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Zeitschrift für 

Wirtschaftsgeographie 

BUCHENVERLAG 

Informal Dynamics 

in Asian Megacities 

56. Jahrgang, 2012, Heft 1-2

Zeitschrift für Wirtschaftsgeographie 

The German Journal of Economic Geography · 56. Jahrgang 2012 · Heft 1-2· Begründet von Dr. Irmfried Siedentop 

Die Zeitschrift für Wirtschaftsgeographie wird in Social Sciences Citation Index (SSCI), Social Scisearch und Journal Citation 

Reports/Social Sciences Edition gelistet und ausgewertet. – The German Journal of Economic Geography is indexed and abstracted 

in Social Sciences Citation Index (SSCI), Social Scisearch and Journal Citation Reports/Social Sciences Edition. 

Herausgeber – Editors 

Prof. Dr. Walter Thomi Prof. i. R. Dr. Karl Vorlaufer 

Institut für Geowissenschaften Heidenfeldstr. 11 

Fachgruppe Wirtschaftsgeographie 65812 Bad Soden am Taunus 

Martin-Luther-Universität Halle-Wittenberg 

Von-Seckendorff-Platz 4 

06099 Halle (Saale) 

Wissenschaftlicher Beirat – Advisory Board 

Prof. Dr. Christian Berndt, Zürich Prof. Dr. Jürgen Oßenbrügge, Hamburg 

Prof. i. R. Dr. Winfried Flüchter, Duisburg-Essen Prof. i. R. Dr. Eike W. Schamp, Frankfurt am Main 

Prof. Dr. Martina Fromhold-Eisebith, Aachen Prof. Dr. Rolf Sternberg, Hannover 

Prof. Dr. Johannes Glückler, Heidelberg Prof. Dr. Simone Strambach, Marburg 

Prof. Dr. Thomas Krings, Freiburg i. Br. 

Schriftleitung – Editorial Management 

Dr. Helmut Schneider 

Arbeitsgebiet Kulturgeographie (Fakultät für Gesellschaftswissenschaften) – Universität Duisburg-Essen 

Campus Duisburg, Lotharstr. 65, D-47048 Duisburg 

Tel.: 0203379 1365/1742, Fax: 02033793516, eMail: helmut.schneider@uni-due.de 

Internet: www.wirtschaftsgeographie.com 

Inhalt 

Editorial: Informal dynamics of economic processes – some remarks 

on the potential of the informality concept 

Susanne Meyer: The world’s factory and informal ties: Organisation of firm networks in the 

1 – 8 

electronics industry in the Greater Pearl River Delta, China 

Frank Bickenbach, Wan-Hsin Liu; Firm characteristics and informal governance of business 

9 – 24 

operations in the Pearl River Delta, China 

Markus Keck, Hans-Georg Bohle, Wolfgang-Peter Zingel: Dealing with insecurity. Informal relations 

25 – 42 

and risk adaptation among food wholesalers in Dhaka, Bangladesh 

Pamela Hartmann Kilian, Daniel Schiller, Frauke Kraas: Workplace quality and labour turnover in the 

43 – 57 

electronics industry of the Pearl River Delta, China: Contrasting employer and employee perspectives 

Wenying Fu, Daniel Schiller, Javier Revilla Diez: Strategies of using social proximity and organizational 

58 – 79 

proximity in product innovation: Empirical insight from the Pearl River Delta, China 

Friederike Schröder, Michael Waibel: Urban governance and informality in China’s Pearl River Delta: 

80 – 96 

Investigating economic restructuring in Guangzhou 97 – 112 

Buchbesprechungen 113 – 120 

Moderation: Dr. Daniel Schiller, Institut für Wirtschafts- und Kulturgeographie, Leibniz Universität Hannover, Schneiderberg 

50 , 30167 Hannover , eMail: schiller@wigeo.uni-hannover.de 

Mitarbeiterinnen und Mitarbeiter des vorliegenden Heftes: Frank Bickenbach, Institute für Weltwirtschaft Kiel, Hindenburgufer 

66, 24105 Kiel, eMail: frank.bickenbach@ifw-kiel.de; Prof. Dr. Hans-Georg Bohle, Geographisches Institut, 

Universität Bonn, Meckenheimer Allee 166, 53115 Bonn, eMail: bohle@geographie.uni-bonn.de; Prof. Dr. Revilla Diez, 

Institut für Wirtschafts- und Kulturgeographie, Leibniz Universität Hannover, Schneiderberg 50, 30167 Hannover, eMail: 

diez@wigeo.uni-hannover.de; Dr. Wenying Fu, School of Geography, South China Normal University, Zhongshan West 

Road No. 55, Tianhe District, Gungazhou, Peoples Republic of China, eMail: ferlicity31@163.com; Pamela Hartmann Kilian, 

Geographisches Institut, Universität Köln, Albertus-Magnus-Platz, 50923 Köln, eMail: pamela.hartmann@unikoeln.de; 

Markus Keck, Geographisches Institut, Universität Bonn, Meckenheimer Allee 166, 53115 Bonn, eMail: 

markus.keck@geographie.uni-bonn.de; Prof. Dr. Frauke Kraas, Geographisches Institut, Universität Köln, Albertus-Magnus-Platz, 

50923 Köln, eMail: f.kraas@uni-koeln.de; Wan-Hsin Liu, Institute für Weltwirtschaft Kiel, Hindenburgufer 66, 

24105 Kiel, eMail: wan-hsin.liu@ifw-kiel.de; Dr. Susanne Meyer, Joanneum Research Forschungsgesellschaft mbH, Policies 

– Centre for Economic and Innovation Research, Sensengasse 1, 1090 Wien, Österreich, eMail: susanne. meyer@ joanneum.at; 

Friederike Schröder, HafenCity Universität Hamburg, Averhoffstr. 38, 22085 Hamburg, eMail: friederike. 

schroeder@hcu-hamburg.de; Dr. Michael Waibel, Geographisches Institut, Universität Hamburg, Bundesstr. 55, 20146 

Hamburg, eMail:waibel@geowiss.uni-hamburg.de; Wolfgang-Peter Zingel, Südasien-Institut, Abt. Internationale Wirtschaft, 

Universität Heidelberg, Im Neuenheimer Feld 330, 69120 Heidelberg, eMail: h93@ix.urz.uni-heidelberg.de 

Titelfoto: Die Entstehung neuer Megastädte in China und die informelle Dynamik des Industrialisierungs- und Urbanisierungsprozesses 

wird in der an Hongkong grenzenden Metropole Shenzhen besonders augenfällig. Wo heute mehr als zehn 

Millionen Menschen leben, befanden sich vor 30 Jahren nur vereinzelte Fischerdörfer (Foto: Daniel Schiller, August 2009).

Zeitschrift für Wirtschaftsgeographie Jg. 56 (2012) Heft 1-2, S.1-8 

Editorial 

Informal dynamics of economic processes 

Remarks on the potential of the informality concept 

The aim of this special issue is to expand the 

concept of informality by incorporating recent 

approaches from institutional economics and 

governance theory. The concept is applied empirically 

to analyse economic processes in the 

context of mega-urban regions and global 

change. This introduction outlines the conceptual 

approach by focusing on the advancements 

in comparison to earlier informality paradigms. 

It discusses the added value of a new informality 

perspective for economic geography and 

explains how the individual papers fit in. The 

contributions to this special issue are based on 

research projects that were carried out within 

the Priority Programme (SPP) 1233 “Megacities 

– Megachallenge: The Informal Dynamics 

of Global Change” funded by the German Research 

Foundation (Deutsche Forschungsgemeinschaft), 

whose support of the projects is 

thankfully acknowledged. 

The shifting conceptualisations 

of informality over time 

The terms ‘informal’ and ‘informality’ have a 

connotation of inferiority in the sense of ‘unofficial’ 

or ‘without form’, but they can also be 

understood in a positive way as ‘casual’ with a 

focus on freedom of action. This simple illustration 

shows the ambivalent character of informality. 

The term informality was first used 

in the 1970s by the ILO (1972) and HART 

(1973) in several reports about the informal 

sector in developing countries. Their informal 

sector comprises all economic activities that 

are not organised in line with the legal, technological 

and managerial standards of modern 

sectors in developed countries. By drawing a 

clear line between the formal and the informal, 

these studies focused on those niches of the 

economy that (i) helped migrants in urban areas 

and slum dwellers to survive (survival 

economies), (ii) carried out illegal activities in 

the underground scene without official regis- 

tration and unnoticed by the tax administration 

(shadow economies), or (iii) micro enterprises 

without any substantial capital stock that do 

not produce for the markets of the formal economy 

(subsistence economy) (PORTES et al. 

1989; CHEN/GEREFFI 1994). German-speaking 

human geographers used the concept of the informal 

sector intensively during the late 1980s 

and early 1990s (c.f. SCHAMP 1989, 1993; ES- 

CHER 1999a). A distinct structural debate 

emerged around the informalisation of labour 

during the post-Fordist transition. Formal wage 

labour became the leading form of labour organisation 

of Fordism and even spread to the 

economic periphery. From a Marxist point of 

view, this is not seen as a success of labour 

unions, but rather as being due to the benefits 

of formal labour for the capitalist system. At 

the same time, informal labour still persisted, 

for example in the form of domestic work, subsistence 

economy and production of petty 

goods. A renaissance of the informal economy 

was more recently caused by post-Fordism and 

also occurred in economic centres (KOMLOSY 

et al. 1997). While the Marxist tradition interpreted 

this shift as a coordinated attack on the 

organised labour class, other scholars of industrial 

organisation economics referred to the 

overall gains in efficiency and flexibility of a 

more informal organisation of economic systems 

and focused on the possibilities for prosperity 

that this new production paradigm implicated 

(PIORE/SABEL 1984). 

This earlier informality concept was problematic 

due to its dualistic nature that implied a 

clear distinction, and which turned out to be 

less useful in practical research. SCHAMP 

(1989,12) pointed out that the formal and the 

informal sectors were rather the extrema of a 

continuum. The heterogeneity of the informality 

definition made it virtually intangible in 

empirical studies, despite the fact that the 

coarse character (ESCHER 1999b) of the concept 

resulted in its ubiquitous application dur-

2 Zeitschrift für Wirtschaftsgeographie 

Heft 1-2 / 2012 

ing its time. Finally, the focus of research on 

informality and the informal sector was mainly 

limited to poor developing countries with an 

emphasis on urban areas. This hindered the integration 

of informality in modern growth and 

development theories in economic geography. 

The dualistic character of the criteria that defined 

the informal sector resulted in the lack of 

a sound theoretical foundation of informality, 

which became clearly apparent in comparative 

studies of different countries and regions. In 

this context, the quote ‘The informal sector is 

like an elephant: we may not be able to define 

it precisely, but we know it when we see it’ is 

attributed to Hernando de Soto (MEAD/MOR- 

RISSON 1996). Obviously, this fuzziness impedes 

the application of the concept for empirical 

research and policy recommendations and 

points out the necessity of a conceptual clarification. 

MEAD/MORRISSON (1996) declared that 

they would not use the term ‘informal sector’ 

in future studies. FRIELING (1989, 74) stated 

that it was not possible to overcome the vague 

terminology of the research object ‘informal 

sector’, and that the term was merely understood 

as a residual that was inferior to the formal 

sector. The interpretation of informality as 

a residual category or something contrary to 

the rules is problematic in that it requires a definition 

of what is regular or normal. The formal-informal 

dichotomy of the informality literature 

in the 1980s and 1990s was based on 

formal laws defined by the dominant legal system 

in Europe and North America. Such an Eurocentric 

perspective overlooks the fact that 

the legal tradition of the Code Napoleon of 

1804 might be less meaningful in other parts of 

the world. Therefore, an informality definition 

that is applicable in other macro-institutional 

environments should be based on a generalisable 

concept. 

The recent debate surrounding informality 

shifted the focus away from a dichotomous definition 

towards an integrative framework that 

is embedded within current conceptual developments 

in economics and social science. 

Based on a new understanding of the state and 

governance, the level of practice, regulatory 

systems and process-related elements is targeted 

instead of persisting with the investigation 

of structural elements. The concept of informality 

derived from this exercise avoids a 

strict distinction between formality and informality, 

and concerns itself with the interdependence 

of social process and structure. This al- 

lows an examination of informal dynamics 

both within a continuum (SINDZINGRE 2007) 

and from a multi-dimensional perspective that 

focuses on the informal dynamics of institutional 

arrangements rather than on a static informal 

sector. As a result, modern approaches 

to informality are neither predetermined as being 

an inferior residual category nor restricted 

to developing countries, but informal practices 

are understood as a governance mode in their 

own right that is intertwined with formal institutional 

arrangements. Indications of such an 

integrative perspective can already be found in 

critical reviews of the informal sector by 

CHENG/GEREFFI (1994) and FRIELING (1989). 

The advancement of the informality concept in 

economic geography is driven by the three 

strands of institutional approaches in economics 

and social science (MARTIN 2000). They 

have the potential to replace the older institutional 

tradition of the discipline that stressed 

the static-structural and historical-deterministic 

approach by Veblen (RAFIQUI 2009). Institutional 

arrangements for the governance of organisations 

and collective goods, as introduced 

by COASE (1937), WILLIAMSON (1975), and OS- 

TROM (1990) form the starting point for a redefinition 

of informality and are central for the 

following explanations. New institutionalism 

with its central authors SCOTT (1987), DIMAG- 

GIO (2001) and Powell (POWELL/DIMAGGIO 

1991) provides additional elements from organisational 

studies. The historical understanding 

of institutions by NORTH (1990) adds a 

dynamic-evolutionary perspective on institutional 

change. Furthermore, concepts of vulnerability 

and resilience as well as the sustainable 

livelihood approach that dominates geographical 

development studies allow for the integration 

of an institutional informality concept 

within the development debate. 

