The ‘varieties of capitalism’ approach is an institutional theory that can also be discussed as a firm-centred theory. According to Soskice and Hall (2001), this theory is actor-centred; actors include not only firms but also stakeholders who are involved in relations in the sphere of the political economy. Firms develop in certain economic and political environments that can be viewed as coordinated market economies and liberal market economies, depending on the aspect of coordination and relationships of the companies with other actors in the system (Prevezer 2017; Soskice & Hall 2001). One more category from the varieties of capitalism is identified by researchers: an emerging market economy or a transitional economy (Prevezer 2017). China is among those countries that are on the path to capitalism, and currently, it is an emerging market economy (Mohan 2013). The purpose of this paper is to analyse Huawei’s strategies and policies in the context of China as an emerging market economy with reference to the specifics of the varieties of capitalism as an institutional theory.
Theoretical Implications Regarding Institutions and Their Role in Economic Growth
Primary institutions related to the varieties of capitalism in this institutional approach are property rights, the legal system, the nature of a state and markets as a recently added institution (Hancké 2009). These are identified with reference to the issue of coordination as the background to varieties of capitalism (McNally 2013a). In this context, institutions should be discussed as sets of norms and rules to address or follow in order to develop effective relationships in an environment of highly coordinated or less-coordinated economies. While analysing the role of these institutions in influencing the political economy of a country, researchers have also evaluated their role in economic growth (Prevezer 2017; Soskice & Hall 2001). Economic progress and the stability of countries are associated with property rights that should be protected by the state to guarantee firms’ growth, a legal system that should be independent and authoritative, the centralised or decentralised nature of a state and free markets as environments for profit-oriented competition (McNally 2013b). These key institutions are the basis for firms’ development within the context of a coordinated market economy or a liberal market economy.
Debates regarding the role of the discussed institutions in influencing a country’s economic growth focus on the reason why these institutions can be viewed as critical. According to Prevezer (2017), the legal system, property rights and nature of a state as well as markets are directly correlated with a country’s progress in the global arena. Douma and Schreuder (2008) also note the fact that if a country’s legal system is non-corrupted and oriented to protecting the interests of firms and individuals, companies will have more opportunities to develop and become more competitive and profitable. If a country has developed markets based on appropriate regulations, this aspect also contributes to economic growth (McNally 2013b; Soskice & Hall 2001). Furthermore, if property rights are diverse – including private and state ownership – and protected, firms and individuals will receive more opportunities to grow while supporting an overall economic rise (Soskice & Hall 2001). As a result, these primary institutions are important in guaranteeing economic growth in a country regardless of its type according to the varieties of capitalism classification.
However, additional institutions serve to fuel debates on the role of the discussed primary institutions in affecting economic growth. Aguilera and Jackson (2010) concentrate on trade unions, associations of workers, professional networks and shareholding networks as institutions that can also contribute to economic progress. These institutions are based on the power of collaboration to support firms and share coordination activities (Aguilera & Jackson 2010; Prevezer 2017). Institutions that guarantee information-sharing contribute to firms’ development and profitability (Mohan 2013; Soskice & Hall 2001). Therefore, the question regarding the role of primary institutions remains debatable. Nevertheless, the discussed primary institutions guarantee the progress of a firm in a regulatory context and a specific market; thus, these institutions are viewed as more important for the economic growth of a country than additional or meta-institutions. Furthermore, institutions depend on each other, and the complex of primary institutions presents the background for the economy’s rise if the proposed rules and norms provide companies with an advantage in developing and gaining revenues.
Institutions in China and Their Evaluation
China is a country that requires detailed discussion in referring to the ‘varieties of capitalism’ approach because it is an emerging market economy that can have or lack features of both coordinated and liberal market economies (Lüthje 2013). Such primary institutions in China as property rights, the nature of a state and the legal system have specific characteristics. According to Prevezer (2017, p. 226), ‘rural land rights,’ ‘enterprise property rights,’ ‘urban developmental rights’ and ‘state-owned enterprise ownership rights’ can be discussed as common property rights in China. Research on the topic indicates that the rights of state-owned enterprises continue to be most effectively protected because of the provided security of proprietors and the state’s orientation to the further development of these firms (Lüthje 2013; McNally 2013a). In this context, private property rights remain underrepresented in the sphere of business and unprotected in contrast to enterprise property rights.
Focusing on the nature of the state in China, it is important to note that it is a party-state with elements of decentralisation (The Economist 2014). As a result, the legal system adopted in China and particular features of the country’s fiscal capacity should be viewed as decentralised and weak in comparison to Western patterns because of the Chinese Communist Party’s influence on their regulation (Hou 2014; Prevezer 2017). Prevezer (2017, p. 237) notes that ‘this is an overtly politicized legal system; the Party mechanisms are seen as alternatives to the judicial system.’ Moreover, corruption develops at all levels of the legal and judiciary systems in China in spite of governmental anti-corruption activities, and this aspect affects the quality and impact of these institutions.
