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«No. 72/2007 Workshop Series on the Role of Institutions in East Asian Development: Institutional Foundations of Innovation and Competitiveness in ...»

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No. 72/2007

Workshop Series on the Role of Institutions

in East Asian Development:

Institutional Foundations of Innovation and

Competitiveness in East Asia

Werner Pascha, Cornelia Storz, Markus Taube (eds.)

Institut für Ostasienwissenschaften (Institute of East Asian Studies)

Universität Duisburg-Essen Campus Duisburg D-47048 Duisburg, Germany Tel.: +49-203-379-4191 Fax: +49-203-379-4157 e-mail: in-east@uni-duisburg-essen.de ©by the author(s) October 2007


Workshop Series on the Role of Institutions in East Asian Development:

Institutional Foundations of Innovation and Competitiveness in East Asia


Werner Pascha, Cornelia Storz, Markus Taube Series/Reihe Duisburg Working Papers on East Asian Studies, No. 72/2007 Duisburger Arbeitspapiere Ostasienwissenschaften, Nr. 72/2007 Abstract/Zusammenfassung The discussion paper summarizes the results of a workshop that focussed on the institutional foundations of innovation and competitiveness in East Asia. The following papers are contained: “Transitional Institutions, Institutional Complementarities and Economic Performance in China. A ‘Varieties of Capitalism’ Approach”, “The Current State of Research on Networks in China’s Business System”, “Recent Changes to Korea’s Innovation Governance”, ”Standardization and Institutional Complementarities in Japan – Empirical Results from SAP R/3 Implementations in Japanese Automotive Suppliers”.

Keywords/Schlagwörter East Asia, Japan, China, Korea, institutional change, competitiveness, innovation Universität Duisburg-Essen Campus Duisburg Institut für Ostasienwissenschaften, Geschäftsstelle D-47048 Duisburg Contents Introduction: Workshop on the Institutional Foundations of Innovation and Competitiveness in East Asia 1 Werner Pascha, Cornelia Storz and Markus Taube Transitional Institutions, Institutional Complementarities and Economic Performance in China. A ‘Varieties of Capitalism’ Approach 3 Joachim Ahrens (Private University of Applied Sciences Goettingen) and Patrick Jünemann (EBS Oestrich-Winkel) The Current State of Research on Networks in China’s Business System 55 Johannes Meuer and Barbara Krug (Erasmus University Rotterdam) Recent Changes to Korea’s Innovation Governance 81 Dominik Schlossstein (EBS Oestrich-Winkel) Standardization and Institutional Complementarities in Japan – Empirical Results from SAP R/3 Implementations in Japanese Automotive Suppliers 99 Alexander Müller (Philipps-Universität Marburg) Introduction: Workshop on the Institutional Foundations of Innovation and Competitiveness in East Asia

Werner Pascha, Cornelia Storz, Markus Taube (eds.)

The workshop series on the role of institutions in East Asian Development tries to make a contribution to the development of theoretical approaches to East Asian Studies. Institutional theory is found to be particularly helpful, as it encompasses a rich variety of approaches that deal with the organisation of socio-economic phenomena in different circumstances. This holds for the different schools of institutional economics, including new institutional economics like property rights, principal-agent, incentive, transaction cost and contract theory, but it also holds for the wider approaches to institutional theory in the social sciences and beyond. The yearly workshops are a gathering of senior and junior scholars who are interested to develop a theory-based view of regional studies and of those interested to apply their institutional knowledge to East Asian phenomena.

Revised papers of the 2007 workshop, held at the Protestant Academy in Tutzing at Lake Starnberg, in view of the Alps in Upper Bavaria, are presented in the present discussion paper.

The general subject of the 2007 meeting was an assessment of the institutional foundations of innovation and competitiveness in East Asia. What those foundations are is a key question that scholars outside East Asian studies are interested in, and for which we were looking for contributions from an institutional perspective. Why have the East Asian economies been growing so strongly? More particularly: What are the institutional and organisational conditions under which this success was possible? Will there be change? What does this mean for their further development?