Informality in new institutional economics 

and organisation science 

Institutions are defined in a broad sense as a 

system of rules (HODGSON 2006). These rules 

comprise consciously created and externally 

enforced formal rules, for example laws, and 

self-enforcing, informal ones, for example traditions, 

norms, conventions, or customs 

(NORTH 1990). Additionally, New Institutional 

Economics (NIE) distinguishes between rules 

(= institutions) and actors (= organisations or

individuals) who are interdependent. The behaviour 

of actors is restricted and incentivised 

by institutions, but actors are also involved in 

the creation and transformation of institutions 

in a co-evolutionary way. Three levels for a 

conceptual redefinition of informality are derived: 

(i) informality of the institutional environment, 

(ii) informality of institutional 

arrangements, and (iii) informality of processes 

within organisations. An informality concept 

that is informed by institutional economics 

is not primarily focused on the structural 

elements (Which transactions are carried 

out?), but on the underlying practices (How 

are transactions carried out?) and dynamic 

processes (What impact does co-evolution of 

institutional environment and arrangements 

have on institutional change?). 

Institutional environment: The institutional environment 

has an informal and a formal component 

which are intentionally understood as 

interdependent in a co-evolutionary relationship 

by NORTH (1990), not in a dualistic, mutually 

exclusive way. Acceptance and enforceability 

of new formal institutions depends on 

the fit with existing informal institutions. The 

externally imposed adoption of rules and regulations 

during the transition of previously 

planned economies into market economies is a 

frequently cited example (STIGLITZ 1999; 

ROLAND 2000). It has been shown by DE SOTO 

(2000) that a lack of alignment of formal rules 

of capitalism with informal institutions resulted 

in dysfunctional institutional frameworks or 

institutional chaos. A central question of this 

strand of institutional informality at the process 

level is whether the institutional environment 

is better shaped by governments or related public 

actors in a top-down manner, or in a self-organised 

bottom-up manner through unintended 

effects of the aggregate behaviour of individuals. 

OSTROM (1990) explained why one should 

be sceptical about leaving formation and enforcement 

of institutions for collective action 

mainly to governmental bodies, and proved it 

by using the example of the commons. The 

Austrian school of economics (HAYEK 1973) 

has also indicated that the aggregate order of 

economy and space is brought about by complex 

interaction of its actors. Self-organisation 

and emergence of the institutional environment 

are understood as an expression of informality. 

Institutional arrangements: Institutional arrangements, 

i.e. contracts among economic ac- 

Editorial 3 

tors in a broad sense, are the central focus of 

the informality perspective in NIE. GUHA- 

KHASNOBIS et al. (2006) distinguish between 

two levels which can be applied for the analysis 

of informality of institutional arrangements. 

At the first level, the interdependence of an institutional 

arrangement with its formal and informal 

institutional environment is described 

and the explanatory power of the institutional 

environment for the arrangement is exposed. 

At the second level, the structuration of the institutional 

arrangement itself is depicted in several 

dimensions, the formal and informal aspects 

of which are not necessarily mutually exclusive, 

but mostly complementary. In a 

multi-dimensional approach, LI (2007) defined 

five dimensions to characterise the formal and 

informal contents of institutional arrangements: 

formation (exogenous vs. endogenous), 

codification (explicit vs. implicit), enforcement 

(tight and strict vs. loose and flexible), power 

(hierarchical vs. horizontal) and personalisation 

(depersonalised vs. personalised). Informality 

thus possesses a subjective, emotional 

and personal character, while formality is objectively 

based on facts and cognition. It is important 

to mention that this should not result in 

new dichotomies, but rather in multiple dimensions 

that allow for continuous specification of 

institutional arrangements within the formality-informality 

nexus. 

The multidimensional, non-dichotomous character 

of informality is illustrated by comparing 

the advantages of particular institutional 

arrangements. In most real world situations, 

economic activities are embedded flexibly in a 

dynamic and complex institutional environment. 

In such a situation, informality is a 

strategic opportunity to complement formal 

arrangements proactively. In close connection 

to NIE, contract theory (HART/MOORE 1999, 

2004) has shown that most contracts are unable 

to comprehend completely the object that is to 

be regulated in a formal way due to complexity 

and uncertainty. Therefore, contracts remain 

incomplete at the time they are concluded and 

are specified and modified in an informal 

process during the contract period. This 

process is often socially embedded. Nevertheless, 

if a high level of uncertainty is connected 

with the institutional environment at a particular 

location or in a market, it might be necessary 

to adapt informal arrangements as a passive 

reaction to non-enforceable formal 

arrangements.


Heft 1-2 / 2012 

Institutions in organisation science: Sociological 

institutionalism, with SCOTT (1995), 

DIMAGGIO/POWELL (1991), and in Germany 

MAYNTZ/SCHARPF (1995) being its main authors, 

looks at economic activity as a process 

that is embedded in a socio-institutional system 

or culture-specific social network. Informality 

is defined in this approach as interaction between 

individuals or groups which could be described, 

for example, as casual, trust-based and 

reciprocal. This normative-collectivist perspective 

adds to the rational choice institutionalism 

of NIE by explaining why trust is of critical 

importance in economic and social life and 

why cooperative arrangements are formed 

even in addition to the transaction cost argument. 

The aim is not to deduce the most costefficient 

institutional arrangement in order to 

reach an economic goal. In fact, embedded institutional 

arrangements are not just strategic 

means in an economic sense, but they also 

shape the preferences and identities of a society. 

Their impact is not necessarily in the form 

of increasing efficiency, but also in the provision 

of societal legitimacy of individual actions. 

The embeddedness perspective on informality 

becomes important if culture-specific 

aspects are introduced to explain why personal 

trust-based networks are chosen for economic 

transactions in situations where alternative 

governance forms are available and useful. 

This approach is of importance to understand 

the relevance of informality for interactive 

learning and the related processes of transforming 

and exchanging knowledge. There is a 

close link with the concept of social capital. 

Research on social embeddedness of economic 

processes has also shown that informal networks 

may have a negative impact (GRA- 

NOVETTER 1973; GRABHER 1993). The starting 

point of this argument is the exclusiveness that 

is an almost necessary outcome of stable, trustbased 

networks and that is responsible for the 

desired effects of these networks. However, 

this feature often results in the judgement of alternative 

options based on the position of the 

actor in the network, and is no longer fair and 

unbiased. A lack of transparency as well as 

gatekeeper functions of central actors or 

groups in the network can be responsible for 

lock-ins or cronyism in the long run. 

The relevance of institutional approaches for 

economic geography has been shown prominently 

by MARTIN (2000), who explained why 

the spatial differences of institutional environments 

and arrangements and their effects on 

the space economy are important topics for the 

discipline. A major argument for the spatial dimension 

of NIE is the fact that institutions are 

not equal across space, but are localised at particular 

points in space and are territorially 

bounded in their effects. Formal institutions 

created by the state are particularly restricted 

by administrative borders. However, informal 

or self-organised institutions also contain a 

spatial dimension, since they came into being 

due to specific local actor constellations, for 

example in agglomerations or local networks, 

and they only guide action within these spaces. 

SCOTT/STORPER (2003) have shown that agglomerations 

are advantageous due to their 

ability to reduce transaction costs. Based on the 

discussion above, it is expected that spatial differences 

of institutional environments lead to 

specific institutional arrangements in each region. 

This is of particular relevance if transactions 

are analysed that span spaces with different 

institutional frameworks. Furthermore, 

conceptual considerations and empirical applications 

of NIE in growth theory (ACEMOGLU et 

al. 2005) have revealed a major impact of institutions 

on differences in growth rates across 

countries and regions. And finally, the institutionalism 

in sociology gains its spatial dimension 

from the fact that social action is embedded 

in local contexts and that informal institutions, 

and thus actions, depend on their spatial 

and cultural context. 

Informality in the mega-urban 

economy 

The definition of informality that has been discussed 

so far is not restricted to developing 

countries or urban regions, as is the case with 

the older concept of the informal sector. However, 

there are arguments in favour of the fact 

that mega-urban regions, such as the Pearl River 

Delta in China or Dhaka in Bangladesh, are 

characterised by high levels of informality in 

an institutional sense. Mega-urban regions are 

more complex and disparate in their economic 

and social structures. They are closely integrated 

into global processes due to their economic, 

political and societal importance. Furthermore, 

rapidly growing mega-urban regions are characterised 

by an increasing speed and degree of 

institutional change. They are also highly vulnerable 

to economic, social and ecological 

shocks. ALTVATER (2005) identified the time

and space compression under conditions of 

globalization and the rapid growth of megacities 

as major drivers of an informalisation in 

mega-urban regions, which is also visible in 

advanced market economies (SASSEN 1997). 

While the negative impacts of informalisation, 

for example in terms of the exclusion of the urban 

poor, prevail in the literature, the potentials 

of informality for development and competitiveness 

at the individual, firm and regional 

level, which were already put forward by DE 

SOTO (1989), are at least equally important for 

the institutional approach used in this special 

issue. ALTVATER (2005) also concedes that informality 

enables the realisation of a bundle of 

political objectives such as formation of cooperatives 

and micro-credit organisations, support 

of local and regional networking, support 

of cooperation with universities and other public 

institutions, and creation of a legal framework 

which contains much more than the mere 

distribution of property rights. Thus, informality 

may provide the flexibility that is necessary 

to adapt to rapidly changing framework conditions. 

By focussing particularly on urban governance, 

ROY (2005) has shown that the ability of 

public actors is insufficient to plan mega-urban 

regions efficiently, but that informal self-organisation 

of institutions by non-public actors 

and related informal arrangements for risk 

management and increased resilience play a 

central role. This does not imply that largescale 

infrastructures are not provided by the 

formal government, but due to the complexity 

of mega-urban regions and the often limited 

governance capability of megacities in developing 

countries, a complementary use of informal 

arrangements is expected to increase the 

governance efficiency. 

The increasing global organisation and integration 

of economic activities as a central part of 

globalisation remains a megatrend that shapes 

the spatial economy (SCHÄTZL 2000). This 

process is characterised, among other things, 

by the spatial disintegration of value chains, 

the emergence of global production networks 

and an increasing division of labour based on 

the principle of flexible specialisation (PI- 

ORE/SABEL 1984). At the same time, shorter 

product life cycles require firms to remain flexible 

by adapting to volatile markets that are increasingly 

plagued by bubble-like expansions 

and crisis-like downturns. The underlying 

Editorial 5 

changes of economic systems result in a higher 

number of interfaces among companies, 

sites within multinational corporations, business 

services, and knowledge providers along 

the global value chain. The increasing complexity 

of interactions and flows and the necessity 

to span spatial, institutional and organisational 

distances reduces the possibility to fall 

back to standardised, completely formalised 

institutional arrangements and increases transaction 

costs, with informal aspects such as incremental 

and continuous adaptation processes 

during the interaction becoming more important. 

It is expected that traditional formalised 

arrangements will remain important, but that 

they will be complemented by informal ones in 

the sense of incomplete contracts. In volatile 

competitive environments, informality of external 

relations at the micro level may provide 

organisations with the amount of flexibility 

that is necessary to gain stability and competitiveness 

at the macro level. The strategic use of 

opportunity informality is suggested to increase 

flexibility and competitiveness and is 

covered by using the terms agility or agile firm 

organisation. 

In recent years, the global economy has been 

characterised by far-reaching changes of formal 

institutional environments defined by the 

state at different levels which may be observed 

in countries and regions at different stages of 

development. The institutional fabric of developed 

countries in Western Europe and North 

America was adapted to the requirements of a 

globalised economy with further rounds of 

deregulation and liberalisation. Previously centrally 

planned economies have been involved 

in a fundamental transition process since the 

1980s which is still going on in countries that 

have chosen a gradual strategy, such as China. 

The integration of developing countries into 

global value chains and the rapid industrialisation 

of regions in East and Southeast Asia are a 

related result of globalising forces in the first 

round, but have also been a driver of the most 

recent round of globalisation. 

Amidst these changes, it is particularly relevant 

to analyse the fit of new formal and existing informal 

institutions and to assess how economic 

actors cope with frictions of institutional 

systems. Since informal institutions are transformed 

slower than formal ones, it is very likely 

that self-organised institutions and institutional 

arrangements will be defined by the eco-


Heft 1-2 / 2012 

nomic actors themselves as a substitute for 

missing or dysfunctional formal institutions set 

by the state, at least for a certain period of time 

during accelerated institutional change. At the 

same time, the transition from plan to market 

redefines the relationship between the state and 

the market as well as that among individual 

economic actors. Uncertainties related to this 

process are expected to be bridged or reduced 

by the emergence of hybrid institutions and 

arrangements. However, necessity informality 

induced by rapid institutional change is rather 

expected to be a temporary phenomenon that 

arises from the necessity to substitute for missing 

or dysfunctional formal institutions. 

The six papers that were accepted for publication 

in this special issue specify different aspects 

of the institutional approach to informality 

and provide empirical tests and illustrations. 

Five papers deal with the mega-urban 

region of the Pearl River Delta, China, and one 

paper with the megacity of Dhaka, Bangladesh. 

Susanne Meyer deals with customer-supplier 

relationships and provides empirical facts that 

support the proposition, that an increasing 

amount of informality occurs due to the higher 

level of flexibility of production processes and 

the transcendence of different institutional environments 

by global production networks. 

Firms from Hong Kong use informal arrangements 

not only to govern transactions with local 

producers in the Pearl River Delta, but also 

with customers on the global scale. In these 

constellations, contractual relationships are becoming 

less specified and specifiable by complete 

contracts, and are governed by framework 

agreements that define the scope of the 

relationship and the terms of reference in general. 

Personal contacts are a method of identifying 

capable suppliers and reducing uncertainties 

about capabilities and conflicts of 

interest through personalised trust and reputation. 

In the low-tech sector, a competitive 

edge over a large number of technologically similar 

competitors is achieved through reliability 

and adaptability in terms of delivery times 

and product quantities with sufficient quality. 

In the high-tech sector, personal relations may 

be a method of ensuring the technological 

competence of the supplier. In addition, contracts 

are more often enforced informally using 

mediation or arbitration and through social 

power rather than using slower formal litigation, 

which is also more detrimental to reputations 

due to its publicity. 