The analysis of the rule of law in the country should be realised with a focus on such indicators as property rights, governmental integrity and judicial effectiveness as these measures have been proposed by the Heritage Foundation and its Index of Economic Freedom. Such measures are effective when reflecting on the rule of law in China because these institutions are traditionally assessed when it is necessary to analyse the economic potential of the country, and they are indicative of the situation in China according to data from multiple sources. Property rights in China are repressed because of corruption (The Heritage Foundation 2017). The level of governmental integrity is also low. In assessing the independence of the judiciary and freedom of the press in the country, it is possible to state that judges are moderately free in their decisions, but there are constraints on the freedom of the press (The Heritage Foundation 2017). However, any measure of the independence of the judiciary seems inappropriate as researchers tend to focus on the lack of judges’ independence because of the political impact on their activities.
Much attention should be paid to the factor of centralisation and decentralisation in this case. This indicator is important for China because, despite a national debt of about 300% of GDP and specifics of focusing on state-owned enterprises and bureaucratic institutions that do not contribute to economic progress, this decentralised country controlled by the Communist Party remains one of the most actively developing economies in the world (Prevezer 2017; Schwab 2017). Measures of business freedom, trade freedom, financial freedom and investment freedom are proposed by the Heritage Foundation (2017) as non-biased indicators, effectively demonstrating the controversy typical of the phenomenon posed by the Chinese economy. Thus, decentralisation in provinces exists alongside centralised control; the development of capitalism is being realised under the Communist Party’s control, market institutions are developing in the context of state-owned enterprises and business and trade freedom are being observed along with repressed investment and financial freedom. These measures are also reflected by Schwab (2017), according to the data of the World Economic Forum.
Varieties of Capitalism: Analysis of China’s Corporate Governance and Labour Market
As stated earlier, two types of economies according to the ‘varieties of capitalism’ approach are liberal and coordinated market economies, but there is also a third type that covers transitional economies (Prevezer 2017). The emerging market economy of China is developing market mechanisms in the context of a highly controlled state where the legal system is rather weak and where it is possible to note a lack of private property rights in the sphere of business (Hou 2014). Using neo-liberal market principles, practices and incentives and referring to strict macroeconomic regulation, China represents a unique type of economy. Much attention should be paid to such components of the varieties of capitalism and associated institutions as corporate governance and employment that can influence a firm’s progress. Furthermore, focusing on China’s shareholding structure and the role of stock market, banks and business groups in supporting businesses, it is important to note that the bank-based business environment of China is becoming more equity-based in some sectors.
The labour market and corporate governance institutions in China have developed as a response to the rule of law and the nature of a state in that country to balance the orientation to capitalism, the impact of the Communist Party and the development of private firms. China’s labour market can be viewed as flexible as it combines features of labour markets typical of liberal and coordinated economies (McNally 2013a). China represents a hybrid of institutions, as well, in terms of the status of employees and employment protection. Decades ago, China’s labour market had elements of a coordinated economy with more focus on employees’ security and protection of their rights through effective wage policies and welfare benefits. However, over two recent decades, China’s labour market has been oriented to liberal patterns resulting in reduced status and power for employees, lower employment protection, longer working hours, lower wages, obvious differences in wages between managers and workers and higher labour mobility (Prevezer 2017). These changes from a coordinated labour market to a neo-liberal market are the results of the country’s orientation to US patterns and approaches to treating employees.
As a consequence, workers’ participation and training in most Chinese firms are weak because of high labour mobility and little focus on supporting and promoting the workforce (Mohan 2013; Prevezer 2017). Instead, improvements are observed in hiring policies that reflect tendencies for turnover. The process of unionisation in the country has also shown several stages in its development. Unions are primarily state-run organisations that demonstrate dependence on Party-controlled unions and a lack of labour autonomy (Prevezer 2017). As a result, there are few independent trade unions in the country, and little attention is paid to collective bargaining. Changes in China’s economic focus have negatively influenced the trade unions that have become weaker while following liberal market patterns. Therefore, workers in China are becoming more oriented to strike activities because their rights are not being protected at the union level, and little autonomy is being proposed in terms of employee representation. However, there are also exceptions, and some firms in China are developing according to an alternative path that is a result of the country’s hybrid transitional economy.
Huawei and the Company’s Policies
Huawei Investment & Holding Co., Ltd, founded in 1988, is an example of a unique firm in the economic environment of China. The company specialises in producing telecommunications equipment and devices, representing its products all over the globe (Zhu et al. 2013). While focusing on Huawei’s corporate governance strategies, ownership and shareholding, it is important to note that the company is privately owned by its employees; more than 80,000 employees have a share in Huawei (Ho & Farhoomand 2012; Zhu et al. 2013). The private ownership sector is only now developing in the country in contrast to the sector of state-owned firms, and Huawei is one of the leaders in the private sector. The company’s type of ownership is also known as employee stock ownership.
