributes of the entrepreneurs in Xiqiao to what is known from studies of earlier decades about

the nature of entrepreneurship in the rise of small and medium-sized industrial enterprises in

rural Taiwan. Can we speak of a common "Chinese" pattern to this entrepreneurship?

To a large extent, we can. In Taiwan, as in Xiqiao, partnerships have been a very

common means to amass the capital to initiate a new small-scale enterprise -- and, again similar

to Xiqiao, these in turn tended regularly to dissolve into family firms. A 1993 interview survey

in Taiwan found that 70% of the surveyed small and medium-sized enterprises had been founded

as partnerships, but at the time of the survey only 29% of these partnerships survived; and half of

these surviving partnerships were between brothers.14 The other enterprises were all run as

family firms. Again much as in Xiqiao, the surviving partnership firms in Taiwan had to be

careful to operate on entirely different premises. Even when the partnership was between

brothers, the inclination to favor one's own nuclear family had to be resisted, to the point that

other family members were kept off the payroll: "If one had hired a family member in the

partnership company [among brothers], it could be interpreted as expanding one's power in the

company, and will cause suspicion among the others".15 A study in Hong Kong likewise found a

pattern of initial partnerships that dissolve into family firms, even when the initial partners are

brothers:

Partnerships are notably unstable. Half of the thirty-two cotton spinning mills in Hong

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Kong for which I obtained information were actually incorporated by partners, but only

four remained as partnerships at the time of my investigation. ... Those who have close

relatives among the partners will have an obvious edge over others as they can act jointly.

This can explain why teams of brothers are so frequently found at this precarious stage.

In this initial phase, the family firm is just emergent. It becomes fully-fledged when a

share-holder and his jia [nuclear family] ultimately attain majority ownership in the

company".16

Too, in many of the small and medium-sized family firms, especially in Taiwan, the wife plays a

role in overseeing some of the enterprise's internal operations.17 In all of these various respects,

in Taiwan, Hong Kong, and Xiqiao the patterns of establishing small manufacturing firms have

been similar.

In Taiwan in the 1960s and 1970s, a great many of the small manufacturing firms were

started by people who had gained a sense of their industry by working first in similar factories (a

survey in Taiwan showed, for instance, that 60% of the owners of shoe factories had originally

been shoe workers).18 Such employees had frugally saved toward the day they could establish a

small factory of their own.19 Again we see this pattern replicated in Xiqiao: prior experience in

the trade as one of the factors that differentiates the case of the ultimate failure from that of the

high achiever -- true, too, of half of the sampled Chamber of Commerce members. But in Xiqiao

this was perhaps not as crucial an element as it might have been. Because of the cloth shortages

in China in the 1980s, even inexperienced producers could initially make profits. This unusual

circumstance provided them with a breathing space, a period of time in which to learn the trade

and the market and how to be entrepreneurial. Yet even this was not entirely dissimilar to the

situation that emerged in the 1960s when Taiwan first burst onto the world economic stage as a

low-cost producer, when "the booming world economy in the 1960s gave entrepreneurial blue-

collar workers a chance...to 'become one's own boss'"20

Once an enterprise in Taiwan was successfully established, the proprietor, just as in

Xiqiao, normally engages in a high rate of reinvestment to upgrade and expand the business;

most of the successful small and medium-sized businesspeople in Taiwan prefer not to borrow

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from banks for these purposes despite the ready availability of credit.21

All told, thus, the means by which would-be entrepreneurs have developed small-scale

industrial enterprises in Taiwan and Xiqiao have directly parallel elements: a similar risk-taking

initiative when opportunities opened for small-scale manufacturing; a similar turn to partnerships

to gain an initial foothold as a small manufacturer; a similar tendency to dissolve these

partnerships eventually in favor of family-based firms; a similar role for the spouse in

supervising some of the firm's internal operations; and a similar propensity for the proprietor to

save and reinvest out of profits in order to upgrade and expand the business rather than be reliant

on bank loans.22 Faced by a somewhat common set of circumstances, would-be entrepreneurs in

the two regions appear to have responded to opportunities in terms of a common set of "Chinese"

practices.