Frank Bickenbach and Wan-Hsin Liu extend 

the discussion about the extent and determinants 

of informality to a larger set of business 

functions. Their argument is based on the hypothesis 

that the availability of formal rulebased 

procedures increases in the course of the 

Chinese transition process and that informal 

personal governance decreases. However, the 

expected effects are, in general, rather weak 

and only significant for very few business 

functions. Similar to the findings of Meyer, 

Bickenbach and Liu conclude that informality 

is not a transitory phenomenon that disappears 

in the process of institutional transition. There 

is evidence that positive effects of informality 

and path-dependent persistence prevail. 

Markus Keck, Hans-Georg Bohle and Wolfgang-Peter 

Zingel examine whether social 

processes and informal adaptation to risks result 

in an increasing level of resilience. Informality 

is defined as trust-based personal relations 

and a high degree of social capital. Effects 

are found for the micro level in the form 

of greater flexibility and adaptability of the actors, 

and at the macro level in terms of increased 

resilience of the urban food system as 

a whole. 

The effects of informality and flexibility are also 

empirically tested by Pamela Hartmann, 

Daniel Schiller and Frauke Kraas, who focus 

on the impact of workplace quality on labour 

turnover and its long-term effects for upgrading 

processes. Labour relations are significantly 

transformed by the flexibilisation of the production 

organisation. On the one hand, highly 

qualified employees with long-term contracts 

among the core staff are expected to fulfil a 

large and varying range of functions with highly 

flexibilised working hours. On the other 

hand, less qualified peripheral staff are strongly 

affected by numerical volatility. Flexible 

firms organise their labour force based on the 

concept of the ‘breathing factory’ and use informal 

channels of employment that differ 

from strict formal regulations. In developing 

countries, informal employment is related to 

missing or incomplete labour contracts, low 

qualifications and an absence of social security 

entitlements. Finally, the long-term effects of 

highly informal labour relations for training 

and upgrading of the labour force are discussed. 

It is concluded that informality and 

flexibility ensure the short-term success in 

highly competitive markets. However, there is

strong empirical evidence to suggest that it 

may not provide the preconditions in terms of 

absorptive capacity and skills to move beyond 

the low-tech, labour-intensive segments of the 

value chain in the long run. 

Wenying Fu, Daniel Schiller and Javier Revilla 

Diez are explicitly looking at these upgrading 

processes at the firm level and potentials 

for the emergence of innovative milieus in the 

Pearl River Delta. The importance of informality 

for upgrading is measured by social 

proximity in comparison to more formal organisational 

proximity. Positive effects of social 

proximity are revealed for the implementation 

of a wide range of innovation activities 

and for coping with volatile demand. However, 

social proximity is mainly applied by domestic 

firms to acquire access to the latest 

technology and market information from foreign 

firms. Therefore, the impact on product 

innovation performance is still fairly small and 

the level of trust-based interactive learning between 

firms in the region remains low. This is 

substantiated by the fact that firms that rely on 

formalised organisational proximity are at 

least as successful with respect to innovation 

outputs. This paper links the institutional perspective 

with an evolutionary approach, since 

it is shown that endogenous potentials of the 

currently externally governed production system 

of the Pearl River Delta are still too weak 

to provide the basis for the emergence of an innovative 

milieu. 

The global integration of economic activities 

and the related institutional change has resulted 

in a far-reaching transition of the role of the 

state and its relationship with economic actors. 

The catchwords ‘new public management’ and 

‘public-private partnership’ demonstrate the 

increasing overlap of public and private actions 

that has resulted in a total withdrawal of 

the state or outsourcing of its activities in some 

areas. Complex bargaining processes among 

the actors involved, new participative institutional 

arrangements and self-organisation have 

thereby come into being for the definition of 

institutional frameworks. The increasing level 

of differentiation of government actions seems 

to result in increasingly informal arrangements 

between the state and private actors. 

Friederike Schröder and Michael Waibel position 

their contribution at the interface of state 

and economy by focusing on informality in 

planning processes for the restructuring of ur- 

Editorial 7 

ban spaces. Their case study of a development 

project in Guangzhou, the capital of the 

Guangdong province, shows that the local government 

reacts to the dynamic complexities of 

the multi-faceted restructuring process by applying 

innovative and flexible governance 

modes. Experimental policies and informal 

governance allowing for a certain degree of 

self-organisation are exclusively applied in 

spatially-bounded development zones. Recently, 

the government has made particular use of 

this approach in projects that aim to attract 

knowledge-intensive business services and a 

highly qualified, creative workforce. 

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Daniel Schiller, Hannover

Zeitschrift für Wirtschaftsgeographie Jg. 56 (2012) Heft 1-2, S. 9-24 

Susanne Meyer, Wien 

The world’s factory and informal ties – organisation of firm networks 

in the electronics industry in the Greater Pearl River Delta, China 

Abstract: Institutional transition in countries such as China is expected to go hand in hand with the 

formalisation of interactional behaviour in firm networks. Recently, however, a different string of 

arguments has entered the academic discussion emphasising the limited extent of the formalisation 

of firms’ behaviour despite the institutional transition being complete. The aim of this paper is to 

show conceptually and empirically that a balance of formal and informal interactions is considered 

optimal for firms due to economic opportunities resulting from informality. The Greater Pearl River 

Delta (PRD), where Hong Kong (HK) firms act as cross-border intermediates between global 

customers and Chinese producers, serves as an example for studying the degree of informality applied 

when operating in two distinct institutional settings. A survey of electronics firms in HK investigates 

the way in which firms organise their contacting and selecting as well as their contracting 

processes when approaching global customers and Chinese producers. The findings show (1) 

that the degree of informality is greater when interacting with producers in the PRD due to the incompleteness 

of the institutional setting, but (2) that when acting with global customers, the behaviour 

of firms is only formalised to a certain extent. Informal interaction also serves as an opportunity 

for firms and is strategically used in an innovative organisational and management 

processes. 

Keywords: informality, institutions, business organisation, electronics industry, Hong Kong, China 

Introduction 

The Greater Pearl River Delta is responsible to 

a large extent for the economic growth and 

prosperity of China. It has made itself irreplaceable 

in the global value chain as a supplier 

for electronics products. The electronic 

firms in the region account for 38 % of Chinese 

exports and 32 % of the gross industrial output 

(Guangdong Provincial Bureau of Statistics 

2007). The region is unique in contrast to 

Shanghai or Bejing due to the intense firm networks 

between Hong Kong (HK), an established 

hub for trade with formal institutions 

meeting international standards, and the Pearl 

River Delta Economic Zone (PRD), part of the 

Chinese province of Guangdong and the 

‘world’s factory’ in the middle of a transitional 

process. HK firms act as intermediaries between 

producers of electronic products in the 

PRD and the global customer base located in 

industrialised economies. HK firms manage to 

interact well with partners in two distinct institutional 

settings. 

Following the general discussion, HK firms are 

expected to apply informal, more personal 

modes of interactions with PRD producers to 

overcome the institutional weaknesses in the 

PRD, for example missing laws or an inadequate 

enforcement of existing laws. Informality 

in interactions is considered to be a necessity. 

Global customers, in contrast, are expected 

to be served in a more formal way. However, 

there are theoretical considerations which emphasise 

the advantage of informal interactions 

even though a complete institutional setting is 

in place, for example social safeguards, trusted 

advice, room for flexible actions. Therefore, 

this paper addresses a slightly different line of 

thought which considers informality in interaction 

as an opportunity for HK firms as well, 

rather than merely as a necessity. This paper 

aims (1) to contribute to the academic discus-


Heft 1-2 / 2012 

sion on informal interactions in firm networks 

by adding a new strand of argumentation 

which turns away from informality as a necessity 

(survival strategy in transitional economies), 

towards informality as an opportunity to 

respond flexibly to the changing economic environment, 

(2) to open ways to operationalise 

and measure informal interactions and (3) to 

present initial empirical evidence to confirm 

that HK firms use informal interactions independently 

from the institutional setting. 

A firm survey conducted in HK revealed to 

what extent informal interactions are applied in 

the contacting and selection of new partners 

and the design of contracts. The answers of HK 

firms pertaining to PRD producers and global 

customers were compared. It could be found 

that HK firms also apply informal modes of interaction 

with their global customer base despite 

the fact that formal institutions are perfectly 

developed. It seems to be a good alternative 

in combination with formal modes of 

interaction. It suits the need for speed in the negotiation 

processes resulting from volatile 

market conditions and provides the flexibility 

required to change agreements. Considering 

informal interactions as a conscious and strategic 

method in business organisation, it can be 

viewed as a managerial innovation. Understanding 

business concepts in Asia may produce 

learning effects. 

In the first section, this paper sheds light on the 

two lines of argument from a conceptual point 

of view: informality as a necessity versus informality 

as an opportunity. In the second part 

the focus is turned to the operationalisation of 

informal interactions and methods with which 

to measure it. The third section presents an empirical 

study of whether informal behaviour 

disappears with the development of comprehensive 

formal institutions on a regional level, 

or whether informal arrangements are considered 

as an opportunity for doing business 

independently of the institutional setting. 

Smoothing business relations: 

new perspectives on informality 

The recent academic discussion on informal 

interactions in business relations has moved 

away from non-legalisation and informal economies 

towards the importance of informal institutions 

and, beyond that, even towards infor- 

mal behaviour. In order to explain informal 

modes of interaction between economic 

agents, there are two arguments on which to 

focus. On the one hand, informal interactions 

may be a consequence of inefficient formal institutions. 

Informal interactions are considered 

to be a necessity (WILLIAMSON 2000). On the 

other hand, informal arrangements and behaviour 

may simply be perceived by firms as more 

efficient, although these firms may act within a 

complete institutional setting. Informal interaction 

is viewed as an opportunity (ETZOLD et 

al. 2009; LI 2007; SINDZINGRE 2006). The 

study of whether informality in business interactions 

is driven by necessity or opportunity 

requires a particular investigation of a region’s 

institutional environment and its evolution. 

These factors shape the framework conditions 

for firms’ interactional behaviour. 

Informal interactions as a necessity: 

inefficient formal institutions 

Formal and informal institutions influence the 

behaviour of firms. Informal constraints are 

characterised by the customs, norms, traditions, 

culture and religion of a region. They are 

based on implicit understanding and are socially 

derived, which makes them inaccessible 

through written documents. Informal institutions 

are path-dependent and have a long, pervasive 

influence on the character of economic 

development. They are also roots for the development 

of formal rules. The two are interwoven 

(WILLIAMSON 2000, 595 ff.). Formal 

rules involve laws and regulations (RICHTER/ 

FURUBOTN 1996, 3 ff.). Although there is a 

clear distinction between formal and informal 

institutions (rules) and formal and informal behaviour 

of firms (actions), it can generally be 

agreed that formal institutions shape the path 

for formal behaviour (e.g. a comprehensive 

contract law encourages formal contracts) and 

informal institutions guide informal behaviour 

(e.g. a culture of harmony avoids formal disputes 

between partners), even though exceptions 

exist. 

This picture loses its simplicity when turning 

to economies under institutional change, such 

as China. There are two arguments as to why 

firms perceive a deviation from formal interactions 

as necessary. Firstly, formal institutions 

are not completely in place following the arguments 

of the New Institutional Economics. In 

their absence, firms are expected to rely on existing 

informal institutions. Secondly, prob-

Susanne Meyer: The world’s factory and informal ties 

lems occur because of a disharmony between 

formal and informal institutions. In transitional 

economies, formal institutions are mainly 

transferred from Western economies and are 

slightly adapted to local needs. This is, in general, 

more cost-efficient and time-saving than 

developing a new system. However, formal institutions 

are not rooted in regionally specific 

informal institutions (WILLIAMSON 2000). It is 

essential for successful reforms to change both 

the formal institutions and the belief systems 

(NORTH 1990). Otherwise, firms, led by individuals, 

will not support the new economic 

rules of the game, since their method of doing 

business is shaped by informal institutions and 

is not compatible with the new rules (GRA- 

NOVETTER 1973). It is not only the existence of 

formal institutions, but rather the costs, the efficiency 

and the willingness to use them which 

makes them attractive for firms. This explains 

why the economic system in some nations still 

does not work effectively, even though formal 

institutions are well developed. 

Although laws in China have been reformed, 

their functionality is still limited. At the same 

time, the Chinese are equipped with a set of 

strong informal institutions guiding social and 

economic interactions – guanxi. Basically, 

guanxi describes a personal connection between 

two people or a network of contacts, the 

idea of which is to draw on established connections 

in order to secure favours in personal 

interests (DUNNING/KIM 2007, LUO/CHEN 

1997, PARK/LUO 2001). These informal rules 

are already in place and may act perfectly as 

substitutes for dysfunctional and costly formal 

rules. The traits of guanxi are manifold (Tab. 

1). Firstly, guanxi operates on the level of individuals 

and corresponds to a highly personal 

relationship. Secondly, guanxi is reciprocal in 

the exchange of favours. Reciprocal processes 

are seen as a supplement to formal procedural 

rules. They involve mutual expectations on the 

part of the economic agents that a favour granted 

now will be repaid later. It is perpetual. Reciprocity 

can also result in mutual dependency. 

Thirdly, guanxi is an intangible asset. People in 

the network are committed to each other 

through an informal and unwritten code of 

trust. This guards against opportunistic behaviour, 

as the reputations of individuals are damaged 

when they disappoint their partners. 

Fourthly, guanxi is long-term oriented. Every 

guanxi relationship expands the stock of relational 

capital. It takes time to establish a functional 

guanxi network. Investments are initially 

high, but if a guanxi network is established, 

it enables firms to react quickly to changes and 

provides them with a certain degree of flexibility. 

Fifthly, guanxi is transferable. If A has 

guanxi with B, and B is a friend of C, then B 

can introduce and recommend A to C. Finally, 

guanxi is a utility concept. It is based on the exchange 

of favours, not on sentiments. If guanxi 

with other parties is no longer achieving objectives, 

it is easily broken (DUNNING/KIM 2007, 

330 f.; LUO/CHEN 1997; PARK/LUO 2001, 457). 

