itK 3C9 PSD Occasional Paper No. 20 December 1995 Cadre Networks, Information Diffusion, and Market Production in Coastal China Jean C. Oi 5 The World Bank Private Sector Development Department PRIVATE SECTOR DEVELOPMENT DEPARTMENT OCCASIONAL PAPERS No. I Rhee, Katterbach, Belot, Bowring, Jun and Lee, Inducing Foreign Industrial Catalysts into Sub-Saharan Africa No. 2 Mody and Wang, Explaining Industrial Growth in Coastal China: Economic Reform... and What Else? No. 3 Biddle and Milor. Institutional Influences on Economic Policy in Turkey: A Three-Industry Comparison No. 4 Lanjouw and Mody, Stimulating Innovation and the International Diffuision of EnvironmentallY Responsive Technology No- 5 Tan and Batra, Technology and Industry Wage DJiffercntials: Evidence fom Three Developing Countries No. 6 Navarro, Reversal of Fortune: The Ephemeral Success qfAdjustnent in Venezuela, 1989-93 No. 7 Morales, Bolivia and the Slowdown of the Reform Process No. 8 Ibrahim and Lofgren, Governance and Structural Adjustment: The Egyptian Case No. 9 Tan and Batra, Enterprise Training in Developing Countries: Overview of Incidence. Determinants, and Productivity Outcomes No. 10 Sundaram. Teik and Tan, Vision, Policy and Governance in MalaYsia No. I I T/annatos, Labor Policies and Regulatory Regimes No. 12 Kessides and Willig, Competition and Regulation in the Railroad Industry No. I 3 Nagaoka. .1nrtidunping Policy and Competition No. 14 Ativas, Hankruptcy Policies No. 15 Brandio and Feder, The Case of Land Markets No. 16 Jebuni, Governance and Structural Adjustment in :hana No. 17 Ativas, Uneven Gorcinance and Fiscal Failure: Thc Adjustment Experience in Turkey No. 18 Van Arkadie, Economic Strategy and Structural Adjus tmrenlt in Tanzania No. I Tan and Batra. Technical Efficiency of SMEs: Comparative Evidence from Developing Economies Private Sector Development Department Occasional Paper No. 20 Cadre Networks, Information Diffusion, and Market Production in Coastal China Jean C. Oi* December 1995 *Associate Professor, Department of Political Science, Stanford University and Visiting Associate Professor (1995- 1996), Division of Social Science, Hong Kong University of Science and Technology. The author would like to thank Ashoka Mody for useful comments on an earlier draft, Professor Wang Huijiong of the Development Research Center (DRC) of the State Council, the People's Republic of China, for facilitating the research, and Li Shantong and Deng Zhigao of the DRC, for fruitful collaboration. Useful comments were also provided by audiences at the University of Western Ontario, and at Harvard University, especially Terry Sicular and Steve Goldstein. This paper was originally prepared for the World Bank project on "Explaining Growth: Chinese Coastal Provinces and Mexican Maquiladoras." The research for this project was financed by the World Bank Research Committee (RPO 677-50). While this paper has been cleared for inclusion in the occasional paper series by the Competition & Strategy Group, Private Sector Development Department, the views expressed are those of the author(s) and should not be attributed to The World Bank or any of its affiliates. The World Bank Private Sector Development Department ii Contents 1. Introduction ................................................................................................................... 1 2. Partial Explanations: Changing Buyer Preferences and the Diffusion of Technology .................................................................................................................... 3 3. Sources of Inform ation and T chnology ..................................................................... 5 Product Development and M arket Research .......................................................................7 Professional Trade Associations and Newsletters ...............................................................8 Personal Net works ...............................................................................................................9 The Political Transfer of Personnel................................................................................ 9 Formal and Informal Interactions among Firms..........................................................10 4. Decision-Maker Networks and the Diffusion of Information....................................13 The Information Grid.........................................................................................................13 Channels for the Diffusion of Inform ation ........................................................................15 M eetin g s ........................................................................................................................1 6 Requests for Assistance.................................................................................................17 Visits to M odels and Study Tours .................................................................................19 Equipment Supply Corporations...................................................................................20 5. Calculating Profit and Interpreting the Market .........................................................21 M arket M iddlemen ............................................................................................................23 Foreign Trade Corporations ........................................................................................23 Private Trading Agents/Brokers...................................................................................24 6. Conclusion .................................................................................................................. 25 III iv 1 Introduction 1.1 Increasingly, the market rather than the plan guides production in China. But how the market guides production, how information is obtained, and how it translates into market production remain conundrums. One example of this is the unanticipated finding by the World Bank of a wave-like synchronization of product development across regions in China's coastal provinces.' This finding raises questions about why and how producers imitate one another within a locality, and also how producers may imitate those outside their own localities. Both information and technology are involved. How does the diffusion of information and technology take place in China? 1.2 Mody and Wang, the authors of the World Bank study, put forth three hypotheses to explain this wave-like synchronization: 1) shifts in buyer preference; 2) industry-wide technology improvements rapidly transmitted along the coast; or 3) the diffusion of strategies among decision makers for promoting sector growth. Of the three explanations, buyer preference is considered the least likely. Technology transmission and decision-maker networks are considered more likely. However, because of the lack of micro-level data, none of these hypotheses can be adequately tested nor is it possible to detail how the decision-maker networks operate or how diffusion takes place. 1.3 My study is a follow-up to the above-mentioned work. It is based on interviews in coastal provinces and Beijing with officials at the central, provincial, county, township, and village levels, as well as with factory managers and owners.2 My research findings confirm Mody and Wang's hunch that the diffusion of strategies among decision makers for promoting sector growth is the most likely explanation for the wave-like synchronization in production. Mody and Wang are quite on the mark when they speculate that the "network of decision makers Ashoka Mody and Fang-yi Wang, "Explaining Industrial Growth in Coastal China: Economic Reforms ... And What Else?" PSD Occasional Paper No. 2, World Bank, July 1995. 2 A total of 62 formal interviews were carried out in Beijing. Shandong, Jiangsu, Zhejiang, and Guangdong, spread over nine different administrative units within the four provinces. This selection of provinces covers 4 of the 5 coastal provinces and Beijing studied by Mody and Wang--only Fujian, Shanghai, and Tianjin are missing from my sample. The research for my project was carried out between June and July 1994. Each interview lasted from one to three hours, the average interview was two hours in duration. I conducted the interviews in Beijing and Shandong, I was joined by two researchers, Li Shantong and Deng Zhigao, from the Development Research Center of the State Council. for most of the interviews in Jiangsu, Zhejiang, and Guangdong. 2 Cadre Networks, Information Diffusion, and Market Production in Coastal China provide a grid for information flows leading to replication of sectoral-targeting strategies...." But through my interviews I also was able to flesh out the identity and structure of the decision- maker networks. Cadres and local governments are among the key decision makers which structure production. As will be detailed below, they affect product choice, acquisition and diffusion of technology, and the marketing of finished products. Information follows the contours of the government bureaucracy and passes through routine channels of communication within and between levels of government. This combination helps explain how information can be diffused quickly and over such wide geographical areas. 1.4 I further found that there may not have been the need in all cases for the diffusion of technology across provincial boundaries to produce the wave-like synchronization of product development. Instead of diffusion of technology across provinces, in many instances it may be a case of activating existing technology within provincial boundaries. It is likely that each province has within its boundaries sufficient technical expertise to produce most of the light industrial items that dominate the economy, with the exception of sophisticated high-tech products. Even within China's villages, the lowest level of the administrative structure and supposedly the most technologically backward, there exist surprising pockets of expertise. The reason for this is due to historical circumstances that dispersed technical personnel to rural areas of the country. The wave-like synchronization of product development across provinces is part and parcel of the lack of regional specialization and diversification.3 This, as I shall show, is a legacy of the Maoist system. 