But if this comparison is helpful in explaining patterns of entrepreneurship at an

individual level, it does not explain why Xiqiao township's business community as a whole has

been so phenomenally successful in competition with the rest of China, to the extent that the

community has carved out a leading position in an important sector of China's textile production.

THE LOCAL EDGE: HOW SMALL LOCAL PRIVATE

ENTREPRENEURS HAVE CORNERED THE NATIONAL MARKET

Why, then, had this tiny corner of rural China become so successful in synthetic-fibre textile

production? Why has the development of a similar textile industry not been replicated

successfully throughout the Chinese countryside? To understand this aspect of Xiqiao's success

we need to examine the importance of concentrated industry.

An initial impetus to Xiqiao's industrialization, as noted, was that three textile factories

were already located there and, separately, that many of the families already had some

knowledge of hand looms and weaving and thus did not feel entirely mystified by the electric-

powered looms. But another vital factor was that once the boom in small textile factories began,

information and ever improving technical know-how very easily circulated within the bounds of

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the local township marketing district, but did not so readily spread beyond these local bounds.

So, too, in an industry that must adjust rapidly to changes in fashion and to the shifting seasonal

buying patterns of wholesalers, knowledge of the national market became centered in Xiqiao. As

the first locale in south China to produce large quantities of synthetic-fibre cloth for the open

market, Xiqiao had rapidly attracted purchasing agents from garment factories from throughout

the country.23 By the 1990s they were arriving each year by the thousands, and they became the

eyes and ears of Xiqiao's factory owners, enabling local producers to keep abreast quickly of

market trends across China.

To serve the buyers, eight hundred small shop-fronts were converted into sales outlets for

the textile factories in the township. As of the time of my visit, these outlets lined street after

street at the center of Xiqiao's market town. Factory owners were spending much of their time

here, chatting and negotiating with purchasing agents and wholesalers. Several of them told me

that they put a premium on this sales activity: they do not normally entrust it to employees

because it enables them to keep abreast of market trends.

In an increasingly competitive business, the difference between high and low profits

depends upon gauging which types of cloth, pitched at what weave and quality, will sell best

during the next season. Financial ruin awaits those who are left with piles of unsold bolts of cloth

at year's end because there has been over-production in China of that specific type. To produce

outside of a major production and wholesaling center such as Xiqiao condemns a manufacturer

to comparative ignorance of fluctuations in market conditions; while to produce within Xiqiao

enables a reasonably capable entrepreneur to stay sensitively attuned to the national market.

Xiqiao does not provide cloth for the factories in south China that produce garments for

Western markets. It is beyond Xiqiao's capacity to make fabric of a high enough quality for this

export market. But Xiqiao has become increasingly competitive at the upper end of the domestic

market for synthetic-fibre cloth. Starting in about 1994, as the quality of the local cloth has

improved, the township has even begun to make inroads into the Chinese market for imported

cloth. New export markets simultaneously have begun to open in the former Soviet bloc. A

private wholesaler from Tianjin advised me that he provides Xiqiao fabrics to Russian

wholesalers in Beijing.

17

Xiqiao is not unique in the degree to which it specializes successfully. Each of the rural

townships in Nanhai County has similarly developed a special niche in which it has become

preeminent. One rural Nanhai township is awash with tanneries; another specializes in

aluminium frames for windows, dominating the Guangdong market; another township

specializes in shoes and socks. The township directly next door to Xiqiao concentrates on

ceramic tiles and is crammed with hundreds of large and small ceramic tile factories, private and

collective enterprises alike, belching out fumes from kilns that operate around the clock.

Such local concentrations of mutually competitive enterprises are not unique to this

corner of China. In this paper we have already noted Jinjiang township in Fujian, which is

packed with many hundreds of private footwear manufacturing firms. In Zhejiang Province's

Wenzhou Prefecture -- which not coincidentally is famous in China as a bastion of private

production -- one rural township produces 70 per cent of all the buttons in China and another

township produces 40 per cent of China's low-voltage electrical switches.