A manager's guanxi network is part of the Chinese 

way of doing business. Guanxi relations 

as found in Chinese society cannot easily be 

created – they are socially derived and are regionally 

embedded. Most of the contacts are 

built with people in spatial proximity, as trust 

and frequent interaction are the fundamental 

axes of guanxi. The network of guanxi is connected 

to a certain region, although guanxi also 

has the potential for long-distance relations, 

for example when family members or classmates 

move. The strong definition of informal 

rules supports entrepreneurs in adequately 

safeguarding their transactions in the absence 

of economic laws. For example, firms are hard- 

Tab. 1: The traits of guanxi 

Traits Description 

Personal Guanxi is established between individuals 

Reciprocal An individual’s reputation is tied up with reciprocal obligation 

Intangible Guanxi maintained by an unspoken commitment 

Long-term Guanxi is reinforced through long-term cultivation 

Transferable Guanxi is transferable through a third party as a referral 

Utilitarian Guanxi is purposefully driven by personal interests 

Source: according to DUNNING/KIM 2007, 331 

11


Heft 1-2 / 2012 

ly able to enforce contracts in the case of conflicts 

due to a lack of functionality of the Chinese 

court system. 

Despite all the positive effects of guanxi, it can 

also lead to lock-in effects, for example when 

firms are forced to select customers and producers 

via social ties (e.g. family members) instead 

of choosing the highest quality partner on 

a market basis. In other cases, firms cannot enforce 

contracts without considering the fact 

that this could burden the relationship. Therefore, 

it may be expected that against the background 

of profit maximisation, the guanxi network 

might become more functionally driven 

by personal connections and profit orientation. 

Business connections would then be associated 

with moderate informality, whereas private 

contacts are associated with a high degree of 

informality. 

According to the New Institutional Economics, 

institutional change in transitional economies – 

setting up a complete set of formal institutions 

in harmony with existing informal rules – is 

expected to lead to a gradual formalisation of 

interactions. However, this paper goes beyond 

that and follows the idea that a sophisticated 

set of informal interactions could still work efficiently 

in business operations even though 

formal institutions are modernised. There 

might be a trade-off point where formal interactions 

substitute for informal behaviour of 

firms, indicating optimal behaviour. Following 

these lines of thought, this paper addresses 

YEUNG/LIN'S (2003) call for a context-specific 

theorising of the economic geographies of 

Asia. 

Informal interactions as opportunity – 

benefiting by smoothing business relations 

If interactions are formalised only to some extent 

in the course of institutional transition and 

keep a certain level of informality due to more 

efficient outcomes, informal interactions in 

business are no longer transitional, but become 

permanent. This line of argumentation states 

that there is not necessarily a complete formalisation 

of interaction, even if sufficient safeguards 

are provided by the current law system. 

Formal and informal interactions no longer 

serve as substitutes, but as complements. It is 

considered to be an opportunity rather than a 

necessity. Psychological research has shown 

that in personal contacts, face-to-face visual 

clues, such as facial expression, gesture and 

posture, play a significant role in understanding 

and trusting the other party and can give all 

participants the impression that the others can 

be influenced more, thus making it appear 

more worthwhile to enter into cooperation 

(PUTNAM1993; MISZTAL 2000). MISZTAL (2000) 

proved that informal meetings still matter, as 

face-to-face contacts have the potential to draw 

individuals deeper into relationships with one 

another and to develop trust and intimacy. 

MACAULAY (1963) observed that business people 

trust in and rely on a person's word in a 

brief letter or a handshake, even if they take 

greater risks concerning the transaction. Moreover, 

experiments revealed that in face-to-face 

discussion, participants reach agreement sooner 

than in any other negotiation setting. This 

leads to greater confidence in the negotiation 

processes. Informal interaction contributes to 

greater flexibility. Firms have more freedom to 

adjust to specific circumstances. For example, 

firms can respond quickly without taking into 

account and discussing fixed contractual 

arrangements first. Additionally, studies discovered 

that personal contacts make negotiations 

more an issue between two people than 

one between two firms, and negotiations are 

less formalised. 

Researchers such as DUYSTERS et al. (1999), 

and recently PIDDUCK (2006, 265), argue that 

“a new perspective on partnership is needed to 

handle recent rapid economic and technological 

developments, and propose a more personal 

approach to partnership”. GRANOVETTER 

(1985) is thought to be the first to have intensively 

studied the effect of social networks on 

business success. Social networks transform 

into business networks and determine the 

choice of economic trading partners and how 

to interact with them. Empirical information on 

social networks proved the positive effects on 

economic development and democracy (PUT- 

NAM 1993; PUTNAM 2000), economic exchange 

(COLEMAN 1990; BURT 1992), education 

(COLEMAN 1988) and career success (BAKER 

2000). The advantages of informality have 

been recognised by firms. Therefore, some elements, 

for example face-to-face negotiation, 

are part of general business practices, rather 

than merely a specific phenomenon observed 

in China or HK, which may only occur there 

more frequently. Social networks are particularly 

beneficial when economic transactions 

take place in an environment of high risk and 

uncertainty. In the case of China, it must be in-


vestigated as to whether guanxi, originating as 

a social network, can transform into a comprehensive 

business network while preserving its 

efficient informal elements. 

Geography matters – regional institutions 

in the study region Greater Pearl River Delta 

Recently, the academic discussion in economic 

geography has stressed the spatial scale of institutions 

by applying concepts from the New 

Institutional Economics to an institutional economic 

geography (GERTLER 2010; BOSCHMA/ 

FRENKEN 2009; BOSCHMA/FRENKEN 2006). 

Economic interaction is shaped by a set of rules 

that are actively produced and reproduced over 

time and are typically bound to a particular region 

(GERTLER 2010). Some regions provide 

comprehensive formal rules and laws to protect 

economic transactions, while others provide 

socially derived, well accepted informal rules 

of doing business. The dependency of firms’ 

behaviour on the regionally specific institutional 

environment may be studied by examining 

cross border business operations between 

regions with two different institutional settings. 

The Greater Perl River Delta (GPRD) serves as 

a perfect study region for this phenomenon. 

The GPRD consists, on the one hand, of HK, a 

former British colony with a formal institutional 

environment corresponding to the international 

standard. On the other hand, there is the 

PRD, a transitional economy. Although firms 

in HK and the PRD act in distinct formal institutional 

settings, they have the same social 

roots resulting in similar informal institutions 

across the border. Production is usually organised 

in the PRD, whereas firms in HK serve as 

intermediaries for exporting and importing 

products to and from industrialised countries. 

HK firms are somewhat janus-faced (MEYER et 

al. 2009). One face is turned to the PRD producers, 

the other face is turned to the world’s 

leading firms as customers of products made in 

China. 

The unique institutional environment in the 

GPRD lends itself to the empirical testing of 

three hypotheses: 

(1) Firms in HK, working in two distinct institutional 

settings, organise business operations 

differently when dealing with PRD 

producers and global customers. According 

to this hypothesis, HK firms should work 

on a more informal basis with PRD producers 

due to the underdevelopment of 

13 

comprehensive formal institutions in China, 

but on a more formal basis with global 

customers. The persistently unsatisfactory 

enforcement of formal laws combined with 

the lack of interwovenness of formal and 

informal institutions in the PRD lead to the 

expectation that Chinese firms do not yet 

rely on formal safeguards to ensure transactional 

success. FEARON/LAITIN (1996, 

730) found that social networks are better 

developed and interactions are more frequent 

within ethnic groups because they 

share certain similarities. Since entrepreneurs 

in HK and the PRD have the same 

ethnic and therefore social roots, their way 

of doing business on an informal basis is 

easier to realise, as it is driven by the concept 

of guanxi. The degree of informality in 

interactions is expected to be higher in HK 

firms’ relations to PRD firms than to global 

customers. 

(2) Since the rules of law in China have improved 

recently, the organisational behaviour 

has formalised to a certain extent, but 

informal organisation still prevails. According 

to the second hypothesis, interactions of 

HK firms with local producers are not completely 

informalised either. With the improvement 

of the institutional setting in 

China, HK entrepreneurs have formalised 

their relations with PRD producers to a certain 

extent. But since they know about the 

advantage of informal interactions (e.g. 

reciprocity, mutual understanding, flexibility), 

they may consider a combination of 

formal and informal interactions to be most 

beneficial for their relations with producers. 

This would provide evidence for the 

importance of personal interactions even 

going beyond the institutional setting. In 

the empirical section, the intensification of 

formal vs. informal interactions will be 

studied, comparing the behaviour of HK 

entrepreneurs when working with PRD 

producers and Western customers. 

(3) Informal methods enable HK firms to engage 

in more flexible behaviour and respond 

quickly to market and customer requirements. 

Informality as an opportunity 

implies that firms benefit from informal behaviour. 

One expected benefit is more flexible 

behaviour leading to quick reaction opportunities, 

for example. Trust-based relations 

could relax negotiation processes,


Heft 1-2 / 2012 

ease the changing of agreements or encourage 

the enforcement of agreements through 

social power. 

Operationalisation of informal 

interactions in business 

LI (2007) discussed the contrasting terms of 

formality and informality of firms' behaviour. 

He distinguished between formal and informal 

attributes of interaction, whereby these mark 

the extreme points of a continuum. According 

to LI (2007, 229), informality in interactions on 

the micro-level “refers to the nature of social 

ties and events as implicitly assumed, endogenously 

embraced and flexibly enforced by horizontal 

… pressures in a particularistic personalized 

process …, while formality as explicitly 

prescribed, exogenously imposed and rigidly 

enforced by vertical authority powers in a … 

depersonalized process.” To study formal and 

informal behaviour, he proposed dimensions of 

informality as a framework to study and measure 

empirically formal and informal practices 

in business interactions. He recommended taking 

into account the degree of personalisation 

in business interactions, the form of agreements 

concluded, the precision of arrangements, 

the enforcement mechanisms of contracts 

and the power of institutions used (Tab. 

2). 

LI (2007) divided each dimension into a variety 

of actions ranging from formal to informal. 

Taking the first dimension, personalisation, into 

account, he refers to business contacts that 

can be highly impersonal (formal) or very personal 

(informal). Personal processes are based 

on face-to-face contacts, trust between partners 

Tab. 2: Formal-informal dimensions in business interactions 

and private involvement. This may also determine 

the second dimension, the form of agreements. 

Contracts can be highly formalised in a 

written way or informally agreed on in a verbal 

way, when partners trust each other's word. Not 

only the form of agreements, but also the precision 

of agreements (third dimension) can 

range from very precise (formal) to openended 

(informal). Business culture can rely on 

open-ended agreements with permanent renegotiations 

rather than specifying details in advance. 

Formal and informal agreements rely on 

different enforcement mechanisms, which can 

either be very tight at the one extreme or very 

loose at the other. In the case of conflicts, the 

power used to enforce agreements can be legal 

via courts or social power relying on shared 

norms within a culture (LI 2007; SINDZINGRE 

2006). A firm may be characterised as acting 

on informal constraints in terms of customerproducer 

relations when dimensions tend to be 

specified by informal practices. In contrast, a 

firm is characterised as acting on formal constraints 

in terms of customer-producer relations 

when dimensions tend to have a formal shape. 

Here a special focus is placed on these three dimensions, 

namely personalisation in business 

interactions, the form of agreements concluded 

and the precision of arrangements. Along these 

dimensions, it will be tested empirically as to 

how high the degree of informality applied in 

business interactions is, comparing firms acting 

in two different institutional settings. To 

test the dimension of personalisation, the instruments 

of HK entrepreneurs for contacting 

and selecting customers and producers were 

studied. Contacting and selecting processes 

can be based on personal or impersonal ties, 

which refer to informal or formal modes re- 

Dimensions Formal Informal Operationlisation 

Personalisation impersonal personal Contacting and selecting of customers 

and producers 

Form of agreements written verbal Form of manufacturing agreements 

Preciseness of agreements precise open-ended Details fixed in manufacturing agree 

ments 

Enforcement of agreements tight loose 

Power legal (vertical) social (horizontal) 

Source: own composition according to LI 2007, 229ff.)


spectively. There are two arguments as to why 

informal means might be used in contacting 

and selecting processes: 

– In the neoclassical theory, firms are expected 

to contact and select their business partners 

by evaluating their rational factors of 

success (e.g. for example firm performance, 

product quality) (ANGELES/NATH 2000; HITT 

et al. 2000; SAFFU/MAMMAN 2000). This 

could be interpreted as an impersonal and 

therefore formal method of contacting customers 

and producers. But bounded rationality 

limits the scope of firms for assessing a 

potential partner's quality and reliability in 

advance. Even though firms can assess potential 

partners’ quality and reliability within 

a screening scheme of their own (formal), 

they can trust in a network of firms with 

pooled experiences (informal). Empirically, 

MENARD (2004, 361) could prove that the 

use of informal modes through networking 

to gain new customers and producers opens 

up additional opportunities for firms without 

weakening any formal modes. 

– Under volatile industry and market conditions 

with changing demand, time is essential 

for a firm's competitiveness. As a personal 

network is always ready to use, it 

seems to be a quicker way of activating new 

customers and producers at short notice 

(MILLINGTON et al. 2006). 

In order to study the dimensions of precision 

and form of contracts, HK firms' contracts 

with customers and producers pertaining to the 

manufacturing of electronics products were investigated. 

Emphasis was placed on the details 

fixed and the form of contracts. Again, there 

are three arguments as to why informal means 

might be used. 

– When the formal institutional environment 

does not provide safeguards for the enforcement 

of contracts, the incentive of firms to 

design precisely written contracts is low. 

Firms have to protect their transactional interests 

in other ways. A trust-based relationship, 

as which guanxi may be characterised, 

in which parties rely on reputation and reciprocity, 

provides informal safeguards which 

lead to self-enforcing contracts (POWELL 

1990; DIMAGGIO/LOUCH 1998; MENARD 

2004, 362). Despite improvements in the 

PRD, the institutional framework does not 

15 

provide firms with the appropriate safeguards 

for protecting their transactions efficiently. 

Even if contractual details are formally 

fixed and verifiable, it is still difficult 

to enforce them through courts (MENARD 

2004, 360). 