1.5 China's reform experience is a story of path dependence altered by institutional change. The result is a hybrid strategy that utilizes capacities inherited from the Maoist state and forms found in capitalist developmental states. The Maoist system was plagued by economic inefficiency but this same legacy provided the foundation that allowed post-Mao China to turn in short order into an economic dynamo. Once the Maoist system was modified to allow for local initiative and the proper incentives were introduced to channel local talent toward economic development, both the central and the local state were left with an impressive array of policy instruments and political capacity, similar to that found in successful developmental states of East Asia.4 1.6 The following sections will examine the sources of information, the contours and composition of the decision-maker networks, and the process by which information is diffused through this network. Such details will allow a more informed assessment of the spatial flow of information and technology and its impact on the replication of production across different regions of China. It will provide an answer to why there has been such a widespread diffusion of information, even to the relatively backward areas of China's countryside. 3 Anjali Kumar, "Economic Reform and the Internal Division of Labor in China: Production, Trade, and Marketing," World Bank, March 4.1994. 4 For a fuller examination of how elements of the Maoist legacy were transformed into policy instruments similar to those used by East Asian NICs see Oi, "The Role of the Local State in China's Transitional Economy," China Quarterly, forthcoming, December 1995. 2 Partial Explanations: Changing Buyer Preferences and the Diffusion of Technology 2.1 Changing buyer preferences and technology diffusion both constitute part of the explanation, but neither is sufficient. Buyer preference fails to provide a satisfying analytical answer for the determinants of product choice. Similarly, diffusion of technology explains part of the puzzle, but again, it says nothing about how this diffusion takes place. Both explanations reflect the outcomes of a process, but neither shed light on the process itself. 2.2 This study recognizes that buyer preferences structure production in China. Entrepreneurs, managers, and officials again and again stress that shifting buyer preferences account for changes in product growth. When interviewed about the wave-like synchronization of production, they say that this is an expected reflection of the new market mentality. Producers, they say, will produce a product if there is a market and profits are to be made from this product. It matters little that ones neighbors are also producing the same item, as long as the market is big enough to make profits. Not to do so would lead to loss of profits. If the market gets saturated, then move on to the next hot market item. If in two years there is no longer money to be made from this product, others will not be making money either. 2.3 Officials in Beijing further confirm the importance of buyer preference when they complain that most producers have too simple of a market mentality that takes a short rather than a long term view of profit. They complain that production follows rather than anticipates demand. Central-level officials cite the household appliance industry as a prime example of such a market calculus that has resulted in stockpiles of unsold goods. Refrigerators are a favorite illustration. In 1978-79, when refrigerators were first made for household use, they were extremely profitable. People lined up and had to use personal connections (guanxi) to buy them. In response, refrigerator factories were built everywhere in China. Now supply far exceeds demand and the crowded field of producers is facing difficulties.5 2.4 Obviously buyer preference is important in shaping product line, but how is buyer preference known to the producers? Do producers themselves decide or are buyer preferences translated and communicated to the producers by intermediary sources? Television commercials and newspaper ads now exist, but these are not the only nor the most important ways in which 5 China Interview 62094. 3 4 Cadre Networks, Information Diffusion, and Market Production in Coastal China producers learn about the market. Moreover, if entrepreneurs engage in copying, how is this possible? How can so many producers obtain the technology and capital to enter the market? Mody and Wang speculate that technology diffusion takes place along the coastal areas. If this is the case, how does technology diffusion take place? What is the process by which technology is acquired and transferred? 3 Sources of Information and Technology 3.1 A first step to understanding how market production works in China is to identify the sources of market and technology information. This will provide clues about the decision- making process that determines product line and how information is diffused. Once we know what these sources are, the spatial distribution of these sources, and the exclusiveness of this information, then we can ask whether it is a process of diffusion across provinces that accounts for the wave-like synchronization, as Mody and Wang hypothesize, or whether each province has sufficient resources to produce these products independently. 3.2 The way producers acquire information and technology is varied and complex, although this is not always reflected in the initial answers that one gets to questions about technology acquisition. A major point to emerge from the interviews is the relatively low capital intensity of production and the incremental nature of technology improvement in rural collective and private enterprises. Many successful enterprises reported that they start out with relatively simple items produced with relatively inexpensive technology. They stressed that product development depends on the success of the original product line. New products usually incorporate the technology of previous products. Only after factories acquire substantial amounts of capital do they start investing in higher-grade equipment and move up on the product ladder. 3.3 For example, a private furniture factory in Xinhui county, Guangdong, started out in 1980 as a three-man operation with 2,000 yuan in capital, using scrap parts from a state-owned bicycle factory to build stools. It now employs 1,000 workers and exports over 10 million dollars a year.6 Only after the stools sold and capital accumulated did it buy better production materials to produce higher quality stools. This took two to three years. The first addition to its product line was ironing boards, which relied on the factory's existing technology. For the first 5 years this factory employed less than 25 people and had investments of less than 1 million yuan. Expansion occurred in the later part of the 1980s when the work force grew to 60. In 1991 it increased to 100, took off in 1993 when it grew to 400, and by 1994 there were 1,000 workers with a total investment of 60 million yuan. 6 This originally started out as a small hardware processing plant that made nails for a county-level state-owned enterprise. After losing money on the operation, the three decided to make stools. This decision came about after seeing large amounts of scrap at a nearby bicycle factory that could easily be recycled into material for stools. 7 China Interview 7794. 5 6 Cadre Networks, Information Diffusion, and Market Production in Coastal China 3.4 A private chemical factory in Hangzhou has a similar history. It started out in 1987 with five workers and a loan of 2,000 yuan from friends and relatives. Only after three years of production was a factory building constructed, the work force increased and advanced technical personnel hired from local state factories to build up its product line. By 1993, there were up to 200 workers with a total investment of approximately 45 million yuan. 3.5 Of the items that Mody and Wang identify as growing significantly during the five-year period, only chemical fibers, pharmaceutical chemicals, and electronics require a relatively high level of technology for production. Even so, it is unclear how much technology actually is required because of the range of products such categories encompass. According to China Foreign Economics Statistics, the category "chemical manufactured goods for daily use" includes soaps, perfumes, essential oils, and matches--products that can be produced with relatively little technology.9 This point is highlighted in an interview with a Hangzhou private chemical factory, which has now grown to be one of the largest enterprises in its township. How could former villagers (i.e., peasants) start a chemical plant? The answer is that the so-called chemical products consisted mostly of liquid soap. The entrepreneur explained that he didn't need much technology or sophisticated knowledge. In fact, he didn't even have a factory building; the business started in his house with little more than a big pot. 3.6 If these stories are typical and the technology is relatively simple and requires little capital, then we have a partial explanation for why there can be such massive shifts in product line from year to year--the entry and exits costs are fairly low. But this is not a very complete answer and one that soon may be outdated. Even if the above generalizations are valid, one must question how long the simple technology argument will hold in today's increasingly competitive market environment. Small producers may have been able earlier to get away with relying on fairly simple technology because China was just coming out of an economy of shortage. Entrepreneurs and officials who say that Chinese consumers are happy simply to have products on the shelves may be right for the earlier period of the reforms and for the disadvantaged segment of the country today. But the larger and more successful enterprises now realize that the only way to survive is to continue to improve their product design and increase their market share in what they see as an increasingly competitive environment where it is increasingly difficult to make profits. 