Forms of and Influencing Factors on Informal Entrepreneurship in China - Dissertation Example

? Informal entrepreneurship: Forms of and influencing factors on informal entrepreneurship in China 0 Introduction Many business scholars inrecent years have argued that sound financial and legal systems are vital to a nation’s economic growth. However, China lacks most of the above, but the country’s economy is growing like gangbusters. The answer is: ‘Informal’ Entrepreneurship is the key to China’s success. (Knowledge@Wharton, 2011) Since the end of Cultural Revolution in China, the informal entrepreneurs occurred before reform and through the 80’s, consisting of very small-scale activities in retail and services such as street vendors. Some of them achieved success beyond their expectations. But for most, business was a means of subsistence. However, with the development of economy in China so far, motivations for many informal entrepreneurs are not only subsistence-related; but also their informal activities are directed at maximizing their business’s profitl. Allen (2002) claims that since China officially became a member of the WTO in 2001, and has agreed to undertake additional economic reforms, the market is freer, and the key to the country’s success lies in its fast-growing ‘informal’ sector. Therefore, there has been increasing interest in researching the types of informal entrepreneurship and the factors that have led the people to do it in China. 1.1 What is informal entrepreneurship in China? However, what is the informal entrepreneurship of China? Allen (2002) defines this sector as all firms or individuals not controlled by the government or publicly traded. Informal entrepreneurship is a vast term that includes self-employment, and private enterprises employing the unregistered migrant workerse. unlike the formal entrepreneurship that is ubject to the regulation and management by the government, and is encouraged, supported and managed by the government (Tsinghua University, 2006). yInformal entrepreneurs in China have established their businesses on a variety of locations ranging fron streets, sidewalks and back alleys of cities where they serve as petty traders, street vendors, coolies and porters, small-scale artisans, barbers and shoeshine boys, to offices and portions of their houses where they offer such services as medical operating and teachinc. 1.2 Research aims & questions This project will focus on two main questions: 1. What are the main types of informal entrepreneurship in China? 2. Why there are lots of people choosing to do this in China? Both of these questions will be researched by combining the unique contextual conditions of China, as well as the government policies and regulations. for instance, the largest population is one of the most important factors to be concerned as it increases the needs of people to be addressed by the government and encourages people to find alternate means of earning money since the number of jobs is limited.  Additionally, it is very interesting that almost all studying abroad Chinese students have always reflected on the same problem: they are complete strangers to the lifestyle of people in Europe because there are less and less ‘informal stores or street vendors’ in the European countries, especially at night, they miss China so much. Thus, it seems the demand of ‘informal business’ is quite large and sustainable in China since many businesses are operated 24/7 thus providing the consumers with more flexibility in terms of approaching the informal entrepreneurs. The aim of this research project is to provide a theoretical base within Chinese context and special nation conditions of China in order to help foreign practitioners as well as local entrepreneurs to gain a deeper and more practical insight into Chinese informal entrepreneurship environment. 2.0 Literature Review This section reviews the literature to discuss what numerous authors, scholars and researchers in the past have said about informal entrepreneurship in general and that in China in particular. Topics discussed in this section include the growth of informal entrepreneurship in China, the factors that have played a role in the growth of informal entrepreneurship in China, some Chinese norms particularly Guanxi and its impact on informal entrepreneurship, and the laws and regulations related to the informal entrepreneurship in China. Informal entrepreneurship can be defined as a kind of entrepreneurship “involving somebody actively engaged in starting a business or is the owner/manager of a business that is less than 42months old who participates in the paid production and sale of goods and services that are legitimate in all respects besides the fact that they are unregistered by, or hidden from the state for tax and/or bene?t purposes” (Williams and Nadin, 2010, p. 363). Informal entrepreneurship has existed for many centuries in the history of China in a variety of forms that included but were not limited to casual, seasonal, temporary, hourly-paid, and part-time, though the scale was never as vast as it is today. Fig. 1 demonstrates the growth of informal entrepreneurship in China. From Fig. 1, it can be inferred that China’s economy has advanced uninterruptedly since the start of the 21st century because of the growth of both the public and private enterprises. Numerous factors have contributed