– Informal modes in contracting can also be 

expected due to the low impact of contracts 

in Chinese business culture. Contracts are not 

the results of intensive negotiations, but are 

seen rather as the beginning of a relationship 

over a much longer time period (see guanxi). 

Therefore, the permanent renegotiation of 

contracts is a process which accompanies the 

development of the relationship. 

– There is, however, another argument: Firms 

still weigh the costs of anticipating, devising 

optimal responses to and drafting provisions 

for future events against the value which 

would be lost in the case of conflicts. Only 

when transaction-specific investments are 

high is it worth incurring the considerable 

costs of administering complex and highly 

detailed contractual arrangements (model in 

HART/MOORE 2004, 5 ff.; MASTEN 2000). Under 

certain circumstances, firms are expected 

to attempt to agree only on the most necessary 

details (SEGAL 1999, 74). Besides cost 

motives, this is associated with greater flexibility. 

Firms can speed up the contractual 

process and revise and renegotiate on a 

steady platform in order to adapt to changing 

demand. In industries with rapidly shifting 

technologies and markets, firms need adjustable 

contracts embedded in networks to 

ensure the ability to react to the changing demand 

profiles of end customers (ERNST 2004, 

106). 

Despite the positive effects of informality on 

business interactions, one has to consider that it 

takes a lot of time and effort to build social ties. 

HUMPHREY/ASHFORTH (2000) showed that interpersonal 

relationships can also lead customers 

to award contracts to producers who 

have higher unit costs, lower quality and slower 

delivery times. Nevertheless, networks may 

also lead to a lock-in, if firms rely on them exclusively. 

Therefore, they need to be supported 

by formal structures to guard against the negative 

effects of informality, such as opportunistic 

behaviour and its intransparency (MISZTAL 

2000, 7).


Heft 1-2 / 2012 

Data and methods 

Informality will be studied empirically, involving 

a comparison between the organisation of 

customer and producer relations of HK firms. 

Emphasis is placed on the contacting and selecting 

procedures and the contractual arrangements. 

To avoid sector-related skewness, the 

study was concentrated on one industry. The 

electronics industry in the GPRD was selected 

because of its large contribution to the economic 

growth in the GPRD and its dynamics 

(CANFEI et al. 2008). The electronics industry 

in the PRD is responsible for 38 % of all Chinese 

electronics exports and 32 % of the gross 

industrial output. 47 % of foreign direct investments 

come from HK (Guangdong Provincial 

Bureau of Statistics 2006). 

As there is a shortage of secondary data on 

this issue, a firm survey was conducted in HK 

focussing on the electronics industry. On a 

micro-level, a survey of small and mediumsized 

electronic firms was conducted in HK in 

2007 and 2008 to collect information on how 

HK firms organise relations to their PRD producers 

as well as to their global customer 

base. This was intended to show whether informal 

interactions are only applied in relations to 

PRD firms as a necessity for manoeuvring 

around institutional incompleteness, or whether 

HK firms also see advantages in organising 

business with customers in an informal way. 

The survey was based on the firm directory of 

the Hong Kong Trade Development Council. 

From 4,903 registered small and medium-sized 

HK electronic firms, a random sample of 2,000 

was selected. In a stepwise process, 1,000 

firms were chosen first, followed by another 

sample of 1,000 firms due to the low return rate 

from the first sample. The survey concentrated 

on firms with not more than 100 employees in 

HK according to HK statistical standards. Although 

a standardised survey was conducted, 

the information was collected personally in an 

hour-long interview to ensure high quality. 

CEOs or senior managers of 104 firms agreed 

to an interview (5 % return rate). Although the 

Social Science Research Center of the Hong 

Kong University (SSRC), who provided strong 

support in contacting and interviewing firms, is 

very professional and experienced, gaining HK 

CEOs for an interview proved to be very difficult. 

The low response rate may be explained 

by the fact that people in these positions were 

requested to participate due to the strategic ori- 

entation of the survey. Unfortunately, potential 

respondents often spend most of their time in 

their Chinese factory and were hardly available 

in HK. Moreover, we wanted CEOs to be 

interviewed personally in order to ensure the 

quality of the survey results, rather than using 

self-completed questionnaires, which also 

dropped the return rate. Additionally, HK firms 

are the target group of many surveys. As we 

cooperated with SSRC, we already had a 

strong academic partner for the interviews, 

which led to a reasonable response rate for HK 

circumstances, but in comparison to other surveys, 

the response rate is lower. However, 

since the collection of empirical data on informality 

in interactions is still at an explorative 

stage, no attempt was made to produce representative 

results. The accessibility of firms and 

reliability of data was of primary importance. 

Nevertheless, it could be proven that there is 

no significant difference between sample and 

population according to employment size. 

Applying informal interactions: 

contacting, selecting and contracting 

The previous sections raised the question of 

whether the institutional environment requires 

informal actions as a necessity or whether informal 

interactions could also be seen as an opportunity 

for firms. This section empirically 

studies the degree of informality applied in the 

customer-producer relations of HK firms in 

terms of contacting and selecting procedures 

and contractual arrangements, depending on 

the institutional environment. 

Contacting and selecting of customers 

and producers 

Contacting: When firms wish to contact new 

customers and producers, they may choose 

from a variety of methods ranging from very 

impersonal to very personal. The importance of 

seven different contact channels of HK firms 

for gaining new global customers (non-Chinese) 

is shown in Tab. 3. In the second part, the 

selecting processes of PRD producers will be 

studied as a comparison. Contact channels 

range from being very personal, and therefore 

informal (private contacts), to very impersonal, 

and therefore formal (bidding competition). 

HK firms were asked to assess their importance 

on a Likert scale (1 = very important to 5 

= not important). Recommendations by business 

partners are, as is shown in Tab. 3, the


most important (61 %). This requires a network 

of trustworthy business partners to receive recommendations. 

Whereas business contacts 

seem to be of importance, private networks are 

not (8 %). Sales agents are the second most important 

(54 %). Sales agents are responsible for 

contacting and keeping in touch with customers. 

The personal contact is important, as 

this creates an atmosphere of trust. However, 

sales agents account for moderate informality. 

In contrast, gaining customers at exhibitions is 

less personal, while gaining them on the internet 

or through bidding competitions is even 

more impersonal, and therefore very formal. 

Exhibitions and internet contact is third in 

terms of importance. Formal bidding processes, 

the contacting of former customers and private 

contacts are of minor importance. The 

Chi²-test shows that the indicated shares significantly 

differ from an equal distribution. 

Contacting channels with a medium degree of 

informality scored highest when HK firms contact 

global customers, although the institutional 

environment would allow them to rely on formal 

means only. Apparently, a certain degree of 

informality is conducive to business success. 

When firms can revert to networks, they enlarge 

their pool of choices for contacting and 

selecting partners. Very impersonal contact 

channels are at everybody's disposal, but personal 

channels are not available to all firms. 

Although formal safeguards can be ensured by 

a functional legal system in HK and transac- 

17 

tions with strangers can be ensured by contracts, 

recruitment within networks might still 

be appealing because of cost-reducing and 

time-saving aspects. Even if HK firms contact 

global customers, they prefer the use of networks 

and other moderately informal means. 

This raises the question of how guanxi networks 

are affected by institutional change. 

XIN/PEARCE (1996) and NEE (1992) see guanxi 

as a substitute for the deficiencies of formal institutional 

artifacts and failures in the legal system. 

Proponents of this thesis argue that guanxi 

will become less important in the future. On 

the other hand, other experts argue that guanxi 

is also transforming into a more functional 

business network. Whereas the traditional 

guanxi network consists of family (zijiaren) 

and fellows/helpers (shouren), it has now 

changed to strangers/business partners (shengren), 

which makes it more effective for business 

(MILLINGTON et al. 2006). Studies of business 

culture in HK or Taiwan are widely used 

to provide examples of the transition – but nevertheless 

survival – of guanxi in the modern 

market (FAN 2002; ZHANG/ZHANG 2006). 

The importance of business networks in comparison 

to private networks confirms the 

change of the nature of guanxi from a private 

to a functional network. This functional guanxi 

network is driven by personal connections. 

When firms in HK use their guanxi networks, 

they profit from the intangible, transferable and 

reciprocal character of the network. Other network 

members are committed either to provid- 

Tab. 3: Importance of formal and informal contacting channels of HK firms to global customers 

(in %) 

customers abroad (n=93) 

important moderate 

important 

not 

important 

Chi² significance 

(1) Bidding competition 19 9 72 64.323 .000 

(2) Internet 48 27 25 9.548 .008 

(3) Exhibitions and fairs 51 26 24 12.452 .002 

(4) Sales agents 

(5) Recommendation by 

54 22 25 17.613 .000 

business partners 61 26 13 35.032 .000 

(6) Former business 

relationship 

22 14 65 41.484 .000 

(7) Private contacts 

(e.g. family ties) 

8 12 81 93.935 .000 

Note: Importance is measured on a Likert scale with 1=very important to 5=not important, mean value indicated. 

Source: calculation based on own survey conducted in DFG SPP 1233 [2007]


Heft 1-2 / 2012 

ing their services to the firm (intangible), or 

they recommend a third party (transferable) 

(DIMAGGIO/LOUCH 1998). Firms save ex ante 

transaction costs for screening their environment 

for new customers and producers, collecting 

information and establishing the first 

contact, but they also hope to achieve better 

safeguards than in a formal process (POWELL 

1990; DIMAGGIO/LOUCH 1998; GRANOVETTER 

1985). Former experiences may be used as an 

indicator for future satisfaction (MACLEOD 

2006). If a producer has acquired a good reputation 

in a business network, it is treated as an 

asset which loses its value should the producer 

disappoint customers (MACLEOD 2006; ARAU- 

JO/ORNELAS 2007:3). As networks are reciprocal, 

firms are willing to repay favours. Preliminary 

empirical evidence was found in the 

study of GASTON/BELL (1988). They proved 

that two-thirds of investors in the informal capital 

market find investments through their networks. 

The most reliable sources are friends 

and business partners. SHILLER/POUND (1989) 

confirmed those findings. They found that the 

majority of purchasers of publicly traded common 

stocks buy based on information from 

friends and business associates. Networks are 

usually developed on an individual level, but 

are often transferred to a firm level. This does 

not skew empirical findings as long as firms 

are small and/or family-led. The owner and 

manager is the same person and the owner's 

network is identical to the firm's network. This 

mainly applies to small and medium enterprises 

(SME) in HK. In large firms with frequent 

changes in management positions, a distinction 

must be made between the networks of 

individuals and those of the firm. 

In conclusion, HK firms proved that contacting 

channels have not yet formalised completely, 

and that informal modes retain their importance. 

This is also in accordance with the theory 

outlined by ZENGER et al. (2002). Formal institutions 

do not necessarily go along with formal 

interactions, but provide room for the use 

of informal as well as formal actions. 

Selecting: It is expected that the contacting of 

customers and producers is carried out on a 

continual basis. A selection occurs if a new 

partner is needed. Selection processes are of 

Tab. 4: Importance of formal and informal selection criteria of HK firms for producers in 

equity cooperation and non-equity cooperation (in %) 

equity cooperation (n=17) non-equity cooperation (n=17) Chi² significance 

important moderate not important moderat not 

important important important important 

(1) Expertise 

(2) Good 

65 18 18 76 18 6 1.167 .558 

reputation 

(3) Good 

experiences 

in previous 

71 12 18 76 18 6 1.240 .538 

business 

(4) Get along 

with local 

workers/ 

82 6 12 71 24 6 2.287 .319 

suppliers well 

(5) Get along 

with public 

29 35 35 24 41 35 .188 .910 

officials well 

(6) Existence 

of personal 

18 35 47 12 18 71 2.000 .368 

relationships 71 12 18 41 47 12 5.116 .077 

Note: Importance is measured on a Likert scale with 1=very important to 5=not important, mean value indicated. 



particular interest when firms look for new cooperation 

partners. MEYER et al. (2009) outlined 

that cooperation with PRD producers has 

become more important for HK firms in recent 

years. Therefore, the selection criteria for PRD 

producers in cooperation were analysed using 

the dimension ‘personalisation’ in the informality 

pattern. Selection criteria can range 

from very formal, without any involvement of 

personal assets, to very informal, which qualifies 

producers only because of personal relations. 

Expertise can be seen as an objective 

measurement of skills and is therefore very impersonal. 

A good reputation is based on a pool 

of subjective measurements and is therefore 

deemed to be impersonal, but not as impersonal 

as expertise. Positive experiences in previous 

business dealings are based on a firm's own 

subjective measurement of the producer's quality. 

It is linked to moderate personalisation. In 

contrast, selection criteria are more personal 

when they qualify producers to get along well 

with local workers, suppliers and public officials. 

When a producer is qualified because of 

a private connection, this counts as informal. 

For analysis, the focus is on cooperative relations, 

as they are concerned with the highest 

degree of mutual interaction and potentially informal 

traits. For simple reasons, there is a distinction 

between equity cooperation and nonequity 

cooperation of HK firms with PRD producers. 

Equity cooperation with Chinese firms 

was mandatory at the beginning of the transformation 

process and could be considered as 

the oldest mode of cooperation existing between 

HK firms and Chinese producers. Nonequity 

cooperation was a free-choice decision 

that appeared with the modernisation of Chinese 

laws. The differentiation between equity 

cooperation (e.g. joint ventures) and non-equity 

cooperation (e.g. loosely concluded cooperation 

agreements) provides interesting results 

about firms' preferences within those relationships 

and potential changes in cooperation. It 

can be seen, for example, whether personal relations 

still steer cooperation or whether they 

are equally important to other formal procedures. 