3.7 China is entering a stage where producers need to sink large investments in research and production design to provide product choice, variation in color, style, etc. Competition is particularly fierce in the export market where quality is a prime consideration. Local officials and producers stress that success increasingly depends on scale and the ability to dominate a market. Those who succeed are those who get into the market first, dominate the market, and thus establish their name. One provincial-level economic commission official vividly described the competition among producers as similar to a military battle. If an enterprise China Interview 7194. 9 1979-1991 China Foreign Economic Statistics. Beijing: China Statistical Information and Consultancy Service. 1992, p. 162. Sources of Information and Technology 7 wants to dominate a new market it must ready its soldiers, i.e., its products, and when everything is in place, meaning when there are sufficient quantities of a product, then it bombards the market with its goods and establishes a name for itself as the leading producer of a certain product, thus undermining the position of potential competitors. How one dominates the market is by providing better service and ultimately better products. o 3.8 The more fundamental reason for probing more deeply is to get a better handle on where exactly the ideas, expertise, and capital come from, as minimal as they may be. For example, the successful private soap makers cited above turn out not to have been just peasants. One of the brothers in the business was a school teacher. He thus was likely to have some expertise or know where to go to get the needed information. There was also already a large soap factory in nearby Hangzhou. Were there any links between this factory and the private soap makers?" 3.9 What follows is an examination of some common channels through which enterprises obtain information and technology to facilitate their decision making. These include open channels as well as particularistic channels rooted in personal connections. The issue concerns what are the most important channels for spreading information and technology, which explains the synchronization of production across regions in China. Product Development and Market Research 3.10 Large factories with capital and resources are likely to have fairly sophisticated internal market research and product design departments to interpret and anticipate shifting buyer preferences. The state-owned Wuxi textile machine factory, for example, devotes 3-5% of sales to new product research.'2 A state-owned Hangzhou television factory has a 100-plus person product research unit with two development research institutes, and a total budget in 1994 of 10 million yuan.13 Large private companies, such as a Xinhui (Guangdong) furniture factory that exports large amounts of its goods, similarly have design departments.14 3.11 Many factories, however, especially the rural enterprises that have figured so prominently in the production of light consumer goods, lack sophisticated market research and 10 The move in the last few years by enterprises to form groups and make themselves into corporations is a direct response to the prevailing emphasis on scale and technological innovation. A popular view seems to be that the larger the corporation, the more prestigious the firm, the more likely creditors and customers alike will trust and support it. Industries enlarge their scope to cut costs through profits of scale and to ensure more self sufficiency of inputs, capital, and technology in an increasingly competitive market environment. Unfortunately, I do not have information on this. 12 China Interview 62894. 13 As part of developing a strong research and design department, the Hangzhou television factory offers various economic incentives, including the promise of attractive housing to keep the best technical people and to attract new college graduates. China Interview 63094. 14 The Xinhui company had 6 to 7 people in their design department. China Interview 7794. 8 Cadre Networks, Information Diffusion, and Market Production in Coastal China product development teams. The market research team, to the extent that it exists, consists of the factory manager, along with his procuring and sales agents. Such smaller factories gauge the market when they attend sales fairs and goods-ordering meetings, the dinghuo huiyi, where they can immediately know what supplies and goods are in demand and what shortages exist. In some cases, entrepreneurs have changed product line or started new factories after discovering hot new items in the course of selling other products, such as did a roof tile maker who opened a forged metal plant.'5 Professional Trade Associations and Newsletters 3.12 Over the course of the reforms, channels for the diffusion of information have emerged in openly published sources and the professional associations that are accessible to all firms, large and small, state, collective, and private. Specialized journals and associations, including those for metal products, chemical products, and even for specialized trades such as cornstarch, now exist. For example, one village that makes cornstarch belongs to the regional cornstarch producers association (dianfen xiehui). According to one village which is a member of this association, it pays 1,000 yuan a year in fees. This fee covers a monthly magazine that provides information about new products and allows the village to attend an annual meeting. Such trade journals, newsletters, and associations have the potential of rapidly diffusing over a wide geographical area specialized information about new techniques and new products and processes. In practice, however, subscribers report that the usefulness of such journals is limited to learning about material markets rather than for finding products or technology that can be easily copied. For example, information is available on new products that can be used in the production process, but not on how to make new products. For most, they are merely a source of ideas that must be supplemented with information obtained elsewhere. 3.13 What about the honorary associations for successful entrepreneurs (qiyejia) from different industries? Established during the course of the reforms, the national and local level associations gather successful entrepreneurs in a county, prefecture, province, or the country. Membership is by nomination and a mark of distinction and economic success. While these associations, like the specialized journals and associations, have the potential of acting as channels for the diffusion of information across localities and industries, their usefulness in this regard also seems restricted. According to those who are members, the interaction among members is infrequent, limited mostly to the formal meetings of the associations. One successful village party secretary, who had already earned the title of "provincial level entrepreneur," declined nomination to be a "national level entrepreneur" because he thought the fees associated with membership were higher than the benefits he or the village would receive. 15 China Interview 62294. 16 China Interview 62394. Sources of Information and Technology 9 Personal Networks 3.14 While the above channels can provide useful information to firms, they only explain partially the rapid growth of rural industry. The more vital channels are personal networks. For example, one Shandong village, relatively far from any major industrial center, has a thriving chemical industry. This is a not a case of simple technology; they were making industrial chemicals, not soap. How could a rural village develop such a specialization? Where did it get the needed technical expertise? The answer lies in its use of personal connections and networks. 3.15 Personal networks are a product of historical circumstances and institutional contexts. Many of the networks that have been crucial to the successful development of China's rural economy have grown out the connections forged during the pre-reform period;17 others have grown out of the new conditions of the reform period. The following section describes various ways in which personal networks develop and connections are made. The Political Transfer of Personnel 3.16 Pockets of technological expertise exist in China's villages because of the Maoist practice of sending intellectuals and officials to the countryside for re-education. The Anti-Rightist Campaign of 1957 sentenced intellectuals, scientists, and officials found guilty of political mistakes to live on a long-term basis among peasants, far from previous work and contacts. The result is that technical expertise for starting industry may exist locally. The case of the village chemical industry noted above is one such example. A chemical engineer from Beijing who worked with the State Chemical Ministry was banished to this Shandong village during the Anti-Rightist Campaign. Localities use these transplanted experts and their connections to facilitate local development. Although the chemical engineer and his family were forced to live in this village, he maintained contacts with his former colleagues in Beijing. When the political situation changed and the village began to diversify its economy, he used his connections in Beijing and his previous expertise to start the village chemical industry. 