to the growth of informal entrepreneurship in China. For one, the act of the monetary authorities of China to quell inflation by tightening the lending of money by trust companies and banks has driven the borrowers into the informal market (The Economist, 2011). Confucianism embodies certain values that might be the contributors of growth of the informal economy in China. "(Confucianism) clearly defines family and social orders, which are very different from the western beliefs on how legal codes should be formulated. Although this set of beliefs has never been formally adopted into the law, it has profound impact on the Chinese people and will continue to do so in the future” (Allen, Qian, and Qian cited in Wharton University, 2002). Sound corporate governance in China is also promoted by competition in addition to the cultural values prevalent in China. The informal entrepreneurs in China in their attempt to win over the public enterprises run their businesses without the fear of the intervention by government or investor-led takeovers. Fig. 1: Growth of informal entrepreneurship in China (The Economist, 2011). The term “informal employment” is not very old to be introduced in China. The labor authority in Shanghai introduced this term for the first time in the year 1996. “Informal employment (also known as ‘non-standard employment’ or ‘flexible employment’) as a flexible labour strategy has been gaining rapid attention in China since the late 1990s as a result of the massive downsizing in the state sector, the rapid expansion of the private economy, and the mass migration of surplus rural labour to urban areas” (Cooke, 2008, p. 4). There are three basic kinds of organizations in which the workers can be employed informally; the first type of organization is the one that operates in the formal sector, the second type of organization functions in the informal sector, whereas the third type of organization is an informal loosely formed organization. Sole proprietorship and joint venture are two fundamental types of informal entrepreneurship (JumpStart, 2007). “Although there is considerable discussion about who is most likely to participate in the informal economy, information on the socio-economic characteristics of workers who participate in the informal economy is relatively sparse” (Losby et al., 2002, p. 18). There are various factors that convince people to engage in informal entrepreneurship. It may be a better alternative to the formal employment in terms of increased profitability and more convenience, and be a means of achievement of a feeling of satisfaction, fulfillment, and recognition. Economic gain and social obligation are some of the drivers of Informal entrepreneurship (Campbell, Spencer, and Amonker, 1993). These are some of the potential motivational factors that have driven the people of China into informal entrepreneurship. 2.1 The fusion with “guanxi” Guanxi is a main business practice in the informal entrepreneurship in China. The literal meaning of the word guanxi is relationship. The word is made up of two different characters of which “guan” is the first character which means “a door” while “xi” is the second character which means …. Metaphorically, “guanxi” means that those who remain inside the door exist while those outside it do not. Guanxi is also used as a term for the act of giving favors. Guanxi is “the concept of drawing on connections in order to secure favors in personal relations” (Luo, 2007, p. 2). Guanxi is not only a business practice in the informal entrepreneurship in China but also one of the fundamental norms of the Chinese culture. “Chinese tend to be well in sync with the needs and sentiments of others and are also used to asking for and providing support” (Gellerstam and Wiesner, 2010, p. 15).  The growth of China’s economy is paradoxical since it fundamentally relies upon the growth of informal entrepreneurship for which sound legal and financial systems are considered a pre-requisite which are not there in China. “[T]his swath of the economy relies on factors such as cultural norms and economic competition to promote good corporate governance, and depends more on bonds of trust and reputation for financing rather than traditional Western sources of capital” (Wharton University, 2002). 2.2 Relevant laws and regulations Since the early 1990’s, the Chinese government has made numerous laws and regulations pertaining to the labor market. Implementation of the Labor Law of China in 1995 has landmarked these laws and regulations. Through these thaws, a legal framework has come into place which governs the employment relationship in principle. Alongside, a system of dispute resolution in the labor market was introduced, though it has not been enforced robustly (Taylor et al., 2003). The labor standards introduced in China other than the freedom of association “are not markedly inferior to those of comparable countries and indeed many developed nations” (Cooney, 2007, p.674). The factor that is the cause of most of the problems in the contemporary labor market in China is poor enforcement of the laws and regulations (Cooke, 2005; Taylor et al., 2003). There are a multitude of factors that complicate the Chinese system that include but are not limited to directive regulations applied at the level of provincial, municipal, and central government, ambiguity of some regulations, diversity of laws, and poorly defined channels which the labor can utilize to increase their compliance with the regulations.  