When looking at equity cooperation, Tab. 4 

shows that positive experience in previous 

business dealings is of the greatest importance 

(82 %), followed by a good reputation of producers 

and the existence of personal relationships 

(both 71 %). HK firms' selection criteria 

19 

for producers in equity cooperation are based 

on subjective quality measurements and personal 

relationships. Informal and moderately 

informal criteria are mainly applied. However, 

when turning to non-equity cooperation, expertise 

as an objective means of measuring the 

quality of producers is of the greatest importance, 

along with a good reputation (both 

76 %). The third most important factor is positive 

experience in previous business dealings 

(71 %). While some firms apparently need to 

smooth relationships to potential joint venture 

partners through informal modes, other firms 

working in non-equity cooperation set their 

priority on measurements of quality, for example 

personal relationships are much more important 

in equity than in non-equity relations. 

This also became significant in the Chi²-test. 

The findings showed that a successful partnership 

in non-equity cooperation is characterised 

by expertise and a good reputation of producers 

in combination with mutual understanding. 

In contrast, equity cooperation follows another 

strategy. It is mainly applied to running 

the business. This was the way in which HK 

firms were forced to work at the beginning of 

the Chinese opening policy. The way equity 

cooperation is seen by HK firms does not seem 

to have changed over recent years. There is an 

initial signal for a difference in importance of 

personal relations, and Guanxi might change 

from a purely personal to a business network. 

Moreover, it can be observed that in a modern 

non-equity relationship, HK firms balance formal 

and informal criteria instead of purely relying 

on informal ties. But to a certain extent, 

informality remains an opportunity. As these 

findings are only a preliminary sign, this issue 

definitely requires further research. 

In summary, the findings on contacting and selecting 

procedures of HK firms show, first, that 

personal relations are much more important 

when dealing with firms in China than with 

global customers, which is an expression of the 

influence of the institutional setting. But second, 

it could be shown that HK firms still use 

informal modes to contact and select global 

customers, even though the institutional environment 

would allow a reliance on formal 

modes only. This confirms again that a certain 

degree of informalisation smoothes business 

relations. HK firms tend to combine formal and 

informal modes in order to succeed. Formal 

and informal modes are not mutually exclu-


Heft 1-2 / 2012 

sive, but rather complement each other. 

MILLINGTON et al. (2006) also worked on the 

identification process of Chinese partners. 

Their findings also show that personal connections, 

and in particular guanxi, helped UK and 

US-invested manufacturers in China to select 

producers. They also observed, however, that 

guanxi nowadays consists of business rather 

than family and community connections. 

Contractual arrangements with customers 

and producers 

Precision and form of contracts: Once firms 

have contacted and selected their potential customers 

and producers, they have to settle transaction-specific 

details. This section provides 

evidence on how contractual arrangements are 

concluded. Two dimensions of informality are 

analysed: the form of agreements (written to 

verbal) and precision (precise to open-ended). 

Interviews with lawyers in the GPRD indicated 

that the following points require attention 

when contracts are concluded: product specification, 

quantity, price, delivery time, agreement 

on exclusivity, penalties for breach of 

contract. 

The proportions of HK firms which fix all 

points in contracts are shown in Tab. 5 (see 

columns ‘precision of contracts’). If points are 

fixed in contract, this could be in written form, 

verbal form or both (see columns ‘form of contracts’). 

The more open-ended an agreement is 

and the more details are agreed on verbally, the 

greater the informal character of a contractual 

Tab. 5: Preciseness and form of framework agreements of HK firms 

arrangement is. Again, a comparison is made 

between HK firms’ contractual organisation to 

global customers and to producers in the PRD. 

When looking at the precision as a dimension 

of informality, the findings show that more 

than three quarters of the necessary details are 

fixed before the actual production process 

starts. Only a small proportion of firms have 

imprecise and therefore informal contracts. A 

look at how points are fixed, the form of agreements, 

indicates that HK firms mainly keep to 

formal modes, although there is a slight trend 

towards more informal agreements with PRD 

producers. If points are agreed on in advance, 

the majority of HK firms fix important points 

in written form. In customer relations, an average 

of 51 % of HK firms reported fixing all 

points in writing, while in producer relations, 

the figure was 46 %. An exclusively verbal 

agreement is only concluded by a very small 

number of firms (customers: 7 %, producers: 

5 %). In producer relations, the combination of 

both written and verbal agreements is preferred 

by about one quarter of the firms, while in customer 

relations, the number drops to 20 %. 

Comparing customer and producer relations, it 

becomes clear that the number of written details 

in contracts is slightly higher with customers 

than with producers. 

HK firms apply informal modes when contacting 

and selecting customers and producers, but 

when it comes to contractual arrangements, 

they mostly do not rely on trust and a hand 

Customers (n=27) Producers (n=38) 

Precision of contracts Precision of contracts 

sum Form of contracts sum Form of contracts 

not fixed fixeda written/verbal/both not fixed fixeda written/verbal/both 

Product specification 100 7 93 → 63 7 22 100 16 84 → 50 3 32 

Quantity of products 100 22 78 → 48 7 22 100 13 87 → 55 0 32 

Price of products 100 15 85 → 63 4 19 100 16 84 → 53 3 29 

Delivery time 

Agreement on 

100 15 85 → 59 7 19 100 13 87 → 58 5 24 

exclusivity 

Penalties for 

100 37 63 → 33 7 22 100 47 53 → 32 5 16 

breach of contracts 100 33 67 → 41 7 19 100 42 58 → 26 16 16 

Mean 100 22 78 → 51 7 20 100 25 75 → 46 5 25 

a sum of shares written, verbal and both 



shake, but prefer written agreements. When 

disputes occur, a written document is of higher 

value than a person's word. What could not be 

proven in the quantitative data, but has been 

derived from the interviews, is that although 

points are fixed in a written form, those written 

contracts are not comparable to what Westerners 

intuitively associate with written contracts. 

Family ties and long-term business relationships 

are reasons for non-dedicated contracts. 

Lawyers have often experienced that Chinese 

firms have only rudimentary contracts, even 

for large projects. Often, a one-page contract is 

concluded covering the main points, but it is 

not proofed by lawyers. Those contracts are 

very difficult to enforce by law in the case of 

disputes. LEE (1997, 189) shows that one third 

of HK managers rely on verbal contracts. 

Informal contracts indicate greater flexibility: 

An important contribution of this work is to 

study the correlation of informality and flexibility. 

Although HK firms indeed indicated 

having formal contracts, there is some evidence 

for informal contracting as well. Initial 

proof of whether informal contracts lead to 

quicker response and greater flexibility can be 

considered as an answer to the question of 

whether informality serves as necessity or opportunity. 

It must be investigated as to whether 

informal contracts are perhaps of even greater 

advantage than formal contracts with respect to 

the time of negotiation. In order to prove the 

correlation of informality and flexibility, evidence 

must be found of informal contracts 

leaving more leeway for firms to arrange the 

actual order, saving them extra time and reducing 

transaction costs. Flexibility in contractual 

arrangements was measured according to the 

time in days required by firms to negotiate details 

before the production process could start. 

What effect informal contracts have on the 

time between the beginning of negotiations and 

the start of production in contrast to formal 

contracts is shown in Tab. 6, distinguishing between 

customers and producers. HK firms 

which have informal contracts with their pro- 

21 

ducers indicated a shorter negotiation time on 

average than firms with formal contracts (three 

days instead of five days). In this case, informal 

contracts seem to allow more leeway for 

final negotiation, which reduces negotiation 

time before production can start. In a rapidly 

changing business environment, the costs of 

drawing up a comprehensive contract are extremely 

high. PRD firms in particular, as component 

suppliers of HK firms, suffer from permanently 

changing market conditions and poor 

forecasting systems, which increases their need 

for flexibility. When producers are located 

within the PRD, informality in contractual 

arrangements works well in combination with 

spatial proximity and guanxi, as information 

may be verbally agreed on and revised. This 

finding cannot yet be generalised due to the 

low number of cases. Moreover, the difference 

between three and five days is not significant. 

This finding only serves as an initial signal for 

the advantages of informal behaviour, but definitely 

needs further investigation. 

Informal agreements with customers reduce 

the time required for negotiation when an actual 

order is placed from seven days to six days. 

It seems to be more difficult to agree upon 

actual orders when the contract is informally 

organised in long-distance customer relationships, 

because the absolute negotiation time is 

longer. Again, due to the low number of cases, 

the findings cannot be generalised. Potential 

explanations for this observation could be that 

forecasting systems of HK firms are better and 

the need for flexibility is lower, therefore informal 

agreements are of advantage, but formal 

agreements can hold their own in terms of 

speed. As HK firms and international customers 

work in a complete institutional environment, 

transaction costs for concluding written 

contracts are lower. Additionally, this 

seems to be of advantage for the enforcement 

of contracts, as the legal system provides firms 

with sufficient enforcement mechanisms. 

LYONS (1994) investigated firms in France and 

found that contracts between firms usually tend 

Tab. 6: Effects of formal and informal framework agreements on the negotiation time 

Customers Producers 

n Time of negotiation n Time of negotiation 

Formal Contract 18 7 days 23 5 days 

Informal Contract 9 6 days 15 3 days 



Heft 1-2 / 2012 

to be informalised when they work in rapidly 

changing business environments, because the 

costs of drawing up a comprehensive contract 

are too high. 

Conclusion 

The aim of this paper was to show the underestimated 

importance of informal interactions 

for business operations in transitional economies, 

which serve more purposes than simply 

to replace dysfunctional formal rules. The 

GPRD, with its distinct institutional setting, 

served as an example to prove to what extent 

informality serves as an opportunity or as a necessity. 

Informal ties in firm networks are 

maintained to some extent due to their high efficiency, 

even if formal institutions are developed 

to international standards. Informal interactions 

turned out not only to be considered 

as a substitute for missing formal rules, but as 

a complement. A firm survey in HK in 2008 

delivered the empirical data to prove the hypotheses. 

104 small and medium-sized firms 

were interviewed. As the quality of the survey 

was of great importance, the return rate was 

only 5 %. This also resulted in a low number of 

cases for analysing specific questions. As this 

study is of an explorative nature, representative 

results were not aimed for. The findings cannot 

be generalised, but they deliver initial signals 

for a positive assessment of informality, which 

should be considered for further research. 

It could be proven that HK firms apply a lower 

degree of informalisation in relations with 

global customers than with local producers 

when contacting and selecting partners as well 

as designing contracts (hypothesis 1). However, 

when firms work with producers in the 

PRD, they do not rely purely on informal ties, 

but have a healthy balance of formal and informal 

behaviour (hypothesis 2). For contacting 

and selecting partners, firms use their networks 

instead of the formal procedure of quality 

assessment. Contracts are mainly fixed in 

writing, but they only cover the most important 

details, which are subject to negotiation afterwards. 

It turned out that HK firms use informal 

ties to organise business with global customers 

as well. They do not only use informality as a 

necessity in dealing with Chinese firms, but 

also see it as an opportunity to increase their 

variety of modes to do business. Therefore, it 

can be expected that the world’s factory for 

electronic products in the GPRD will continue 

to rely on informal ties between firms, even if 

China makes an effort to improve its formal institutional 

environment. In order to prove this, 

further research is needed to see whether informal 

ties in reality overcome the discussion 

about the influence of institutions on firms’ behaviour, 

and to what extent. There were also 

empirical signals confirming hypothesis 3. The 

data showed that informal contracting reduces 

the time of negotiating contracts and therefore 

increases flexibility. This is initial proof for informality 

providing an opportunity for firms. 

Informality is not limited to necessity. As the 

number of cases is low, further investigation is 

required here. 

Without being a newly introduced business 

concept to firms in the GPRD, the strategic application 

of informal interaction may be an innovative 

approach to Western firms. With this 

study having stepped forward in identifying the 

relevance of informal interactions, a sound empirical 

analysis is desirable in order to clarify 

the patterns and mechanisms in more detail. 

Acknowledgement 

I would like to thank my colleague Daniel Schiller for 

the fruitful discussions and joint development of the 

idea to study informality from the perspective of necessity 

and opportunity. This paper is the result of our idea. 

Moreover, I would like to thank the anonymous reviewer 

for her/his helpful comments on earlier versions of 

the paper. Funding for this research was received from 

the German Research Foundation (DFG) within the 

Priority Programme (SPP 1233) “Megacities-Megachallenge 

– the informal dynamics of global change” 

under grant RE 1720/8-1. 

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Frank Bickenbach/ Wan-Hsin Liu, Kiel 

Firm characteristics and informal governance of business operations 

in the Pearl River Delta, China 

Abstract: This paper describes the Chinese economic and institutional reform process as a gradual 

transition of an informal, relation-based governance system into a more formal and rule-based 

governance system. The consequences of macro-level institutional reforms on the importance of 

personal relationships for the firm-level governance of business operations are discussed. Theoretical 

considerations suggest that in a transition economy such as China companies’ incentives to 

reduce the reliance on personal relationships should depend on firm characteristics such as the age, 

size and the internationalization of the firm. We confront these suppositions with empirical data 

obtained from a company survey performed among 222 companies in the electronics industry operating 

in the Pearl River Delta, China. From this we obtain some, though often weak, evidence 

in favor of the suppositions. 

Keywords: formal and informal institutions, relation-based governance, firm characteristics, 

China, company survey 

JEL classification: L20, L63, P0 

Introduction 

Over the last three decades, China has recorded 

very high economic growth rates and developed 

into the second largest economy in the 

world. This remarkable growth was accompanied 

and fueled by continuing reforms of formal 

legal and market institutions which together 

led to substantial changes in the institutional 

environment in which business firms operate in 

China. This reform process may be viewed as a 

gradual transformation of the Chinese economy 

from an informal, relation-based governance 

system to a more formal and rule-based 

governance system (LI 2004; LI/PARK/LI 

2004). 

The importance and pervasive use of personal 

relationships in daily social and business life in 

China has attracted considerable attention 

among researchers from various disciplines. 