3.17 In other instances, such as during the Cultural Revolution (1966-1976), officials and intellectuals were sent down to the countryside for shorter periods of time. Some lived with peasants in the communes, others were forced to create their own communities.8 In both cases, ties were formed between the local peasants and the upper-level officials. Localities may or may not have made immediate use of these sent-down officials, but in later years after the cadres were allowed to return to their posts in the urban areas, peasants could call on them for help and information. 17 On the "stickiness" of relationships developed in the context of Maoist central planning and their persistence in the conduct of business today see, Dorothy J. Solinger, "Urban Reform in Post-Mao China." In Richard Baum, ed.. Reform and Reaction in Post-Mao China: The Road to Tiananmen. pp. 104-123. New York: Routledge, 1991. These rural communities, made up of sent-down cadres, were called May 7th Cadre Schools. 10 Cadre Networks, Information Diffusion, and Market Production in Coastal China 3.18 Downward transfers of officials are still taking place, but unlike during the Maoist period, the current downward transfers are of promising middle-level officials destined for higher positions. Provincial and central-level officials are sent to serve as deputy county magistrates; sometimes they are sent to villages to gain practical experience and knowledge of the lower levels. They live and work in their assigned areas for one or two years. During the course of this training, personal relationships between these upper-level officials and the localities are cemented. Later, after the officials are back at the province level or in Beijing, the locality feels comfortable contacting them for assistance and information. The higher officials, having developed ties with particular localities, will likely turn to these localities if there are new opportunities to dispense.'9 Formal and Informal Interactions among Firms 3.19 The diffusion of information and technology also occurs through routine business interactions. The precise way this occurs may take various forms. One of the most common is for village factories to rely on the personal connections of native villagers who either work or have relatives who work in state-owned enterprises. Relying on these connections, local technicians learn complicated procedures and techniques from their urban counterparts. Ideally, these connections will result in a expert coming to the village as a consultant. The expert may be employed only on the weekends, if he is still working in a state factory, or on a long-term basis, if he is a retired state worker. In the later case, the village makes sure to provide lucrative wages and good housing. Relying on the Tianjin connections of its villagers was one of the ways that one of China's richest villages, Daqiuzhuang, went from no village industries to over 120 by the late 1980s.20 3.20 Over the course of the reforms, institutionalized channels have broadened the personal connections of village and township enterprises. Vertical and horizontal linkages (hengxiang lianhe) are established when larger, more advanced urban firms subcontract assembly or material processing work to township or village enterprises, and sometimes to private firms. These links have come to serve as a source of technology transfer that allows smaller rural firms to become producers through a rotation of labor. Interviews reveal a number of cases of former managers of collective or state owned factories starting their own businesses with the skills they learned as employees. In one case, a former cadre decided to start his own private tile factory based on his years of expertise gained through the running of a tile factory for the township.21 Sometimes subcontractors who originally only performed part of the production process expand their scope to become producers of the end product. For example, a Shandong collector of scrap iron who had worked for a number of years for a larger steel mill decided to start his own mill 19 I encountered such officials during my interviews in Shandong, Henan. and Jiangsu. They all seem to have maintained close ties with their adopted areas. 20 China Interview 11888 and China Interview 12888. It is also apparent that after it began its industrialization process Daqiuzhuang attracted the attention of high-level central leaders. Patronage and favorable attention from high-level officials no doubt also helped the village achieve its dramatic growth. 2 China Interview 62294. Sources of Information and Technology 11 when he saw how steel prices were rising. In another case, in the same Shandong county, a private copper scrap collector decided to start his own copper smelting factory. He originally had sold his collected material to a large Shenyang factory that turned the scrap into finished copper items.12 3.21 The numbers engaged in a certain sector also expand as successful producers brings friends and neighbors into the trade. At the local level, particularly within villages, there remains something of a communal spirit--if one person becomes rich from a trade, there is the expectation that he will teach others the trade to allow them to enjoy the profits as well. There are numerous examples of this, ranging from raising rabbits and smelting to making furniture. This sometimes has had the unhappy result of flooding the market, as when too many peasants in one area raise rabbits or cultivate oysters for pearls. But sometimes, at least in the case of industrial goods, the new entrants become subcontractors for the original entrepreneur. A private sofa-frame maker, for example, led most of his fellow villagers down the path of prosperity by allowing them to be his subcontractors. The original sofa-frame maker sold their goods, along with his own, to a large urban collective enterprise. The private steel mill in Shandong mentioned above provides employment for numerous small private entrepreneurs who now collect scrap materials for the local factory. Wenzhou, famous for its private enterprises, is in fact in a situation where entire villages are part of an assembly line and individual households sell to a local agent who then sells in bulk to the end producer. 3.22 Joint ventures are an important subcategory of enterprise interaction through which technology and information is gained. An increasing number of firms, both state and collectively owned, are entering into such arrangements to secure both capital and technology as well as to enjoy the tax breaks that go along with being a joint-venture. This was evident in a number of the factories interviewed for this study, including a Hangzhou television factory, a shoe factory in Shandong, and a Guangdong car jack factory, to name only a few. 3.23 Less formal than joint ventures are the interactions between foreign businesses and Chinese enterprises that receive export orders. In such situations the foreign buyer goes to China with specific designs in mind in search of an appropriate producer. Sometimes, the production materials are provided; in other instances, they are only specified. This not only directly affects the product line of the enterprise that has received the order, but it is likely that others will try to copy a product once it becomes known that it has an export market potential. 3.24 So far I have examined only the personal connections of individual enterprises. This tells part of the story of the inputs into the decision-making process. Market and profits determine what is produced, but a central feature of the market in China is that market 22 China Interview 62294. 23 China Interview 11891. 12 Cadre Networks, Information Diffusion, and Market Production in Coastal China calculations are not only those of individual producers, i.e., factory owners or managers. Most enterprises in China, unlike in the United States, are not autonomous entities independent of government ties. The major decision makers who decide product choice, initiate enterprises, and procure technology include local officials, known generally as cadres, who have administrative control over local enterprises. Enterprises may come up with a product idea, but the actualization of the product often depends on help from local government officials. 4 Decision-Maker Networks and the Diffusion of Information 4.1 The cadre networks are among the most important personal connections through which firms gain information and technology. In many cases, the cadre networks are the means for obtaining contracts with larger state enterprises as well as for obtaining those contacts that eventually lead to the establishment of joint ventures and export orders. Reliance on cadre networks and government support is especially crucial for smaller factories that do not themselves have the resources for product development and market research. The scrap metal collector, cited above, started his own factory, but only with assistance from county and township officials. In this case, the area has a long tradition of making small metal tools, but he needed help in securing land and the necessary licenses, as well as technical personnel to bring his products up to acceptable standards. The role of local government was more apparent in the case of the above-mentioned copper ware factory. The scrap copper collector had some knowledge of how to make copper ware, but did not have sufficient funds to start a factory. He solved his problem by going into partnership with the village to form a village-owned copper smelting factory, of which he was named the manager. 