Nor is China alone in this phenomenon of concentrated production in one locality.

America's Silicon Valley provides just one of many similar examples around the world today. In

Japan, nine-tenths of all the eyeglass frames are made in one small semi-rural district. In

northern Italy, several towns are crowded with small firms that compete to produce designer

shoes; other nearby towns specialize in fine handbags; and yet others are competitive in other

sectors of the fashion industry. Historically, the phenomenon exists even in Xiqiao's own area of

specialization, textiles. In the Industrial Revolution in late 18th and early 19th century Britain,

the cotton textile industry likewise became "closely localized".24

But rarely around the world has local comparative advantage been more clearly

delineated than in Xiqiao and the adjoining townships. The breakneck speed at which China has

developed has given distinct advantages to districts that get a head start and can build upon it.

Xiqiao and the surrounding townships in Nanhai county exemplify "location theory" with a

vengeance. Their localized technical know-how and acute knowledge of the wider market keep

them invaluable steps ahead of the competition in what Paul Krugman, in a study of similar

localized geographic specializations around the world, has called "the locking in of transitory

advantages".25

18

Xiqiao's main competition in China in the synthetic fabrics trade is found in a few similar

specialist districts in Zhejiang and Jiangsu province. They compete across the board with each

other, but each also has begun to gravitate toward particular niches where they do particularly

well. While Xiqiao predominates in synthetic-fibre cloth for winter-wear, a small city called

Zhaoqing in Zhejiang predominates in cheap synthetic-fibre summer-wear textiles, and another

town in Zhejiang has a strong national position in trouser cloth. (In Zhejiang, unlike Xiqiao,

there are both private and collective producers in competition.) Areas in rural Jiangsu dominate

yet other niches in the textile market. Generally speaking, though, these districts have been able

to compete most successfully with Xiqiao at the lower-quality end of the domestic market, in the

niches that call for cheap light-weight cloth. Over-production has begun to dog these cheaper

types of textiles, and profits have plummeted.

The answer for Xiqiao businesspeople has been to keep one step ahead by switching

increasingly to the production of the higher-quality cloth -- the more profitable end of the

national market -- a market niche that is expanding as a monied clientele emerges within China.

To produce a high-quality cloth, those factories in Xiqiao that can afford to do so have

scrambled to purchase more advanced looms at Y120,000 apiece, six times the cost of the looms

used by most of the Xiqiao factories and their competitors further north.

Xiqiao entrepreneurs first started purchasing the new looms in 1995. It has been a vast

expense for these small business households that has required considerable family belt-

tightening. Yet by the spring of 1996 factories in the township had purchased 700 new looms and

by the spring of 1997 4,000. Xiqiao's smallest producers, unable to afford this leap to more

capital-intensive machines, are rapidly being weeded out. As one successful manufacturer noted,

"These new looms introduced a revolutionary change. A big gap developed: those who had been

making money make big money; those who had not made enough profits to get these machines

are collapsing." Xiqiao contained close to 2,000 separate textile manufacturing enterprises

during the early 1990s, but by 1997 the weakest had been winnowed out and the number of

textile firms had been reduced to some 1,600. The days in which a villager with a bit of cash and

a handful of used looms could get a start on the ladder are over.26

19

LOOKING TO THE FUTURE

Xiqiao provides a birds-eye view of practices and trends that I believe will become increasingly

salient throughout rural China. There remains little doubt today that private enterprise will

become progressively more important in China's economic life in the decades to come,27 and we

can expect this private entrepreneurship to develop along lines somewhat similar to Xiqiao. The

patterns found in Xiqiao are likely to be reproduced a thousand times over. We can expect

attempts by would-be small entrepreneurs across China to form partnerships as a means to amass

the capital needed to establish small enterprises, and with many such partnerships in turn

dissolving into separate family firms. It is a pattern for developing private enterprise that has

strong social roots in China.