The employment-related regulations in the contemporary labor market mostly pertain to the formal entrepreneurship that cultivates formal employment relationships (Hu, 2004). There is a lot of ambiguity surrounding the application of the same laws and regulations to workers in the informal entrepreneurship. Taking benefit of the doubt, employers tend to argue for the exemption of these laws. However, despite these problems, there are certain regulations of the Chinese labor market that pertain to the informal entrepreneurship. In the year 1999, the government of China implemented the Labor Market Wage Rate Guideline in several cities, of which Shanghai was the forerunner. The government announced wage rate for up to 627 professions by the end of the year 2001 (china.org.cn, 2003). 3.0 Methodology A qualitative methodology was adopted for this research in which the information was retrieved from the research participants via focus group discussions. Qualitative methodology was best-suited to the topic of research since the research fundamentally relates to sociology; a field of science that discusses the motivations and aspirations of people involved in a certain practice. The prime objective of this research was to identify the types of informal entrepreneurship in China and the factors that motivated a lot of people in China to establish informal businesses. The best way to achieve this was by conducting interviews with the informal entrepreneurs in China since that allowed the researchers to have a greater insight into the different types of informal entrepreneurship in China and the actual factors that have motivated the Chinese people to endorse it. Focus group was chosen as a way to interview the research participants because it was not only convenient for both the researchers and the research participants as it saved time but also served as a brain-storming session for the research participants where they could not just listen to the responses of their fellow participants but could also criticize them and add to their responses to make the information more comprehensive and well-analyzed. A potential con of using focus groups to retrieve information from the research participants include group think, while its pros include retrieval of more information in lesser time, and reinforcement of ideas and brain-storming of the research participants that enables them to optimize on their potential to respond to the questions asked. From the literature review, two main types of informal entrepreneurship in terms of the scope and nature of business were identified i.e. sole proprietorship and joint-ventures. While many people in China engage in informal entrepreneurship to earn some money to afford the basic necessities of life, there is a considerable population of informal entrepreneurs whose aspirations to do informal business come from things beyond money, like power, recognition, and time-pass. Therefore, two focus groups were selected for interviewing, each containing 5 participants in total, one of which was of the informal entrepreneurs who were sole proprietors and belonged to different businesses of their own while the second focus group of interviewees contained informal entrepreneurs who had a joint-venture. Individual participants were approached on telephone and were invited on a high-tea in a restaurant. It was hard to establish a time for meeting owing to the different schedules of the individual participants. Therefore, with mutual consensus of the research participants, the focus group sessions were conducted on consecutive weekends, first with the group of sole proprietors followed by the group of informal entrepreneurs having joint venture. In addition to the focus group sessions, a case studs from secondary source (edwinnelsonsmedevelopment.com, n.d.) hae also been discussed to explore the risks and challenges in the establishment of informal entrepreneurship in China.  One limitation of the research was the subjectivity of criteria of judgment of the financial status of the informal entrepreneurs in China who were interviewed. The informal entrepreneurs were classified into two distinct groups of rich and poor depending upon the locality in which they owned the homes and their average monthly income. While these two are sufficiently strong depicters of the financial status of an individual, there may be other factors controlling the individual’s income and locality of residence. This study is limited in researching relevant materials and information such it is impossible to do a better research in Sussex’s library because of the time-constraints. Besides, being an outsider around some interview team members may also limit what is revealed to researcher while making some interviews with those informal entrepreneurs. Additionally, it is very difficult to get accurate information about these underground (or as a subset informal economy) activities on the goods and labor market, because all individuals engaged in these activities wish not to be identified. Hence, the estimation of the informal economy activities can be considered as a scientific passion for knowing the unknown (Schneider, 2002). Future research needs to concentrate upon objective measures of distinction between the individual informal