The collected papers approach these issues from various angles. Joachim Ahrens and Patrick Jünemann (Private University of Applied Sciences, Göttingen, and European Business School, Oestrich Winkel) take up a puzzle of the recent spectacular success of the Chinese economy: Although one might expect, at first glance, that economic growth was due to fully embracing the advantages of a market economy, in the understanding of the authors this was actually not the case. Rather, China made use of “transitional institutions”, as the authors call them. Ahrens and Jünemann analyze them from the viewpoint of the “varieties of capitalism” approach and discuss possible future courses. They conclude that the duality of the economic and the political realm as well as wide-spread bureaucratic behaviour are likely to remain.

Johannes Meuer and Barbara Krug (Erasmus University, Rotterdam) take up another key factor that is frequently associated with China’s economic success, namely the presence of network ties that goes beyond the simple distinction of markets and firms. The authors undertake a careful literature survey and identify four approaches to networks, namely Chinese business groups (qiyejituan), Overseas Chinese Communities, networks of social relations (guanxi), and Network Capitalism as an alternative economic model. Through their theory-focused lens, they identify gaps within the individual approaches that might guide future research. For instance, they argue that “Chinese business groups” and “Overseas Chinese Communities” studies could profit from structuralist research that looks into concrete personal and professional ties.

Dominik Schlossstein (European Business School, Oestrich-Winkel) deals with another East Asian success story: the phenomenal rise of South Korea’s economic competitiveness. He applies a national innovation system framework and argues that upstream governance of the innovation system was critically important to bring the economic successes about. On this basis, Schlossstein is particularly concerned about future challenges, namely those of effectiveness, efficiency and efficacy. Generally, he feels that the restructuring of the innovation system from “imitation to innovation” is well under way.

Alexander Müller (Philipps University, Marburg) contributes to a topic that is important for Japan’s future economic path, namely for the prospects of convergence or divergence with other advanced economies. A key issue in this field is whether global standards are readily adopted in Japan or not. Müller studies this with respect to the implementation of the widely accepted SAP R/3 Enterprise Resource Planning (ERP) software in the Japanese automotive industry. He notices that SAP R/3 is widely used, but rather as a quality standard signalling best practice than as a compatibility standard, because the complex Japanese supplier system are not easy to integrate in the SAP R/3 standard. This finding sheds a sobering light on the widely held expectations that the spreading of global standards will lead to a convergence of Japanese development patterns with other leading economies.

The contributors shed light on different aspects of innovation and development, and were inspired by different theoretical approaches, such as the concept of varieties of capitalism, network theories or standardisation economics. One heatedly discussed topic of all contributions was the relevance of multiple equilibria, and how differentiated our analysis has to be in order to explain real world phenomena. A further issue was the necessity of considering the role of actors in the development of institutional paths. Summing up, the contributions offer interesting insights into vital aspects of competitiveness and economic progress in East Asia, and are challenging both for regional specialists as for those interested in institutional studies.

The organisers plan to continue the workshop series in cooperation with the Tutzing Protestant Academy (Evangelische Akademie). The next workshop is scheduled for March 2008 and will again take place in conjunction with the Tutzing (German-language) conference series on Normative and Institutional Foundations of Economics. Depending on the submitted papers, the workshop may be held in English too. Those interested in attending or in presenting a paper are invited to get in touch with any of the workshop organisers signing below. For the documentation of earlier workshops see http://www.vsjf.net/de/ aktiv.php?back=ja&aid=1 on the homepage of the German Association for Social Science Research on Japan.

We would to thank all those who contributed to make the workshop and its documentation a success, including Martin Held, Gisela Kubon-Gilke, Richard Sturn of the Tutzing conference series and Susanne Satzger of the Tutzing Academy.