There has in particular been a growing economics 

and management literature on the role 

of personal relationships for doing business in 

China. Most of the empirical studies of that literature 

are based on surveys among Chinese 

managers or foreign managers with some experience 

in Chinese business (e.g. XIN/PEARCE 

1996; DAVIES/LEUNG/LUK/WONG 1995; LUO 

1997; PARK/LUO 2001). Generally, the survey 

results confirm the importance of personal relationships 

with other managers and/or with 

government officials (for a summary see LAN- 

GENBERG 2007, LUO 2007). In a study related to 

the present one, BICKENBACH/LIU (2010) confirm 

this general observation for Hong Kong 

based companies with operations in the Pearl 

River Delta (PRD) 1 , China. They also find evidence 

showing that personal relationships are 

less important than other more objective criteria 

for these companies’ decisions on business 

partners (and business locations). This result 

may be interpreted as an indication that the improvements 

in the formal institutional environment 

induce companies operating in current 

China to gradually reduce their predominant 

reliance on informal relation-based governance 

instruments and turn to make increased use of 

rule-based governance instruments such as formal 

contracting and public information institutions. 

Theoretical considerations suggest that, in a 

transition economy such as China, not all companies 

will have equally strong incentives to


Heft 1-2 / 2012 

move from informal relation-based to more 

formal, rule-based forms of governance. The 

incentives to reduce the reliance on personal 

relations will be stronger, in particular, for older, 

larger and faster growing firms. The same 

may be expected to be true for companies with 

more international business contacts (international 

suppliers or customers) or larger foreign 

ownership interests. This paper outlines the 

theoretical considerations underlying these 

suppositions and confronts them with data obtained 

from a company survey that was done 

among 222 companies in the electronics industry 

operating in the PRD, China. 

In the following we briefly present the institutional 

economics perspective on the nature of 

informal, relation-based and formal, rule-based 

modes of governance and their comparative 

(dis)advantages, both at the aggregate and at 

the firm level and derive our core suppositions 

regarding the relation between firm characteristics 

and firms’ incentives to use of personal 

relationships for doing business in a “transition” 

economy. Then we outline the changing 

institutional environment in China in general 

and in the PRD in particular and we discuss the 

empirical results regarding the relation between 

firm characteristics and the role of personal 

relationships for doing business in the 

PRD. 

Theoretical considerations 

Institutions, i.e. rules and instruments to enforce 

these rules, matter for the efficiency of 

human exchange (NORTH 1990). By defining 

and protecting property rights, enforcing contracts, 

and providing reliable information, well 

functioning (economic) institutions can reduce 

the risks and transaction costs of investment 

and exchange. These institutions can be formal 

or informal. Formal institutions include political, 

judicial and economic rules, ranging from 

written constitutions and statutory laws to specific 

regulations and to individual contracts. 

Informal institutions include the social and religious 

norms, traditions and codes of conduct 

and the social networks that exist in a society 

(NORTH 1990, 36, 47). Two levels of institutions 

are to be distinguished: the institutional 

environment and institutional arrangements. 

The institutional environment is the overarching 

framework of political, social and legal 

rules and constraints that define the context in 

which economic and social interaction takes 

place. Within this framework, parties to a specific 

exchange set up institutional arrangements, 

i.e., formal and informal (micro-level) 

rules and forms of contracts that govern the 

way in which they cooperate and/or compete 

(WILLIAMSON 1996, 378). 

Three elements of the institutional environment, 

in particular, are of great importance for 

the level and the organization of economic exchange 

of an economy: contracting institutions, 

property rights institutions and information 

institutions. Contracting institutions are 

the rules that support the conclusion and the 

enforcement of contracts between (private) 

economic agents (ACEMOGLU/JOHNSON 2005, 

955). They affect the costs of drafting and enforcing 

contracts and consequently the type of 

contracts and transactions realized. Property 

rights institutions are the rules that protect (the 

returns to) the assets held by economic agents 

against expropriation by others, in particular, 

by the government and politically powerful 

elites (ACEMOGLU/JOHNSON 2005, 955; GREIF 

2005, 728). They affect the risk of direct government 

expropriation as well as the level to 

which regulations and public decisions determine 

a level playing field for all economic actors 

or favor and protect a small elite with close 

relationships with the government. Information 

institutions are public or private institutions 

for gathering and distributing information. 

They affect the amount and the quality of 

information available to economic actors (and 

public agents) and impact, in particular, the 

cost of screening (potential) business partners 

and of monitoring their performance. 2 

There are substantial differences between societies 

in the nature and sophistication of their 

basic institutions and in the degree to which 

they are able to reduce the transaction costs 

and the risks associated with economic exchange 

and investments in private assets. In 

Western societies, over time, a complex system 

of formal institutions for public information 

provision, contract enforcement and property 

rights protection has been devised, on which 

people can build for governing economic exchanges. 

Many of these formal institutions are 

non-existent, weak or poorly devised in less 

developed countries (BARDHAN 2005, 512). To 

govern economic exchanges people in these 

countries tend to rely more on informal institu-

Frank Bickenbach / Wan-Hsin Liu: Firm characteristics and informal governance 27 

tions and personal relations, e.g., guanxi in 

China (LI/PARK/LI 2004, 63). 

Based on this general observation, we may 

distinguish for analytical purposes between 

two modes of governance systems: relationbased 

and rule-based governance systems (LI 

2003; LI/PARK/LI 2004; DIXIT 2004). The two 

systems differ both at the macro-level of the 

institutional environment and at the micro-level 

of the institutional arrangements chosen to 

govern individual transactions between economic 

agents. These differences have profound 

implications for the nature and size of 

transaction costs under the two governance 

systems. 

In a rule-based governance system public rules 

(laws and regulations) and state policies are 

transparent, fair, and universally applied and 

economic transactions are largely based on impersonal 

and explicit formal contracts. Both, 

public rules and private contracts can be impartially 

enforced by the executive and the 

court system (LI 2003, 655; LI/PARK/LI 2004, 

64). Economic agents have access to highquality 

and verifiable business information 

provided through a broad range of well established 

public information institutions (e.g. accounting 

and auditing rules, credit information 

institutions). This reduces the costs of screening 

and monitoring (potential) business partners 

and of enforcing business contracts (LI 

2003, 657). 

In a relation-based governance system, by contrast, 

public rules tend to be unfair and opaque, 

and the state is unable to enforce these rules 

impartially (LI /PARK /LI 2004, 64). Courts, 

due to the lack of independence and/or competence, 

are generally not able to enforce public 

rules or private contracts effectively. Most 

transactions between business partners are 

governed by personal and implicit agreements 

that are enforced outside the courtrooms (LI 

2003, 652). Publicly available information 

about (potential) business partners is rare and 

generally of low-quality. Key information 

about business partners has to be derived from 

personal relations. Information about business 

partners and business relationships tends to remain 

personal, and relational, i.e., mutually 

observable to the two transaction partners but 

unverifiable by people outside the relationship 

(LI/PARK/LI 2004, 64, 69; LI 2004, 108). 3 

It is widely recognized that the importance and 

the relative efficiency of formal institutions 

and rule-based governance increases relative to 

that of informal institution and relation-based 

governance as the scope of market exchange 

broadens and deepens (see NORTH 1990; LII 

2003; DIXIT 2004; LI/PARK/LI 2004). Relationbased 

governance systems work well in small 

or/and well-knit groups, whereas efficient exchange 

relations in large groups require more 

formal institutions for information dissemination 

and enforcement. At the aggregate level 

relation-based governance is associated with 

comparatively low fixed costs as it avoids the 

high fixed costs of developing elaborate formal 

public information and contracting institutions. 

At the level of individual exchanges, parties 

with existing personal relationships will find 

relation-based governance to be less costly as it 

saves the costs of legal enforcement and information 

verification. However, relation-based 

governance exhibits comparatively high and 

increasing costs of extending business to new 

business partners. Extending business will increasingly 

require establishing relations with 

persons, to which agents have a priori only 

weak or no private relations which raises the 

costs of searching for competent and reliable 

partners and of establishing personal relations 

with them. 

A rule-based governance system, in contrast, 

involves large fixed costs for establishing the 

necessary legal and informational infrastructure. 

However, once the necessary information 

and contracting institutions have been established 

the marginal costs of screening potential 

business partners and of negotiating and enforcing 

an (additional) contract between an 

(additional) pair of transaction parties, including 

strangers, are comparatively low due to the 

quality of publicly available information and 

the fact that the contracts are explicit, impersonal, 

and standardized (LI 2003, 657; 

LI/PARK/LI 2004, 65). As the scale and scope 

of the economy increases, the fixed costs of establishing 

a rule-based governance system can 

be spread over a larger number of transactions, 

thus lowering the average costs. Eventually an 

expanding economy will reach a point where 

the average transaction costs are smaller under 

rule-based governance than under relationbased 

governance and it would be advantageous 

for society to develop an institutional environment 

that supports rule-based governance.


Heft 1-2 / 2012 

The transition of an economy from a (more) relation-based 

to a (more) rule-based governance 

system will generally be a gradual and slow 

process. The basic informal institutions that exist 

in a society are often embedded in cultural 

traditions and moral value systems. They therefore 

possess inertia that slows the pace of institutional 

change (ZENGER/LAZZARINI/POPPO 

2002, 283 f.). 4 Even the effects of occasional 

broad and fast changes of formal institutions 

may be limited by tensions between the new 

formal rules and existing informal rules that respond 

only gradually to changes in the formal 

institutions. These tensions may undermine 

compliance with formal rules and may create a 

lag between the implementation of a new formal 

institutional structure and its overall functionality 

(ZENGER/LAZZARINI/POPPO 2002, 283 

f.; NORTH 1990, 91). Simply issuing new, Western-type, 

business laws and formal institutions 

may thus not be sufficient to substantially improve 

the quality of public information, of legal 

contract enforcement and of the effective 

protection of property rights. And even if the 

new formal institutions work reasonably well, 

persistent cultural norms may still induce 

(some) economic agents at the micro-level to 

stick to the use of relation-based forms of governance. 

This is true, in particular, where the 

cost advantage of rule-based governance is still 

relatively small (and competitive pressures are 

not too strong). 

The theoretical considerations about the working 

and the (relative) costs and benefits of the 

two modes of governance suggest, that firms’ 

incentives to move from relation-based to rulebased 

governance should depend on a number 

of firm characteristics, such as the size and the 

growth performance of the firm, its age, its 

ownership and the degree of its integration into 

national and international markets. The marginal 

cost of relation-based governance will 

generally be higher for large firms than for 

small firms. At the same time it will be easier 

for them to bear the firm-level fixed costs of 

rule-based governance – such as the costs of 

introducing new accounting and auditing systems 

or of acquiring the skills necessary to formulate 

and manage externally enforceable contracts. 

We should therefore expect that large 

firms have a greater propensity to engage in 

rule-based governance than small firms. Similarly, 

as the development of personal relations 

to new business partners is costly and timeconsuming, 

firms that are growing quickly in 

size and in the number of business partners will 

have greater incentives to reduce their reliance 

on personal relationships. Firms that are able 

and willing to make use of formal, rule-based 

mechanisms for searching and screening new 

business partners and managing and enforcing 

contractual agreements will find it easier to 

quickly expand the number of their business 

partners and will thus be able to grow faster. 

The age of a firm is certainly correlated with its 

size and possibly with its growth rate. The age 

of a firm will therefore have an indirect effect 

on its incentives to use rule-based governance 

mechanisms. The age of a firm can be expected 

to also have a direct influence on these incentives, 

however. Old-established firms will 

have accumulated substantial experience with 

relation-based governance and will already 

have established long-term personal relationships 

with a number of business partners and 

possibly public officials as well. Even as institutions 

of rule-based governance get gradually 

established at the level of the institutional environment, 

these firms will have an interest to 

continue to make use of their existing relationships, 

though it may become increasingly difficult 

to sustain these relationships as switching 

business partners becomes easier during the 

transition. At the same time established firms 

may have built up a public reputation as reliable 

business partners which allows them to 

get into business with new partners more easily. 

By contrast, even with improving information 

institutions new firms will generally have 

great difficulties signalling reliability and competence. 

At least with respect to getting into 

contact with new business partners existing 

personal relations with family members or 

friends (or early business partners) can thus be 

expected to be more important for young firms 

than for old-established ones. As to the importance 

of personal relations for doing business 

in general there is no clear conjecture about the 

role of firm age, however. On the one hand it 

will be very difficult for young firms to establish 

themselves in the market without personal 

relations, on the other hand older firms will 

simply have more well-established personal relations 

to business partners or public officials 

on that they can continue to build. 

For heads of firms from a relation-based economy 

it is generally much more difficult to establish 

and cultivate personal relations with 

foreign business partners that are not acquaint-


ed with the specifics of relation-based governance 

than with business partners from their 

own region or country. Domestic firms will 

therefore be less likely to use relation-based 

governance mechanisms for business transactions 

with foreigners than for transactions with 

domestic business partners. As firms with 

many foreign business partners will get acquainted 

with using formal information and 

contracting institutions and will have to invest 

in their ability to use these institutions, they 

will also be more likely to reduce their reliance 

on relation-based governance even for transactions 

with domestic business partners. In a 

transition economy, relation-based governance 

will therefore be comparatively less important 

for firms that have more business relations 

with customers or suppliers from Western 

economies. Similar arguments apply to the 

comparison of domestically-owned and foreign-owned 

firms. Foreign owners and managers 

will generally not be familiar with the 

specifics of relation-based governance and it 

will be much harder for them to establish personal 

relationships with executives of local 

firms. At the same time, they are familiar with 

rule-based governance instruments. They will 

therefore have an incentive to extend formal 

governance mechanisms to their local subsidiaries 

and their transactions with local partners 

as well. In transition economies, foreignowned 

(in particular Western-owned) firms can 

thus be expected to make less use of personal 

relationships than domestically owned firms. 

Changing institutional environment for 

doing business 

China today may be viewed as a society that is 

in a gradual process of transition from a relation-based 

to a more rule-based governance 

system (LI 2004; LI/PARK/LI 2004). 

The (traditional) role of personal 

relationships in China 

The importance and pervasive use of personal 

relationships in daily social and business life in 

China has been stressed by numerous observers 

and has attracted considerable attention 

among researchers from various disciplines 

(for a partial overview with a focus on business 

economics and sociological economics see 

LANGENBERG 2007). While the cultivation of 

personal relationships, in some form and to 

some extent, exists in every society, its specif- 

ic form, guanxi, and its pervasiveness and importance 

in daily social and business life are 

often considered distinctively Chinese (STAN- 

DIFIRD/MARSHALL 2000, 22). Guanxi is cultivated 

through the repeated exchange of gifts 

and favors, which creates a sense of reciprocal 

obligation and indebtedness of the partners 

(STANDIFIRD/MARSHALL 2000, 22 f.). Developing 

bilateral guanxi to several other persons 

that may also develop personal relationships 

among each other leads to a guanxi network. 