entrepreneurs to classify them according to their financial status. In addition to that, there was no objective criterion of classification of the interviewees between the rich and the poor informal entrepreneurs. Establishment of an average monthly income of 4000 Yuans as a line of division between the rich and the poor informal entrepreneurs may be very subjective, as an informal entrepreneur earning lesser than this limit might actually be richer than another earning more than this limit a month because of alternate sources of income and vice versa. Therefore, future research should focus upon the establishment of a stronger criterion of classification of the informal entrepreneurs in China into the rich and the poor. Another limitation of the research was the reliability of information retrieved from the interviewees. Since the interviews were conducted as focus groups, the interviewees’ answers to the questions were inspired by each others’ responses. Many a times, it was the response of the first two or three interviewees that mattered. The last ones reproduced the same information on their turn.  This study will quote great amount literatures about informal entrepreneurship in developing countries includes China, and explain the subsistence of types and motivations of informal entrepreneurship. Moreover, using case study of some classic informal businesses in China as an argument, analyzing why there is a huge number of people doing ‘these’ types of informal businesses and become successful in China. Furthermore, this study will make a conclusion after the documentation review and analysis. 3.1 Focus group 1 The first focus group consisted of discussion with 5 informal entrepreneurs in China that were sole proprietors. The financial status of the interviewees was judged by the area in which they owned their homes, and their average monthly income. Table 1 shows the characteristics of the participants of Focus Group 1. The first informal entrepreneur included in this category, An, has a private construction business. The second interviewee, Bai, owns fruit farm and has a well-established business of fresh juices and cocktails. The third interviewee, Chang, is a Civil Engineer and has a private business of software teaching. The fourth interviewee, Hui, is a Fashion Designer by profession and has his own clothing line. The fifth interviewee, Kang, has a restaurant that he owns and operates individually.  Table 1: Characteristics of Participants of Focus Group 1 Participant Name Informal Business 1 An Construction 2 Bai Farming 3 Chang Software teaching 4 Hui Fashion designing 5 Kang Restaurant Focus group 2 This interview was conducted with a focus group of 5 poor informal entrepreneurs in China that had a joint-venture. They were all women and belonged to the same extended family. Their names were Ai, Bik, Chun, Daiyu, and Li. All were into the same business of cloth-sewing. They produced a wide range of designs and patterns included embroidered classic and bridal wear inspired from the Pakistani and Indian designs. Their clothes also catered to the consumers of all age-groups ranging from new-born babies to old women. They just produced clothes for women. They have been into this business for over ten years. Table 2: Characteristics of Participants of Focus Group 2 Participant Name Informal Business 1 Ai Cloth-sewing 2 Bik Cloth-sewing 3 Chun Cloth-sewing 4 Daiyu Cloth-sewing 5 Li Cloth-sewing For both focus groups the topic guide consisted of six questions. Table 2 shows topics against each question. The questions will be mentioned hereafter through the topics listed against each question. Table 2: Questions and Topics Question Number Questions Topic 1 What are the types of informal entrepreneurship in China? Types 2 Which types do you belong to? Belongingness 3 Which one do you think is the most challenging? Most challenging type 4 What motivates you to do informal entrepreneurship? Motivations 5 How do you think about informal entrepreneurship in China? Perceptions 6 How do the laws and regulations of the labor market affect your business? Effect of laws …. Responses of each of the five interviewees were recorded for the focus group topics. 3.2 Case Study Subjectivity of the knowledge about laws and regulations of the labor market has caused the Chinese entrepreneurs considerable troubles in the past. One such company that experienced such issues is the Dalian Food Exporters Co. Ltd, that was established as an informal entrepreneurship and commenced working in the year 1998 (edwinnelsonsmedevelopment.com, n.d.). The business was started by a Chinese entrepreneur who was the sole investor and the Chairman of the company. The business was started to provide a contact in Japan with a variety of wild edible plants that included but were not limited to dulwat, brake, wild celery, fastasia shoot, fungi, and osmund. The plants were mostly exported to Japan where they were packaged to be sold in the market. In 1998, the Chairman of the company purchased packaging equipment and recruited a total of 4 salesmen to package the goods for release in the Chinese market. The duty of the salesmen was to bring orders to the factory and get them delivered and they got a 5% commission for each order (edwinnelsonsmedevelopment.com, n.d.). The problem arose when the accountants of the client companies refused to make the payment as the invoices