4.2 The following sections will show how local cadres use their official and informal connections to help enterprises find the necessary information, markets, and technology. The wave-like synchronization of production across China is a product of local government involvement and coordination. The contours of local cadre networks shape the diffusion of technology and the choice of product line. The Information Grid 4.3 The primary nodes of the decision-maker networks consist of government officials. In many respects they are the entrepreneurs responsible for the significant growth of China's rural economy . Elsewhere I have developed an analogy that compares these local 24 This point has been made in a number of different works. See, for example. Oi, "Fiscal Reform and the Economic Foundations of Local State Corporatism," World Politics Vol. 45. No. 1 (October 1992). pp. 99-126; Rural China Takes Off: Incentives for Industrialization (Berkeley: University of California Press, forthcoming): see also D. Bateman and A. Mody, "Growth in an Inefficient Economy: A Chinese Case-Study," World Bank. Mimeograph. 1991. 13 14 Cadre Networks, Information Diffusion, and Market Production in Coastal China cadres to the board of directors of a business corporation. This merger of government and economy characterizes the new institutional development that I label local state corporatism.25 Depending on the size of the corporation and the importance of the enterprise, local officials can regularly and directly intervene in the day-to-day affairs of its companies or simply use their network of contacts, resources, and information to promote their development. Regardless of the level, each mobilizes its own resources and connections to do what they can to help favored enterprises. 4.4 The involvement by government that I point to is neither of the variety associated with the Maoist central planning nor is it necessarily initiated in Beijing. Government involvement central to the development of China's economy is at the local levels. The term "local level" encompasses all levels of government from the province, prefecture, municipality, county, township, to the village. All of these levels of government are involved in developing their local economies. But because of the smaller size and number of enterprises involved, the lower down the bureaucratic hierarchy one goes, the more direct is the role that government plays. By the time one gets to the village, it is not unusual to find the village party secretary personally intervening in the economic decision making of the village's enterprises. 4.5 The precise form of the information grid may vary from locality to locality, but much of the flow of information follows the contours of the administrative bureaucracy and passes through routine channels of communication within and between levels of government, from the village, to the township, to the county, that then extends to the prefecture, to the province, and finally to Beijing. The fact that this network operates within as well as across provincial boundaries using established bureaucratic procedures as well as personal connections helps explain the diffusion of information and technology across as well as within regions. 4.6 Not all officials are equally plugged into each level, nor do all officials have a direct lead to all nodes. The success of local economic development is dependent on how well local decision makers are connected into this network and how far up and across one can operate. The normal order of communication is to pass information through the successive levels according to the bureaucratic hierarchy, although those well connected can bypass certain levels and go directly to higher or lower levels. 4.7 The embeddedness of this network in the administrative hierarchy allows branches to multiply automatically the higher ones goes in the bureaucracy. In the rural areas, the county, which is responsible for townships and villages, has the widest network of personal and professional relationships along with the broadest knowledge of developments outside of the county. County government runs its own enterprises but oversees, guides, and facilitates growth in the county as a whole, including that of its townships and villages. 25 See Oi, "Fiscal Reform." and Rural China Takes Off. 26 See Andrew Walder, "Local Governments as Industrial Firms: An Organizational Analysis of China's Transitional Economy," American Journal of Sociology Vol. 101. No. 2 (September 1995), pp. 263-301 for a comparison of the size and number of enterprises managed by each level of government. Decision-Maker Networks and the Diffusion of Information 15 4.8 The township plays a similar role but on a much reduced scale. The township acts as the agent for the county, coordinating and implementing county-set targets and plans. Like the county, the village has its own enterprises but is responsible for overseeing the development of its villages. The township is the first stop in the search for information by villages. 4.9 The village is the lowest administrative unit.27 Like the township above, villages carry out upper-level directives and oversee their own development and that of the households under their jurisdiction. Villages may have one or many enterprises, some have none. 4.10 Enterprises are at the base of this information hierarchy. Regardless of the level of ownership--state, collective, or private--all enterprises have the potential to benefit from similar types of information that flow from the cadre networks. All enterprises have the potential of being the focus of government attention and of benefiting from the information and assistance. The difference is how much help is provided and how direct is the involvement of local officials. In contrast to the Maoist era, support is not given equally or to all. In practice, the collectively- owned factories below the county have the closest relationship with the local government.28 They also have enjoyed the most rapid and sustained growth during the 1980s. As Mody and Wang point out, production by township and village enterprises accounts for much of the production charted in the 1985 to 1989 period. Much of the discussion and the examples that follow focus on this sector of the economy. Channels for the Diffusion of Information 4.11 The diffusion of information and technology takes place primarily through administrative channels. There continue to be plans, targets, and meetings, but they operate differently than during the Maoist period. There is still planning, but the closest thing to a central plan is what the Chinese now call an "industrial policy" (chanye zhengce) that targets specific sectors which the government wants to promote.29 This resembles Japan's industrial policy30 more than the mandatory plans of the Maoist period. Like Japan's industrial policy, the targets 31 are general and sectoral in nature. 27 Technically, the village is not a level of government, which formally ends at the township level. Village cadres do not have bureaucratic slots not are they paid state salaries from the within budget funds. Nonetheless, in most other respects they behave like a level of government. 28 The term collectively owned refers to the fact that these factories belong to township and village government--originally the commune and brigade levels in the collective production system. 29 The degree to which there has been a movement away from central planning is suggested by the debate about whether there should be an industrial policy. The issue, in part, is that some feel that it might look too much like a plan and result in too much government direction and the same problems of central planning. 30 According to a State Planning Commission official, after 1984-85 there was a group of students from Beijing University who were strongly advocating that China adopt an industrial policy similar to that of Taiwan, Korea, or Japan. China Interview 62094. According to one source, China has consulted with the Japanese on this subject. 31 Product preference lists are still sent to the provinces. It is understood that these include the products the center is interested in and willing to support. I was not able to ascertain how specific these lists are. 16 Cadre Networks, Information Diffusion, and Market Production in Coastal China 4.12 The State Economic Commission and its successor, the Economic and Trade Commission, hold annual and semi-annual meetings for the provinces to assess past production and the current year's plans for production. Each province receives a set of guidelines about appropriate production, but no detailed plans for production and allocation of materials and procurement of products are issued. -Economic incentives are provided to encourage producers to engage in certain areas of production, perhaps even for certain products, rewarding the producer with cheap credit or lower priced production inputs, including land and other hard-to-procure factors of production.32 This includes the provision of such inputs as electricity, which is still in short supply. A recent list focuses on the development of infrastructure and energy resources. While suggestive, these lists provide little explanation for the wave-like development. It is unlikely that the synchronization of production can be explained simply as a result of central coordination.33 This is not simply a continuation of Maoist central planning. 4.13 A more likely explanation is local-level planning. Numerous plans and targets continue to be sent at the local levels. For example, the county finance bureau sends revenue plans to each of its townships. The county economic commission sends plans to its county- owned industries. The county rural enterprise management bureau sends plans with detailed targets for total production value, tax payments, and income to each of its township economic commissions. Township economic commissions send similarly detailed plans to their township- owned enterprises. Sometimes villages also receive plans from the townships. 