Currently, the funding of the company is based on employees’ resources in financing operations as shareholders. In 1990, 15% of the firm’s stocks became available to employees, although employee shareholders did not receive any bargaining power. The ownership model was revised in 1997, when Huawei focused on incentivising the productivity of its employees, who actively began to take loans, buy stocks and finance the firm because the price of stocks had been lowered for them (Zhu et al. 2013). The company also referred to virtual stock options in the early part of the 2000s, and the price of stocks increased, accentuating the company’s profitability. Thus, ‘linking the net assets of Huawei and its employees’ equity price… further intertwined the interests of the company and its employees and allowed Huawei to be seen as a more significantly employee-owned firm’ (Zhu et al. 2013, p. 19). This basic model was further developed to improve the employee stock ownership approach being followed by the company.
The role of employees is an important aspect for Huawei as they hold the company’s shares. The number of shares allowed for purchase by certain employees in departments depends on the results of appraisals, employees’ experience, performance and productivity. As a result, employees receive more responsibility for their work, and their intentions regarding turnover decrease. The turnover issue is not discussed as a problem by human resource managers in the company because of Huawei’s attractiveness to employees (Ho & Farhoomand 2012). Thus, the system creates benefits for both employees and the company because of employees’ interest in Huawei’s profitability. The dividend amount is determined by the shareholders, depending on the outcome of a fiscal year (Zhu et al. 2013). Furthermore, the company’s managers can decide to withdraw stocks if employees’ work does not correspond to performance standards. Those employees having the largest share of stocks also participate in collective bargaining.
The research and development department is one of the largest in the company, and much attention is paid to training and development of employees in order to focus on the strategy of innovation and guarantee high-quality performance (Ho & Farhoomand 2012). Education and training for employees are the company’s priorities; Huawei University was established in 2005 as an education and training centre for the company’s current and potential employees (Zhu et al. 2013). The company did not merge with other companies to strengthen its potential, and its focus is on the development of its employees’ knowledge and skills in technical areas and the support of research in telecommunications technologies and innovations.
The company uses a system of trade unions to protect employees’ rights and guarantee their security. However, wage issues are discussed not in the context of trade unions but as a result of regular appraisals in order to determine the sum of bonuses and dividends that can be received by an employee (Zhu et al. 2013). The focus remains on the active and even accentuated participation of employees in Huawei’s activities, and economic progress contributes to the development of advantageous internal relations within the company.
Huawei’s Strategies in the Context of China’s Emerging Market Economy and Institutions
In discussing Huawei in the context of the emerging market economy of China, it is possible to claim that this firm is not typical of the country’s business arena. In China, the majority of firms are state-owned and collective enterprises that are typical of all industries, and only a small number of businesses are privately owned companies in the technology and information communication industries (Prevezer 2017). State-owned enterprises are supported by the government in terms of policies, regulations and financing. These companies take advantage of China’s legal system, which can be viewed as influenced by political authorities (Lüthje 2013). As a result, the progress of private companies is somewhat problematic in this context.
However, the economic phenomenon of China in relation to the varieties of capitalism lies in the fact that this economic system is a hybrid, and it is rather liberal. Therefore, Huawei follows a modern strategy of being mostly oriented to the international market, developing employee stock ownership as a unique form for China and investing in expensive research (Hou 2014; Zhu et al. 2013). As a result, Huawei can be viewed as a company that is developing according to the patterns of Western firms, and it has also adapted to features of both coordinated and liberal market economies, as well as the impact of the Communist Party.
Researchers claim that four decades ago, the protection of employees’ rights in China and labour conditions were better than three or even two decades ago because of the country’s re-orientation to a new economic model with elements of capitalism (Hou 2014; Prevezer 2017). However, in this controversial political and economic situation, Huawei has developed an effective model oriented to motivating employees and supporting the business through encouraging workers financially and providing dividends. As a result, working practices and employee protection in Huawei differ significantly from practices adopted in other firms belonging to the country in terms of training and benefits provided to employees, but they are similar in terms of focusing on high-quality performance standards. Thus, employees in Chinese firms in general are not sufficiently trained and supported or secured because of managers’ focus on the patterns of liberal economies. However, performance and productivity norms and expectations are high, leading to turnover (McNally 2013b; Prevezer 2017). In contrast, at Huawei, employees’ skills are actively trained, the employees themselves are protected and high performance standards are associated with high bonuses.
An important feature of Huawei’s corporate governance practices in the context of China’s hybrid economy is that the company applies liberal patterns in adapting meta-institutions. The economy of the country is heterogeneous because local institutional arrangements influence the flexibility and openness of local businesses in terms of funding. For example, the economy of Shanghai is internationalised and oriented to trade, in contrast to the economy of Shanxi that is developing as an exporter of resources (Mohan 2013; Prevezer 2017). The decentralisation of power in China’s regions allows for the growth of such companies as Huawei because it was established in a region that is viewed as an environment for new businesses. As a result, Huawei’s internationalisation strategies are influenced by China’s institutional characteristics and orientation to liberal market economies.
Conclusion
This paper has presented an analysis of China’s emerging market economy with reference to varieties of capitalism as an institutional theory and with a focus on Huawei’s strategies and policies in this unique context. China cannot be discussed as a standard liberal market economy or as a coordinated economy because of its orientation to capitalism as supported by the impact of the Communist Party on business. As a result, this hybrid context is advantageous for creating not only firms with low employee representation and ineffective work practices but also innovative employee- and profit-oriented firms like Huawei.
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