documentation lacked the initials of people who had authorized the initial order because they were not recorded by the salesmen and was in effect, a breach of regulations. The Chairman fired the salesmen and ended the packaging of the products in the Chinese market, though it continued the trade with Japan. The Chairman later recruited a new executive as the Marketing Manager of the company with an intention to make a second attempt to release the packaged goods for sale in the Chinese market. After making an inquiry of the previous attempt, Wu Qun reached the conclusion that the first attempt to sell the goods in the Chinese market failed because of the Chairman’s lack of awareness regarding the practices, laws, and regulations that governed the domestic sales in China. Once again, 5 salesmen were recruited by Wu Qun who would be trained so as to be enabled to operate in a system that works on signed orders and well-defined conditions of contract.  3.3 Analysis Table 3.1 shows the responses of the research participants from both focus groups to the questions asked. Topic Respondents Focus Group 1 Focus Group 2 R1 R2 R3 R4 R5 R1 R2 R3 R4 R5 Types SP & JV SP & JV SP & JV SP & JV SP & JV SP & JV SP & JV SP & JV All working partners, and combination of working and sleeping partners Belongingness SP SP SP SP SP JV JV JV JV JV Most challenging type SP SP SP SP JV JV SP SP SP SP Motivations Money Money Escape from job Money Escape from job Money Money, fame, Money, empowerment, independence, and recognition Money Good use of time Perceptions Economic growth Economic growth Guanxi Guanxi Economic growth and guanxi Means of financial assistance of spouse Means of financial assistance of spouse Blessing of life Effect of laws Don’t know Don’t apply Don’t apply Don’t know Don’t know Don’t know Don’t know Don’t know Don’t know Don’t know All interviewees in the first focus group and three interviewees in the second focus group identified sole proprietorship and joint venture as the two fundamental types of informal entrepreneurship in China whereas two interviewees in the second focus group identified other types. Four interviewees in the first focus group said that they derived motivation for having an informal entrepreneurship because it pays them off really well whereas one interviewee in the first focus group said that informal entrepreneurship provides him with freedom from rules that are enforced in the formal employment. On the other hand, four of the interviewees in the second focus group said that it is mainly money that encourages them to have informal entrepreneurship whereas one interviewee in the second focus group said that constructive use of time drives her motivation to have informal entrepreneurship. Besides, independence, fame, empowerment, and recognition were also identified as motivational factors by some. All the interviewees in the both the focus group said that informal entrepreneurship in China is both a secret of China’s economic growth and growth of social networking whereas three interviewees in the second focus group said informal entrepreneurship has had very positive effect on their relationships with others specially their spouses. Since most the interviewees in the first focus group were all sole proprietors having small businesses, they didn’t know much about the laws and regulations in the labor market in China, though they all pay taxes upon their individual businesses and tend to keep their workers satisfied enough to avoid labor issues. Interviewees in the second focus group hardly had any idea of what laws and regulations apply to their business. 3.4 Discussion Social networking was found to be a key driver of the rich into informal entrepreneurship in China. This finding coincides with the finding of John Osburg, who is an Assistant Professor at the University of Rochester. Osburg found that a vast majority of the new rich population in China has been into entrepreneurship (University of Rochester, 2012). Osburg noticed that the trend of informal entrepreneurship among the rich people in China surfaced as a result of cultivation of relationships with other entrepreneurs and people in power like the state officials. These social networks serve as catalysts in the growth of informal entrepreneurship since people use their links to gain support for different aspects of businesses that include but are not limited to the arrangement of capital, collection of information about the rising trends in the market, and gathering information about successful business strategies and practices. Families are the bedrock of both the Chinese society and Chinese business. In a vast majority of cases, Chinese businesses are family businesses (Jansson, 1987, p. 27). The focus group of the 2nd interview provides an evidence for the same where the women were related to one another and were running a family business of cloth-sewing. Although several ways of arrangement of the funds for the business were described by the informants, but the prime way was borrowing from the relatives. Interactions that later lead the entrepreneurs to cooperation in the business commence in an informal manner at public events, and such social gatherings as birthday parties and weddings. Networking is one of the most fundamental essentials of advancement in business in China (Seagrave, 1996, p. 341). Chinese entrepreneurs use their contacts