Think - AT LONDON BUSINESS SCHOOL

Business through the lens of Chinese history

China’s heritage has much to bear on its business customs. Understanding that in the West is critical to building trust, says Tammy Erickson

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Every executive who has worked in multiple cultures will have noticed the differences between them. These differences could be as simple as the amount of time typically spent in a discussion before arriving at a decision, to far more complex differences, for example, regarding the relationship between individual companies and government policies.

Unfortunately, in many instances, it’s often an easy step from finding the other’s way different to concluding that they are somehow wrong or unfair.

Nowhere is the dichotomy greater than in the assumptions made by business leaders from Western democracies and China about the actions of the other. Rarely has there been a greater need for understanding between China and the West.

Today, as Western businesses work to succeed in China while Chinese companies seek to grow in global markets, it is understandable that leaders from both are increasingly unnerved by behaviours that, at best, they don’t recognise – or at worst perceive to be threatening or hostile.

Understanding how business customs have developed in the different regions could hold the key to successful China-West relationships in the future. The history and development of financial and governmental institutions in each region provide insight into the traditions and business practices considered normal and acceptable in each culture.

One of the most fundamental differences between China and the West stems from a bottom-line business question: what’s my source of capital? Answers to this simple question shape assumptions about where one owes loyalties and the obligations and relationship (or lack thereof) between the business and the community.

What’s my source of capital?

The banking system in the West developed in Italy in the 14th century, eventually spreading through the Holy Roman Empire to northern Europe, which continues to be a hub of financial and banking innovation. The development of banking made finance available from third parties to private individuals for a variety of business ventures.

In contrast, the modern concepts of banking, such as fractional reserve banking, where deposits from customers are used to make loans to borrowers, did not exist in China until they were introduced by European bankers in the 19th century, and then primarily to service the growing number of Western trade firms. During the 1400s and 1500s, while the precursor of the modern financial system was evolving in Europe, there were no equivalent institutions in China.

During the Ming Dynasty, the craft and trading businesses of China kept cash-based records, recording cash income and expenditures and calculating profit as the difference between the two. There were no records of assets or liabilities in Chinese accounts from the time: no capital accounts and no record of in-process goods or their movement. Accounting practices made no provision for interest or depreciation. Withdrawals were recorded but not related to capital invested.

‘Western concerns about “strong state support” for Chinese businesses fail to recognise historical precedence for that position’

Beyond the accounting practices, there were no legal means for accumulating capital during this time. There were no instruments for holding or circulating capital: no deeds, shares, bonds or any certificates of savings or loans. Everything was done on a cash transaction basis, largely limiting the scale of enterprise to that which could be supported by one household or estate.

The situation began to change in the Qing Dynasty in the late 1600s. Extended families were granted the right to form quasi-corporate business institutions. These lineage groups built ancestral halls and used Confucian norms. This established a sense of mutuality, responsibility and obligation to foster collective kinship identity. Over time, many villages became populated almost exclusively by a single lineage or family.

Significantly, lineage groups were given legal privileges. They could form legal contracts among other lineages, own land and property, and collect rents.

This was the first major step in allowing Chinese business leaders access to the capital required to expand scale. But the money they made stayed within the family, reinforcing the importance of trusted relationship ties. Individuals existed as part of a collective family and community. For centuries in China, financial resources were intertwined with one’s relationships. In contrast, views in the West about financial and economic resource allocation and management are grounded in the intellectual heritage of Adam Smith: that a decentralised economy motivated by individual self-interest represents the most effective use of economic resources.

The development of governmental bodies and views on the role we expect them to play are also different between China and the West. China began the transition from an aristocratic society to a bureaucratic one more than 600 years before Europe.

Beginning in the Tang dynasty, in 750-1250, bureaucrats were recruited by examination, creating a strong class of administrators who prided themselves on scholarship. Rather than relying on laws passed down from the aristocracy, stability throughout the state was maintained by close collaboration between the scholar-official class and local leaders to maintain the propriety of rituals.

Interventionist approach

As a result of this heritage, even in today’s state/government structure, ‘the Party’ is less a physical entity represented by a legislature or judiciary as in Western governments. It is actively embedded in the day-to-day details of the public and private sectors. The Chinese do not generally share Adam Smith’s confidence in the market to self-correct and believe that market order requires the continual intervention of officials.

China also has a longer tradition of public support for education than the West. Seven centuries before Europe, China committed itself to support an empire-wide school network. This continued willingness to invest state funds into education provides China with what many believe is one of its greatest advantages: a vast pool of reasonably priced medium - and high-skilled workers.

‘The Chinese do not generally share Adam Smith’s confidence in the market to self-correct and believe that market order requires the continual intervention of officials’

Beijing’s Made in China 2025 plan seeks to upgrade China’s economy through additional policy reforms and a shared commitment to key growth targets, all in high-technology fields. While financial support is implicit, it’s important to recognise that much of the support is based on creating an environment that will enable the success of Chinese firms, largely based on collective norms. For example, the Chinese government is assembling a comprehensive database on its citizens that will enable private sector companies to design and target new services, discern key user attributes and train algorithms.

China’s provision of universal healthcare will provide the same advantage to its fledgling pharmaceutical firms as they develop and test drugs for the global market. And the Belt and Road Initiative will provide infrastructure and connectivity for Chinese firms with supportive partners throughout the world.

These initiatives are fundamentally different from those of governments in the West, which tend to focus on rules to create level playing fields. But Western concerns about ‘strong state support’ for Chinese businesses fail to recognise the historical precedence for that position. Neither position is an absolute truth; both are expressions of our histories and understanding that will be more productive than debating which one is ‘right’ or ‘wrong’.

Tammy Erickson is Adjunct Professor of Organisational Behaviour at London Business School

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