Increasing incidences in China of locational specialization should also be expected. At

present, despite the "opening up" of inter-regional trade under the economic reforms, many of

the provincial and county governments continue to insist, much as in Mao's days, on erecting

duplicative industry for one type of product after another. As one extraordinary example, twenty-

two of China's thirty provinces have listed automobile manufacturing as a key provincial

industry.28 Similarly, watch, bicycle and small electronics factories (to name but a few

industries) are spread across the landscape, with their localized markets still somewhat protected

by administrative boundaries. China's more low-tech industries exhibit an even greater profusion

of small, dispersed, semi-protected factories.

In future, as obstacles to trade across China's internal political boundaries continue to

recede, we can expect much of this duplication in manufacturing to disappear, with the less

efficient and less strategically located factories closing. As this occurs, we can expect that, much

as has already occurred in Xiqiao, particular regions and localities which enjoy an initial

competitive edge will begin to dominate specific national or macro-regional market niches. In

short, even if not as dramatically as in Xiqiao, the pattern of specialization witnessed in the

township is likely to become much more common in China during the decades to come. Indeed,

more generally, the findings for Xiqiao -- on the backgrounds and characteristics of

entrepreneurs, on how they get started, and on their local concentration in one industrial sector --

20

afford us a glimpse into the next stages of rural Chinese development.

ENDNOTES 1 This research project was funded by the Asia Research Centre at Murdoch University and by the Australian National University. Our deepest thanks also go to Eva Hung and Lam Tao-chiu, two PhD students at the Australian National University, who joined us in the fieldwork.

2 The author, a sociologist, is head of the Contemporary China Centre at the Australian National University and co-editor of The China Journal. This research project was funded by the Asia Research Centre at Murdoch University and by the Australian National University. Thanks are owed to Dr. Anita Chan, Eva Hung and Lam Tao-chiu, who accompanied me during the fieldwork for this paper.

3On the growth of the rural private sector (including private petty commerce), and also on the difficulties across China that the small entrepreneurs have faced, see Susan Young and Yang Gang, "Private Enterprises and Local Government in Rural China", in Christopher Findlay, Andrew Watson, and Harry X. Wu (eds), Rural Enterprises in China (New York: St. Martin's Press, 1994). An accelerating growth of private enterprise is evident even in the type of rural area that has, up to now, been dominated by collective industry; on this, see Jean Oi, "The Evolution of Local State Corporatism", in Andrew Walder (ed.), Zouping in Transition (Cambridge, Mass.: Harvard University Press, 1998), pp.35-61. Oi notes, e.g., that "by the end of the decade it was no longer economically advantageous [for the officials in a county in Shandong that she researched] to rely exclusively on collectively owned township and village enterprise", and that "By the early 1990s, private firms became a new target of local plans, and the sector began to receive the kind of preferential treatment earlier reserved for public firms" (p.36). Gregory Ruf, who returned to rural Sichuan to conduct research in the summer of 1998, discovered trends favorable to the private sector that were very similar to what Oi observed in Shandong. (Personal communication from Ruf.) Also see Susan Young, "Ownership and Community Interest in China's Rural Enterprises", in Kjeld Erik Brodsgaard and David Strand (eds), Reconstructing Twentieth-Century China (Oxford: Oxford University Press, 1998), esp. pp. 116-24.

4 Nanhai was elevated in 1992 into the status of a county-level "city" as a reward for its rapid industrialization. But in English this Chinese administrative term "city" is a misnomer, as much of Nanhai remains an area of villages surrounding rural towns, interspersed with expanses of agricultural activity. In recognition of this, we shall continue to refer to Nanhai as a county.

5See, e.g., Chen Qiyuan yu Nanhaixian fangzhi gongye shi (Chen Qiyuan and the History of the Textile Industry in Nanhai County) (Nanhai: Renmin Zhengzhi Xieshang Huiyi, 1987).