4.14 While there is planning and local government involvement, the relationship with enterprises and subordinate levels again differs from the old strict central planning. The key difference is that the plans are no longer mandatory. If a locality or an enterprise does not want to produce a certain product, the upper levels will not force the issue. As will be clear from the examples below, much of the initiative to start certain enterprises comes from the lower levels. Local governments develop an overall plan, but they also act on ideas from individual townships, villages, and private enterprises. While plans remain a part of local development, there are a number of other mechanisms that better explain the process by which information and technology are diffused in China's current economic context. Meetings 4.15 Market and technology information is commonly diffused through official meetings. When a locality wants to develop local industry, rural enterprise development meetings are convened. These may be countywide or more localized, inviting only selected townships and villages. Township and village officials have recounted meetings in which the 32 The center is attempting to give more direction to production for market sale, in part. as a corrective to the simplistic market mentality that I described above--i.e., to the wave-like synchronization--to prevent the stockpiling of goods. such as refrigerators. also described above. One area of central-level direction that probably constitutes the strongest explanation for the waves is the quotas held by the Ministry of Foreign Trade. During the period studied by Mody and Wang China's foreign trade was substantially more centrally coordinated than it is today. Consequently, the export quotas allocated by Beijing may explain some of the synchronization of production. Decision-Maker Networks and the Diffusion of Information 17 county suggests specific products and enterprises for its different townships. Such practices were common in the 1980s. For example, it was at a three-day rural enterprise development meeting in 1984 that a Shandong county worked out plans to have one of its townships start a tire factory, which has since grown to be the largest business in the township. The meeting was for all 35 townships in that county. During part of the meeting, the 35 townships were divided into small groups, led by county officials. These small groups met for about half a day to solve concrete problems of individual townships. 4.16 Prior to these meetings, much leg work and discussion have already taken place, as is common in the Chinese policy-making process. A number of examples suggest that entrepreneurial initiative on the part of the county is in response to lower-level concerns and sometimes to specific inquires. In the above example, the township tapped to started the tire factory had previously consulted county officials about the need to convert an unprofitable machine factory into a more profitable product line. The county rural enterprise management bureau had discussed the matter with the township heads and economic commission, which manages all township-owned enterprises. The vice head of the township economic commission proposed the idea of a tire factory, after noticing the shortage of tires in Qingdao and having seen a very successful tire factory in Shantou. After the county and township decided that this was the route to go, the vice head of the township economic commission then used personal and professional connections to secure the needed technology. Key was an old classmate who was working in Qingdao but who had maintained good connections with his home town of Shantou. It was through this classmate that the township eventually secured the technology and machines from Shantou.34 4.17 When county officials discover a product that they think is particularly profitable and suited to local conditions, they convene special meetings to bring it to the attention of their townships and villages. In one county, the rural enterprise management bureau organized such a meeting to promote the production of chemical products. The county convened the meeting in one of its townships and had a township official chair the meeting, which was attended by relevant villages that already had chemical plants and by those that had an interest in starting such a venture. Notices had been sent to the villages. The same county held similar meetings to promote rug making; again these were held at the township level. The idea to produce rugs stemmed from a township that had been subcontracting production for a Tianjin carpet company since 1986. Once the township started making rugs, a number of private entrepreneurs started to subcontract for the township-owned carpet factory. One of its townships is now exporting rugs to the United States.35 Requests for Assistance 4.18 In other instances, a township or a village comes up with an idea for an enterprise or product and then seeks the help of the county officials to carry out the project. Local officials 3 China Interview 62694. 3 China Interview 62294. 18 Cadre Networks, Information Diffusion, and Market Production in Coastal China shepherd the project through the bureaucratic process of licensing and approvals. It is not uncommon for local officials to take factory managers or village party secretaries with them to the provincial capital or even to Beijing when developing a project, to get funding or approval. 4.19 In addition, local officials can provide technical assistance. For complex projects, local officials will help seek outside expertise. How this is done is illustrated in the following example of a Shandong village cornstarch factory that wanted to expand and produce a highly marketable type of cornstarch by-product. The village came across the product in a trade magazine but they knew nothing about the technology or expertise involved. The village party secretary, who was a representative to the provincial people's congress, heard more about this product when he was in Ji'nan attending a congress. He discovered that the Wuxi Light Industrial Research Institute was the source of this product. The village party secretary then pursued his connections in the county, enlisting the support of various county officials, including the county magistrate. The project was turned over to the rural enterprise management bureau, which has responsibility for the development of all rural enterprises in the county. One of the vice bureau heads, who often takes the lead in searching out relevant technology, knew about the product and had good connections in Wuxi, having gone there a number times on official business. He then took the village official with him to Wuxi to negotiate with the research institute. Together they succeeded in convincing the research institute that the village, with the help of the county, would be capable of producing the product. A deal was concluded where the village paid 520 thousand yuan in technical fees to the research institute for the expertise, training, resident experts, and equipment. The village hoped to start production in December of 1994. 4.20 The ability of local levels to acquire technical assistance has become much more feasible in recent years as specialized research units have been established, often by professors linked to universities or academies. These institutes may provide both expertise and specialized equipment. In some cases, research units seek out local enterprises to produce items that they have designed to make money for themselves and their units. 4.21 Increasingly, private businesses also benefit from many of the same types of local government assistance. For example, the Shandong tile maker turned steel maker succeeded only because he could call upon the county rural enterprise management bureau for assistance. He discovered a profitable product, but he lacked technical knowledge that would allow him to produce the product. After he approached the county, local officials helped him contact consultants in Shanghai . 4.22 To ensure that private businesses succeed, some local governments are allowing privately-owned enterprises to call themselves collectively-owned.38 The collective label allows 36 China Interview 62494. 3 This private tile maker had developed close ties with those within the county rural enterprise management bureau when he managed the township-owned tile factory. China Interview 62294. 3 Local governments not only receive taxes from these firms, but local governments which have this arrangement with its private businesses commonly also collect a negotiated fee for the use of the collective status. For example, a Xinhui furniture Decision-Maker Networks and the Diffusion of Information 19 private firms to take full and direct advantage of the preferential taxes and credit policies that collectively-owned enterprises enjoy. In addition, the collective label also allows companies to acquire land more easily, which in the current context, may be one of the most important benefits once a private company reaches sufficient size to secure their own loans.39 Visits to Models and Study Tours 4.23 First-hand information is often gained through the old Maoist practice of visiting successful models. Many local-level officials, particularly those at the county level, take factory managers and township or village leaders to the most industrially-developed areas, such as Jiangsu and Guangdong, and to nationally famous models like Daqiuzhuang village outside Tianjin to study management techniques as well as to see what products can be made. Once they find a product, they use connections to learn how to copy or adapt the project for their locality. 