to locate the person who is the most suitable to resolve a certain issue that they have encountered. The informal entrepreneurship in China boils down to social networking as has been argued by various authors in the past (Lasserre and Schutte, 1995; Hoon-Halbauer, 1994) and confirmed by the focus group of the rich informal entrepreneurs in the 1st interview. The term used to signify the distinctive feature of the informal entrepreneurship in China as a business that cultivates on social networking is “gaun-xi” that means “connections”. “Good gaun-xi both inside and outside the firm is a guarantee of success at the personal as well as at the professional level” (Bjerke, 2004, p. 8). One of the prime challenges in the growth of informal entrepreneurship in China is the entrepreneurs’ lack of knowledge about the laws and regulations that apply on their businesses. Many companies like Dalian Food Exporters Co. Ltd have incurred losses in the past in their attempt to do business in the domestic market because of the lack of awareness of the rules that apply. Healthy development of informal entrepreneurship in China needs a balanced system of social security, an objective and effective legislative framework, and a sound mechanism of representation which adequately represents the interests of both the employers and the workers. Workers employed in the informal entrepreneurship have a lot of needs but no sound platform to raise their voice to obtain them. The rapidly changing traits of the populations of employers and workers, the ineffectiveness of the Chinese trade union, and the ever-increasing challenges in the way of protection of labor rights for the Chinese government have been recognized by several authors (White, 1996; Chan, 1998; Lee, 1999). 4.0 Conclusion The informal entrepreneurial stories of the interviewees and the case studies in China discussed elaborate the process of establishment of an informal entrepreneurship in China and the conditions and factors that help the businesses flourish. From the processes of development explored, it can be inferred that the entrepreneurial activities commenced by the entrepreneurs by means of social networking forms a cluster. The interaction between people with capital and others with ideas has led to the development of an entrepreneurial climate in China, in which Chinese norms and culture reflect. The mutual understanding of the Chinese entrepreneurs is shaped and reinforced via the same interactive process. Put in simple words, the interwoven interactions assist the people in the development of a shared meaning and identify ideas for social networking, thus forming the clusters. Both the rich and the poor informal entrepreneurs in China heavily rely upon family relations and guanxi to expand their business and tackle the challenges that come their way. The types of informal entrepreneurship in terms of the scope and nature of business is sole proprietorship and joint-venture, with the examples of the latter far exceeding in number as compared to the former given the strong climate of social networking and joint-effort-making in China. The main motives of people indulging in the informal entrepreneurship is to eradicate poverty, improve their social status, have an independent source of income, have recognition and the sense of achievement, and most importantly, to expand their social network because this norm lays the foundations of the cultural and ethical framework of the Chinese society. Risks and challenges for the informal entrepreneurs in China include but are not limited to lack of sufficient awareness about the laws and regulations of the labor market that apply on the businesses, and lack of support from the government. Most of the interviewees declared sole proprietorship and joint venture as the two types of informal entrepreneurship in China. The interviewees in the first focus group all belong to the sole proprietorship type whereas all interviewees in the second focus group had a joint venture. Money was identified as the prime motivator of having informal entrepreneurship for interviewees by both the focus groups. Informal entrepreneurship in China has been recognized by most of the interviewees as the secret of growth of China’s economy and a catalyst in improving relations and growth of social network. From the responses, it can be concluded that good personal relationships with people in China help people develop good business relationships. Most of the interviewees in both the focus groups lacked objective knowledge of the laws and regulations of the labor market in China and the level to which they applied on their respective businesses.  5.0 Limitations of the Research However, considering the time-constraints and the convenience of the interviewees, focus group interviews were conducted. Future research should particularly focus upon removing this bias from the information collected from the interviewees by arranging separate interview with each interviewee. Another factor that might have affected the results of this research is the fact that the interviewees in the first focus group were all men whereas the ones in the second focus group were all women. Gender difference might have played a role in the difference in their responses and their respective levels of knowledge that reflected in their responses. 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