6The Chambers of Commerce in China are in turn offshoots of the equally exclusive Federation of Industry and Commerce (Gongshanglian). The Chinese government's strategy in establishing these exclusive associations for elite businesspeople is explained in Jonathan Unger, "Bridges: Private Business, the Chinese Government and the Rise of New Associations", The China Quarterly, no. 147 (September 1996), pp. 795-819.

7The wives may play a very significant role in the success of the businesses, but men usually occupy the top

21

formal position in Xiqiao's firms. This is similar to what Ole Bruun found among retail shops in the city of Chengdu. Business and Bureaucracy in a Chinese City: An Ethnography of Private Business Households in Contemporary China (Berkeley: Institute of East Asian Studies, 1993).

8Both urban and rural studies portray efforts by private businesspeople to ingratiate themselves with the officialdom and even to volunteer for political duties in order to secure needed political connections, and several studies have shown, too, that the families of political officials do well in business due to their connections. See, e.g., David Wank, "Private Business, Bureaucracy, and Political Alliance in a Chinese City", The Australian Journal of Chinese Affairs, no. 33 (January 1995), pp.55-71; Ole Bruun, Business and Bureaucracy in a Chinese City, Ch. 5; Ole Odgaard, "Entrepreneurs and Elite Formation in Rural China", The Australian Journal of Chinese Affairs, no. 28 (pp. 89-108); Susan Young, Private Business and Economic Reform in China (Armonk: M.E. Sharpe, 1995); Hy Van Luong and Jonathan Unger, "Wealth, Power and Poverty in the Transition to Market Economies: The Process of Socio-Economic Differentiation in Rural China and Northern Vietnam", The China Journal, no. 40 (July 1998) pp. 85-9.

9The autonomy of the Xiqiao business community vis a vis the local state is discussed in Jonathan Unger and Anita Chan, "Inheritors o the Boom: Private Enterprise and the Role of Local Government in a Rural South China Township", Working Paper No. 89 (Perth: Murdoch University, 1998).

10On this, see ibid.

11Similar findings on the importance of family heritage and personal experience, from sites elsewhere in China, are discussed in Hy Van Luong and Jonathan Unger, "Wealth, Power and Poverty...", p. 84.

12In the mid-1960s, 95 percent of the manufacturing enterprises in Taiwan employed fewer than a hundred employees (Richard Stites, "Small-Scale Industry in Yingge, Taiwan", Modern China, vol. 8, no. 2 (April 1982), p. 248) and the rate of growth in industrial employment was greater outside of the urban centers than in them. Thus, according to Taiwan's 1971 industrial census, half of all industrial employment lay in rural districts (Samuel Ho, "Decentralized Industrialization and Rural Development: Evidence from Taiwan," Economic Development and Cultural Change, vol. 28, no. 1, p. 83. Also see Alice H. Amsden, "Big Business and Urban Congestion in Taiwan: The Origins of Small Enterprise and Regionally Decentralized Industry", World Development Vol. 19, No. 9 (September 1991), pp. 1121-35.

13Samuel P.S. Ho, "Small Scale Industries in Two Rapidly Growing Less Developed Countries: Korea and Taiwan", Studies in Employment and Rural Development, no. 53 (Washington, D.C.: World Bank, 1978); Susan Greenhalgh, "Families and Networks in Taiwan's Economic Development", in Edwin A. Winckler and Susan Greenhalgh (eds), Contending Approaches to the Political Economy of Taiwan (Armonk: M.E. Sharpe, 1988), p. 229.

14Wang Hong-zen, "Mobility Patterns and Strategies Among Taiwan's Small and Medium-Scale Business People" (Doctoral dissertation, Australian National University, 1998), p. 110. In a parallel light, the data from the 1992 General Survey of Social Change in Taiwan shows that only 13% of the small and medium-scale companies on the island are partnerships (ibid).