4.24 In recent years, local officials have organized trips abroad to gain contracts, buy machinery, and search for products. Heads of successful factories are sometimes included in the delegation. A number of factory managers of state-owned enterprises reported that they were going to the United States to purchase equipment. This included the Hangzhou television factory and the Wuxi textile machinery factory. Foreign companies trying to sell technology to China have begun to invite important prospective buyers to come to their country to see their equipment in operation. Some county-level factory managers, even in interior provinces such as Henan, have taken advantage of such opportunities.40 4.25 Regardless of whether a factory manager goes along, local-level government officials are well versed in the production process and technological needs of their key industries. The degree of attention paid by local officials to their important industries was evident in the barrage of technical questions that a county magistrate asked when touring the Sam Adams Brewery in Boston. This is not surprising given the concentration of investment by the county in their local brewery.4' 4.26 While abroad officials scour the stores in search of products that their localities can produce or export. They buy products and take them back to be studied, modified, and reproduced. This practice of copying foreign products seems to be particularly widespread in those provinces close to Hong Kong. Officials in Guangdong, including managers of large enterprises, have special visas that allow them easily and regularly to go to Hong Kong to do market research. maker that was allowed to call itself a "collective enterprise" paid local officials 50,000 yuan in fee in 1993; in 92 they paid 30,000 yuan; and in 1991, the first year of this arrangement, 10,000 yuan was paid. China Interview 7794 39 China Interview 7794. 40 This was the factory manager of a very large county-owned textile factory. 41 While this county has a number of other factories, looking at its investments over the last number of years, the bulk of investment has been poured into the brewery, which was originally a money-losing fertilizer factory. 20 Cadre Networks, Information Diffusion, and Market Production in Coastal China Equipment Supply Corporations 4.27 In addition to long-established bureaucratic channels, local governments have established new mechanisms in response to the current market conditions. Some provinces have companies, such as the Guangdong Engineering and Equipment Supply Company (set up by the provincial authorities) that provide complete machinery systems, including technical assistance. The provision of such services is an economic transaction available to all types of enterprises, private as well as state and collective. The supply company charges a percentage of the total cost of the package as its commission. It conducts research and procures the equipment.42 42 China Interview 7/3/94. 5 Calculating Profit and Interpreting the Market 5.1 Now that I have identified the sources of information and have provided a sense of how diffusion of technology occurs, let us move to the remaining part of the puzzle--why particular products are selected over others. Here I accept that buyer preference and profit are key determinants, but the way that profit is viewed depends on who the decisions makers are. The fact that local governments play a central role in the development of local economies suggests that one cannot simply look at the profitability of products for producers. Calculations that go into determining the product mix of a locality may have less to do with profit for an individual enterprise than with the larger interests of the local government. One must ask what benefit local governments would receive from the growth of certain types of products as well as whether there is a market and whether it is profitable for the producer. 5.2 Examining the list of products that Mody and Wang identify as growing significantly across areas of China, one finds that they are all products that can be produced by rural enterprises, particularly the larger collectively-owned enterprises at the township and village levels. This fact alone would suggests two reasons why local governments want to promote such products. The first is that production of these products by township and village industries helps solve the surplus labor problem created by decollectivization. 5.3 Second, because all of these products are likely products for rural enterprises, their production is fiscally lucrative to local governments. Rural enterprises, after the larger county- owned enterprises, yield the greatest share of local tax revenues in many counties. For townships, and especially for villages, such enterprises are the primary and sometimes the only viable sources of income for local government after the institution of the household responsibility system that deprived the collective of the right to the income from agricultural production and returned it to the household, which is now the unit of production and accounting. The fiscal returns from rural enterprises have been the motivating force behind the rapid growth of rural -43 enterprises in China. 5.4 To pursue further this line of inquiry, let us examine whether certain products produced by rural enterprises would yield exceptionally high returns for the decision 43 For details on the type of income that local governments receive from rural enterprises see Oi, Rural China Takes Off. 21 22 Cadre Networks, Information Diffusion, and Market Production in Coastal China makers--whether for the producers or local governments. One way of getting at this issue is to look at the tax returns and tax breaks for different types of products. 5.5 The importance of tax considerations for structuring production is reflected in the 1994 tax reforms. The central state has decided to raise the taxes on those sectors of the economy that it wants to cool down. The incentives built into the new tax regulations seem to be having an effect on development strategies and altering the product mix of localities.4 With the new tax laws, county magistrates must consider anew what products incur the highest taxes as well as which have the biggest markets. Breweries fall squarely into this category of goods. What was once a profitable industry yielding high sales taxes could become a liability because of the 17% excise tax on the production of beer.45 Counties that have invested in breweries are now having to reconsider their options. One county has adopted the strategy of producing a higher grade beer to sell at a higher price to compensate for the new high excise tax. The excise tax is 46 on the volume, not the price, of beer. 5.6 Looking at the list of products identified by Mody and Wang, one finds that they do in fact fall into a privileged tax category--most are products that can be exported. One would have to look more closely into China's exports for the period, but it would not be surprising to find that the items that grew the fastest and constituted the crest of the waves of growth were also the same items that China exported in the largest quantities during that period. This fact explains why they would be popular in so many different areas across different regions of China--all factories that engage in export production receive special tax breaks. 5.7 On the surface it does not make sense for local governments to promote the production of products that are eligible for tax breaks because the amount of taxes collected would be less. However, in considering the fiscal implications of various types of production, one must consider non-tax as well as tax revenues. Localities may collect less in taxes, but they have access to the non-tax revenues of their local state and collectively-owned enterprises through an array of formal and informal mechanisms, including management fees, surcharges, and the taking of "loans." The ability of local governments to access these extra-budgetary revenues is a major cause for the rapid development of rural collective enterprises.47 While local governments are happy to benefit from both, the preferable type of revenue is the non-tax, commonly referred to as the extra-budgetary revenue. Localities must pass a portion of tax revenue to the upper levels under the terms of the revenue-sharing system. Extra-budgetary revenues, in contrast, are not subject to revenue sharing; localities have exclusive rights over these amounts. The new system has reduced many of the tax breaks. There remain, however, special breaks for promoting new products: tax exemptions for one year to promote new technology. This may be one of the reasons why some of the larger firms are investing in R&D. This is an example of where local governments could collect large amounts of sales tax regardless of the amount of profits from the production of beer for the manufacturer. The two taxes are calculated differently. 46 China Interview 62294. 47 Oi. "Fiscal Reform," and Rural China Takes Off. Calculating Profit and Interpreting the Market 23 Market Middlemen 5.8 Market middlemen fill in the final piece of the puzzle of how items are targeted for production from one year to the next. Factory managers, owners, and local officials are only part of the cast of characters who are involved in determining what products are being produced in China. In the increasingly internationalized environment, foreign trade corporations, trading companies, and private agents also play a role in this process. These market middlemen are the most accurate sources of information that decision makers have regarding buyer preference. Buyer preferences are transmitted via production orders and sales contracts. An understanding of the role of middlemen will thus provide us with a more comprehensive answer to the question of how it is known what to produce. Foreign Trade Corporations 5.9 Many enterprises do not produce directly for the foreign market; until recently most did not have the right to export directly; most have gone through the foreign trade companies. Consequently, the foreign trade companies have a direct impact on the products being produced and product growth. They are the middlemen and brokers who receive the orders and sell to foreign markets. 