Prof. Dr. Cornelia Storz (storz@wiwi.uni-frankfurt.de) Prof. Dr. Werner Pascha (werner.pascha@uni-due.de) Prof. Dr. Markus Taube (markus.taube@uni-due.de)

–  –  –


The paper focuses on institutional change and institution building as integral parts of economic transition in China. China’s success, particularly compared with other advanced transition economies, implies a puzzling observation: China did not apply theoretically-derived policy recommendations. Instead, authorities followed a gradual, pragmatic approach to reform, decentralize, and transform the economy. Notable examples of non-orthodox policy measures, which worked effectively in China, include so-called transitional institutions such as the dualtrack approach to industrial restructuring, anonymous banking, the establishment of special economic zones or the priority given to create competitive structures while postponing largescale privatization of state-owned enterprises.

Hence, it is not evident what kind of market economy will emerge in China in the long run.

The paper aims at (i) applying the Varieties-of-Capitalism (VoC) framework to China and assessing its suitability in a transition context; (ii) addressing the question of what kind of market economy is emerging in China; (iii) analyzing the impact which the emerging type of capitalism will have on the economy’s allocative and dynamic efficiency; and (iv) elaborating policy implications which may help generate or strengthen potential institutional complementarities in the long run.

JEL classification: H0, O53, P2, P3List of abbreviations

ACFTU All-China Federation of Trade Unions ADB Asian Development Bank CCP Chinese Communist Party CEE Central and Eastern Europe CIS Commonwealth of Independent States CSRC China Securities Regulatory Commission eds. Editors FASB Financial Accounting Standards Board FDI Foreign Direct Investment GDP Gross Domestic Product IAS International Accounting Standards IFRS International Financial Reporting Standards IIF Institute of International Finance MEGS Market-Enhancing Governance Structure MNC Multi-National Corporation NPC National People’s Congress NPL Non-Performing Loan OECD Organization for Economic Co-operation and Development R&D Research & Development RMB Renminbi (Chinese currency) SFAC Statements of Financial Accounting Concepts SME Small and Medium sized Enterprises SOE State-Owned Enterprise SHSE Shanghai Stock Exchange SZSE Shenzhen Stock Exchange TQM Total Quality Management TVE Town or Village Enterprise US-GAAP U.S. Generally Accepted Accounting Principles VET Vocational Education and Training WTO World Trade Organization

1 Introduction

One of the most important events in modern economic history is the socialist countries’ transition from a centrally planned economy to a capitalist market economy that started in the last two decades of the 20th century. China’s transition was very successful compared to the

difficulties experienced by countries in Central and Eastern Europe and the former Soviet Union:

China’s annual economic growth has been consistently higher than 7% for the last decade; the country has managed to attract increasing amounts of FDI and successfully fought poverty across the nation. 1 China did however not follow theoretic policy recommendations developed by Western think tanks such the IMF or the World Bank, but pursued an incremental, gradual, and highly pragmatic “Chinese” approach to transform its economy into a capitalist system.

The ‘Varieties of Capitalism’ 2 literature claims that there are two coordination regimes that vary systematically across countries: at one end of the spectrum there are liberal market economies (LMEs) that use markets as their main means of coordinating economic activity. At the other end, coordinated market economies are identified that rely more heavily on non-market institutions to solve their coordination problems. This binary classification of national forms of capitalism leaves many countries in an ambiguous position, since they cannot be clearly categorized. France and Italy are examples of such intermediate countries in the developed world. 3 One crucial characteristic of the ‘Varieties of Capitalism’ approach is that it has been developed to analyze advanced market economies and does not offer any theoretic explanation as to how to classify transition economies – such as China. The objective of this paper is to apply the ‘Varieties of Capitalism’ framework to the institutional reform process in China and to test its validity within a transition context. The ‘Varieties of Capitalism’ analysis will serve as a foundation to derive an answer to the question as to what kind of capitalism is currently being developed in China. Has China’s transition process taken the way towards a LME or rather a CME or does China actually represent a certain third “hybrid form” of capitalism that cannot be classified according to the standard ‘Varieties of Capitalism’ concept? How efficient, stable and sustainable is China’s variety of capitalism?

Cp. ASIAN DEVELOPMENT BANK (2000), pp. 1 – 10.

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