15ibid, p. 112. Similarly, a study in Lukang, a small city in Taiwan, found that "Most partners in Lukang

22

businesses are brothers, or fathers and sons. ... The business [with brothers as partners] is described as 'just like a corporation...' Partnerships between brothers do not endure indefinitely, and there are no large, complex businesses run jointly by several brothers and their sons." (Donald R. DeGlopper, "Doing Business in Lukang", in W.E. Willmott (ed.), Economic Organization in Chinese Society (Stanford: Stanford University Press, 1972), p. 317.

16Wong Siu-lun, "The Chinese Family Firm: A Model", The British Journal of Sociology, Vol. 36, no. 1 (March 1985), pp. 62-3.

17For Taiwan, see Susan Greenhalgh, op. cit, p. 23; Wang Hong-zen, op. cit. Both of these sources note that the wife or another female family member often takes charge of the firm's accounts.

18Gwo-shyong Shieh, "Boss" Island (New York: Peter Lang, 1992), p. 178.

19Wang Hong-zen, "Mobility Patterns and Strategies...".

20ibid, p. 105.

21Wang Hong-zen, op cit. According to Wang, large numbers of such businesses do take out loans from banks, but principally as part of a complicated tax dodge that has become commonplace in Taiwan.

22A very similar pattern of strategies of establishing and expanding private factories is evident, too, in a just-released study of a village in Jinjiang Township, Fujian Province, that is filled with private footwear factories. Just as in Xiqiao (and Taiwan), a great many of the enterprises in this Fujian village were started as partnerships between friends and relatives; and then, once successful, most of these were divided up into family firms. In these family enterprises, the wife similarly plays a significant management role in overseeing production: the Fujian study in fact notes that in many of them "the men are in charge of matters external to the firm; the wives are in charge of what goes on inside it" (nan zhu wai, nu zhu nei).(The report also notes, though, that much as in Xiqiao, some of the "successful shoe factories have already discarded the family-firm form of management".) Finally, almost all of the factory owners in the Fujian village, again akin to Xiqiao and Taiwan, have opted to expand their operations through high rates of savings and reinvestment rather than turn to bank credit. Chen Xiangshui and Ding Yuling, "Gaige kaifang houde siren qiye jingying: Fujian Jinjiang Yijiacun de xiechang qiye" (The Management of Private Enterprises in the Period of Reform and Opening: Footwear Manufacturing Enterprises in Yi Family Village, Jinjiang Township, Fujian Province), in Huanan nongcun shehui wenhua yanjiu lunwen ji (A Collection of Essays on Society and Culture in South China's Villages) (Taibei: Zhongguo Yanjiuyuan Minzuxuesuo [Taipei: Ethnology Institute of the Academia Sinica], 1998), pp. 287-310.

23A street filled with restaurants to feed the buyers, opened by immigrant restaurateurs from throughout China, reflects the diverse regions of China from which the buyers arrive. Several Sichuanese restaurants that cater almost exclusively to buyers from that province squeeze alongside a few that specialize in Zhejiang cuisine, and restaurants that cater to Hubei, Hebei, Jiangsu, and Shandong tastes.

24Wilfred Smith, An Economic Geography of Great Britain (London: Methuen & Co., second edition, 1953), pp. 469, 475; on locational concentration also see Edward H. Lorenz, "Trust, Community, and Cooperation: Toward a Theory of Industrial Districts", in Michael Storper and Allen J. Scott, eds., Pathways to Industrial

23

Development and Regional Development (London and New York: Routledge, 1992).

25Paul Krugman, Geography and Trade (Leuven and Cambridge: Leuven University Press and MIT Press, 1991), p. 10.

26Exactly the same phenomenon, during the same years, has occurred in Fujian Province's Jinjiang Township. There, it had become evident by the mid-1990s that the larger enterprises were doing better while the smaller ones were being driven out of business through intensified competition and the capital requirements for upgrading machinery (Chen Xiangshui and Ding Yumin, "Gaige kaifang dehou....", p. 296).

27For evidence, see footnote 1.

28Lance Gore, "The Communist Legacy in the Chinese Economy", The China Journal, No. 42 (July 1999).