5.10 Foreign trade companies operate in a variety of ways. Some have become sophisticated operations with computerized and up-to-the minute information on various local, national, and international markets. Some have started to give contracts to raw material producers to ensure a closer match between demand and supply. These companies provide producers with a guaranteed price and assume the risk of a later decrease in the market price.48 Others, unwilling to take such risks, shy away from contracts and rely on the "market price," but then sometimes face shortages if their suppliers sell elsewhere. Some put out announcements of the goods that are to be procured; others rely on established networks of previous providers. 5.11 For manufactured products, after securing a foreign contract, a foreign trade company will sign contracts with the domestic factories which it deems the best suited for the job. Usually, they go with those factories with which they have an established relationship; in some cases factories come to them when they hear about export possibilities. It is through the establishment of relations with foreign trade companies at different levels of the system that village enterprises have been able to cash in on China's growing export market. This extends to those that are relatively faraway from major ports. For example, through the connections of a village party secretary, a Shandong village forging plant has been producing under contract for the provincial trade corporation in Qingdao since 1987. With the new super highway, this village is still about 4 hours from Qingdao. 48 China Interview 62594. 24 Cadre Networks, Information Diffusion, and Market Production in Coastal China Private Trading Agents/Brokers 5.12 In addition to the foreign trade companies, there are now a growing group of private agents who act as brokers for individual enterprises and foreign trade corporations. These agents have complex networks that include foreign contacts, official cadre networks, and producers in China. The broker upon whom this section is based is a young college-educated technician who has taken a leave of absence from a large state-owned textile factory to try his hand at business. Because of his background, he specializes in buying and selling apparel.49 5.13 These brokers deal with both local foreign trade companies and with individual enterprises. Unlike the foreign trade companies, these brokers cannot require enterprises to sell through them. Consequently, they are constantly on guard to keep their producers and suppliers apart, lest they meet, strike up a direct contract, and cut him out of the deal. Their profits are made in a variety of ways, ranging from a simple commission basis to arrangements where they buy low from the producer and sell high to the foreign buyers. Some, such as the agent interviewed, are on permanent commission for foreign companies. 5.14 Why would foreign trade companies work through such agents? Their leverage, according to one such broker, is that the foreign companies know and trust him. Therefore, he has the contacts that the local foreign trade companies need. Consequently, he can extract a handsome cormission from the local foreign trade company and from the foreign firm which is the end buyer. 5.15 Sometimes these agents go directly to the producers, often the rural enterprises. The commission in these cases comes from the markup between the price paid by these agents for finished goods and the sales price. The agents make a profit and small rural firms which have few contacts can sell on the export market. The more established firms, on the other hand, shy away from these private agents, saying that they need not go through them. 5.16 Regardless of their somewhat uncertain position within the current market, these are a group that deserves watching in trying to understand China's shifts in production. 49 China Interview 63094. 6 Conclusion 6.1 Based on qualitative research using interviews with producers and local officials, this study has fleshed out how buyer preference operates and how the diffusion of technology occurs in China. The explication for these two processes provides answers to how a wave-like synchronization of production can occur across regions of China's coastal areas. As Mody and Wang suspect, the key lies in the operation of decision-maker networks. I identify local government officials along with producers as the decision makers who determine product line. I find that the information grid is embedded in the administrative hierarchy running from Beijing to the villages all over China. I further identify a new group of actors who transmit buyer preferences for the decision makers--the foreign trade corporations and agents who buy from the domestic producers to sell on the foreign market. 6.2 As I have filled in the details of how the decision-maker network operates, I also find that the technology needed for production is such that it allows for relatively low cost entry and exit--thus further explaining the speed of the turnover and shifts in production. The operation of this cadre network in China's cellular pattern of industrial production, coupled with the relatively simple nature of the products being produced, suggest the need to refine our assumptions about technology and its spatial distribution. We need not assume that China's market production necessarily requires: 1) special technology that is both scarce and difficult to master; 2) that this technology exists in a limited area or is the exclusive property of a small number of firms; and 3) that this technology is being diffused across provincial boundaries. Requirements likely vary depending on the items to be produced and whether a factory is producing component parts or entire products. 6.3 What is clear is that China is in a relatively unique position that distinguishes it from most developing countries. The Maoist legacy provided China with a unparalleled set of circumstances that diffused technical personnel to settle pennanently in the countryside. This forced diffusion, while costly to the individuals involved, has unexpectedly allowed a wide range of localities to be positioned to take part in market production. Coupled with the use by local officials of the bureaucratic network to further local economic interests, localities have been quick to receive and develop production to follow and interpret the market. 6.4 The flow of ideas is now a two-way street; individual enterprises are free to do their own market research and develop their own product line. But local government remains important for facilitating the actual implementation of these ideas, regardless of the source. Local 25 26 Cadre Networks, Information Diffusion, and Market Production in Coastal China cadres use their expansive connections and bureaucratic positions to secure information that will serve local economic growth, particularly as China enters the more competitive international market. Here one sees how having a developed and experienced bureaucracy works to China's advantage and how China differs from the developing countries in Latin American and Africa that are plagued by bureaucratic inexperience and little or no organizational capacity.50 Embedded in the administrative hierarchy, the branches of the information network automatically multiply the higher one goes in the bureaucracy. 6.5 A practical lesson to be learned from the Chinese experience may be that reforming regimes when trying to reform, should not be too quick to judge incumbent bureaucrats, merely because they have been associated with poor economic performance. In China it has been the local government bureaucracies, headed by communist party first secretaries, who are leading much of the rural industrialization. Institutional context and incentives matter. The Chinese case suggests that reformers need to craft incentives that will make it in the interests of those in the bureaucracy and those involved in production to see the reforms succeed. In China, altering fiscal flows and property rights overcame the inertia that many associate with communist officialdom. 6.6 China's experience also suggests that more is needed than just incentives for successful economic growth. This study has shown that producers are not left to fend for themselves in the newly emerging market context. The growth that is occurring in China is based on a corporatist strategy that spreads risks and resources to maximize local community interests. This gives competitive advantage to local enterprises. In today's modern economic environment infrastructural support needs to be defined more broadly than roads and the provision of electricity to include the provision of market information and technology.51 6.7 It remains for future research to probe how different levels of government and different types of enterprises interact and utilize the decision-maker networks. Do differences in these interactions explain differences in enterprise performance? Can this explain the differences in the performance of state and collectively-owned firms? Moreover, as the market becomes more sophisticated in China, will these networks remain effective? Will the foreign trade companies and brokers come to replace some of the functions of these networks? The limited scope of this study precludes answers to such questions, but hopefully the findings here will be suggestive and useful as a guide for future studies on these issues. 50 On the importance of what is sometimes also called the maturity of a bureaucracy, see Dietrich Rueschemeyer and Peter Evans, "The State and Economic Transformation: Toward An Analysis of the Conditions Underlying Effective Intervention, in Peter Evans. Dietrich Rueschemeyer, and Theda Skocpol, eds., Bringing the State Back In. Cambridge: Cambridge University Press, 1985, pp. 44-77. A useful succinct statement on effective bureaucracy as a key to capacity is by Stephan Haggard and Robert Kaufman. "The State in the initiation and Consolidation of Market Oriented Reform," in Putterman and Rueschemeyer, eds., State and Market in Development. Boulder: Lynne Rienner. 1992. pp. 221-242. 51 Douglass North. Institutions, Institutional Change and Economic Performance, especially pp. 76-77. Cambridge: Cambridge University Press, 1990.