As information about a partner’s opportunistic 

behavior with one of his exchange partners 

spreads through the whole network, such behavior 

can easily result in the offending party 

being banished from the network altogether. 

Within guanxi networks, the threat of network 

expulsion increases the cost of opportunistic 

behavior, thus providing an increased assurance 

that one’s exchange partner will not act 

opportunistically. The flow of information 

within guanxi networks is not restricted to information 

on members’ conduct for the purpose 

of sanctioning opportunistic behavior, 

however. There is also a vivid exchange of information 

about business opportunities and 

about the competence and reliability of potential 

business partners. “The exchange of information 

favors in guanxi networks is so common 

that guanxi is said to act as an ‘information 

bridge’” (LANGENBERG 2007, 46). These 

benefits do not come for free, however. Establishing 

and cultivating guanxi networks takes 

time and other resources. Moreover, having to 

choose, due to reciprocal obligations, transaction 

partners from within one’s personal network 

may inhibit potentially profitable transactions 

with people outside the network (LAN- 

GENBERG 2007). 

The importance of guanxi in China is not restricted 

to relations between private persons. 

Given the paramount role that the state (government 

and bureaucracy) continues to play in 

the Chinese society and economy, personal relationships 

with government and party officials 

(political relations) are considered to be of 

great significance for citizens’ quality of life 

and businesses’ success (see, e.g., LANGENBERG 

2007). 5 

Reform of the formal institutional 

environment in China 

Since the beginning of economic reforms in 

1978 there have been dramatic changes in the 

institutional environment for doing business in


Heft 1-2 / 2012 

China. By 2007, the year of the company survey 

underlying our empirical analysis, formal 

contracting, information, and with some reservations 

also, property rights institutions have 

been improved considerably. The first Economic 

Contract Law passed in 1981 was still 

intended largely to regularize relations between 

state-owned enterprises. As economic 

reforms gradually led to a great expansion in 

the number and importance of non-state enterprises 

the role of contract law shifted towards 

governing the interactions between independent 

economic agents. The overall scope of 

contract laws was gradually broadened by 

passing specific contract laws and amending 

the Economic Contract Law. In 1999, the different 

contract laws were replaced by a new 

unified contract law that gave broad range to 

freedom of contract and provided a uniform legal 

framework for economic contracts by individuals 

and enterprises alike, regardless of 

ownership and nationality (for details see 

CLARKE/MURRELL/WHITING 2008). During the 

reform, the importance of courts for the resolution 

of disputes over contracts increased substantially. 

Despite their many remaining deficiencies 

courts are now playing a significant 

role in dispute resolution (CLARKE/ MUR- 

RELL/WHITING 2008), and in comparison with 

other developing and developed countries, the 

ability of Chinese courts to solve disputes over 

simple and clearly written contracts has been 

rated quite favorably (in 2007). 6 

Like contract law, many of the public information 

institutions that are of great importance in 

modern market economies were virtually nonexistent 

when the reform process began. By 

2007, China has made substantial progress in 

reforming or introducing some of these information 

institutions – though much remains to 

be done. An important example are accounting 

standards. In the early stages of the reform 

process, several different sets of accounting 

rules applying to firms with different ownership 

structures and from different industries 

were introduced. Generally, these rules deviated 

substantially from international accounting 

standards. The new Accounting Standards for 

Business Enterprises that came into force in 

2007 are, by contrast, broadly in line with international 

accounting standards but they are 

mandatory, for now, only for listed companies. 

Despite some convergence with international 

standards, the practical application of China’s 

accounting principles is still a complex and 

opaque process (for additional information see 

World Bank 2009). A second example relates to 

credit information. In the early 2000s the People’s 

Bank of China established a rapidly expanding 

Corporate Credit Information Database 

that contains information on companies’ 

bank and non-bank credit relationships (see 

JENTZSCH 2008). In 2006, it contained information 

on about eleven million enterprises of 

which about five million had a credit relationship. 

Later the system was extended to include 

credit information on individuals. 7 As these examples 

illustrate, access to business information 

has expanded substantially during the reform 

period. Several important reform steps 

have been taken only rather recently, however, 

and there is still a long way to go before public 

information institutions in China reach Western 

standards. 

Compared to the progress made in improving 

formal contracting and information institutions, 

reform progress in formal property rights 

institutions has been (even) more limited. Only 

in 2007, after several years of considerable 

controversy and delay, a unified Property Law 

was passed. This law introduces and defines 

the concept of property rights in a unified way 

covering state property, collective property as 

well as private property. It defines the rights 

owners have over their property and the obligations 

assumed by others in respect of this 

property. However, to ensure that the law was 

passed, a number of areas, including modalities 

of legal redress, have been left vague, limiting 

the effectiveness of the protection of private 

property rights in practice (OECD 2008, 23 ff.; 

MARECHAL/TEKIN/GULIYEVA 2009). 

More generally, due to broad decision making 

powers of numerous (local and central) government 

bodies and courts’ inability to effectively 

constrain (arbitrary) government action 

China’s current legal system is largely unable 

to provide secure property rights. A main reason 

for courts’ inability to effectively enforce 

laws and constrain governments is their political 

and financial dependence on local governments. 

8 This makes it difficult for courts to decide 

against the wishes of local governments, 

and allows local governments to influence 

courts, or to ignore their decisions, in order to 

accommodate the interests of companies with 

strong political relationships (CLARKE/MUR- 

RELL/WHITING 2008; for examples see LI 

2004).


In current China, local and central government 

officials still hold numerous instruments and 

wide discretionary powers to interfere with 

business operations and affect business success. 

Business operations require licenses, permits 

and approvals from various governmental 

authorities and are subject to numerous business 

laws and regulations. The requirements 

for obtaining licenses and permits as well as 

the terms and interpretations of business regulations 

often lack transparency. They can differ 

substantially across provinces, districts and 

even towns and are subject to frequent 

changes. Business success is also affected by 

officials’ decisions on the allocation of landuse 

rights and of other scarce resources, or by 

their decisions on subsidies, favorable tax 

treatments and government procurement contracts. 

Against this background personal relations 

with public officials can help smooth 

business operations and reduce the risk of expropriation 

by the politically powerful. 

Changing institutional business 

environment in the PRD 

As a consequence of the substantial influence 

that local and regional politicians have on 

business relevant policies and on the enforcement 

of laws and contracts, the quality of the 

legal system and of formal market institutions 

can differ considerably across Chinese provinces. 

Our empirical analysis is restricted to 

firms located in the Pearl River Delta in the 

province of Guangdong. Therefore, the quality 

of the institutional environment of Guangdong 

is of particular interest to our analysis. Guangdong 

has been a pioneer region of the Chinese 

economic reforms over the last three decades. 

Since the beginning of reforms the business 

and investment environment in Guangdong 

has been more developed and more business 

friendly than in many other Chinese provinces. 

This has recently been confirmed by a World 

Bank report (World Bank 2008) that compared 

the business and investment environments of 

30 major cities in China (from all Chinese 

provinces, with the exception of Tibet). Four 

indicators of a business-friendly environment 

were compared: the ease of starting a business, 

of registering property, of getting credit, and of 

enforcing contracts. Guangzhou, the capital of 

Guangdong, ranked among the top three cities 

for all four indicators and it even ranked first 

for contract enforcement. Legal and formal 

market institutions are thus generally more developed 

in Guangdong (and in the PRD in par- 

ticular), than in most other Chinese provinces. 

Still, as compared to advanced Western countries 

(or to neighboring Hong Kong) formal legal 

and market institutions in Guangdong are 

still clearly deficient and certainly much less 

favorable to a rule-based governance of individual 

business operations. 

It is worth mentioning that the comparatively 

advanced institutional reform process in 

Guangdong has gone hand in hand with an 

expansion and internationalization of (private) 

economic activity that is outstanding even for 

Chinese standards. Guangdong had the highest 

GDP (2,621 bio. RMB) of all Chinese provinces 

and the growth rate (15 %) was also among 

the highest in China in 2006 (NBSC 2007). In 

the same year, the number of state-owned and 

non-state-owned industrial enterprises with annual 

revenues of over 5 mio. RMB was about 

37,500, the second largest number of all Chinese 

provinces, and these companies’ gross industrial 

output and industrial value added were 

higher than the corresponding figures in all 

other provinces. Having the second highest 

openness index 9 , Guangdong’s economy was 

also more strongly integrated into the international 

markets than all other Chinese provinces, 

with the exception of Shanghai. 

For an institutional and economic environment 

such as that of Guangdong, or the PRD, the institutional 

approach suggests that personal relations 

with business partners and with public 

officials are still playing an important role for 

many firms’ business operations. However, 

with continuously improved formal institutions 

and with increasing scale and complexity in 

business operations on site, certain firms may 

already begin to reduce their dependence on 

personal relations and to increasingly rely on 

formal institutions for governing their business 

operations. 

Empirical analysis 

The PRD Company Survey 2007 on which our 

empirical analysis is based was addressed to 

executives of electronics companies in the 

PRD. 10 As the economically dominant region 

within Guangdong province with its comparatively 

advanced institutional reform process 

and its vivid private enterprise sector, the PRD 

constitutes a suitable research region for our 

research purpose. The focus on a single indus-


Heft 1-2 / 2012 

try helps to reduce industry-level firm heterogeneity 

and allows our analysis to focus on 

those firm characteristics that are, according to 

the theoretical considerations, likely to affect 

firms’ decisions on the use of relation-based or 

rule-based governance instruments. The electronics 

industry was selected due to its substantial 

importance for the regional economy in 

the PRD. The gross output of the electronics 

industry’s enterprises (state-owned enterprises 

and non-state-owned enterprises with annual 

business revenues of at least 5 mio. RMB) 

amounted to 41 % of all industries in 2006 

(GPBS 2007). Moreover, the electronics industry 

is a very dynamic industry characterized by 

short product life-cycles, quick product-related 

process modifications, and large research and 

development expenditures (TUAN/NG, 1995). 

In combination with the high intensity of global 

competition within the industry, these features 

force companies to continuously optimize 

the governance of their business operations. 

For our survey a total of 400 electronics companies 

were randomly selected from the comprehensive 

company catalogue Guangdong 

Electronics 2007. Overall 222 of these companies 

completed and returned the questionnaire. 

Our empirical analysis is based on the responses 

to a subset of the questions of these questionnaires. 

In the following we first present our 

results on the general role of personal relationships 

for doing business in the PRD. We then 

turn to the results on the importance of personal 

relationships (relative to other more formal 

and impersonal alternatives) for three critical 

business functions, namely for getting into 

contact with customers and with suppliers and 

for obtaining short-term finance. Finally, we 

present evidence on how the importance of 

personal relationships for individual firms 

varies with firm characteristics such as age, 

ownership structure, size and growth performance. 

Role of personal relationships 

for doing business in general 

Within the questionnaire two questions relate 

to the general importance of personal relationships 

for companies’ business operations in the 

PRD, with the first one considering personal 

relationships in general and the second one focusing 

on political relations. As to the importance 

of personal relationships in general, executives 

were asked to use a five-level Likert 

scale to assess the importance of six specified 

reasons for their firms’ decisions to fulfill some 

business tasks in the PRD via personal networks: 

to “substitute for missing laws and regulations” 

(SubMLaw), to “respond quickly to 

customer demands” (ResCus), to “increase 

company’s operational flexibility” (IncFlex), 

to “reduce risks and uncertainties” (RedRisk), 

to get “access to business-related information” 

(AccInfo), and to “solve business disputes” 

(SolDis). In total, about two thirds of respondents 

consider responding quickly to customer 

demands as a very important or important reason 

for their company to fulfill some tasks via 

personal relationships, whereas only about a 

quarter of them do so for substituting missing 

laws/regulations, or for solving business disputes 

(Tab.1). The shares of respondents considering 

the other three reasons as very important 

or important are at intermediate levels. 11 

Of the 212 executives who answered this question, 

170 executives (about 80 %) considered at 

least one reason as very important or important 

for their company to fulfill some tasks in PRD 

Tab. 1: Importance of reasons for using personal relationships – company distribution 

SubMLaw ResCus IncFlex RedRisk AccInfo SolDis 

1 very important 24 (13.3) 76 (37.4) 56 (29.3) 40 (21.1) 49 (25.5) 19 (10.4) 

2 important 24 (13.3) 60 (29.6) 42 (22.0) 39 (20.5) 28 (14.6) 26 (14.2) 

3 of normal 

importance 41 (22.8) 38 (18.7) 54 (28.3) 62 (32.6) 62 (32.3) 53 (29.0) 

4 of little 

importance 26 (14.4) 9 (4.4) 14 (7.3) 17 (9.0) 14 (7.3) 35 (19.1) 

5 not important 65 (36.1) 20 (9.9) 25 (13.1) 32 (16.8) 39 (20.3) 50 (27.3) 

Total 180 (100) 203 (100) 191 (100) 190 (100) 192 (100) 183 (100) 

Note: Numbers in parentheses refer to the corresponding company shares (%). 

Source: own survey


via personal relations (not documented in Tab. 

1). This suggests that personal relations are, for 

one reason or another, playing an important 

role for most companies in the PRD. It is less 

clear, however, how this relates to the weakness 

of formal legal and market institutions in 

current China. The two most important reasons 

for using personal relations, improving the 

ability to quickly respond to customer needs 

and increasing companies’ operational flexibility 

– the executives’ assessments of the importance 

of these two reasons are highly correlated 

across firms (Spearman correlation coefficient 

of almost 0.6) –, are essentially performance 

objectives and relation-based 

governance instruments may be advantageous 

for achieving these objectives even if formal 

institutions were well developed. And the one 

reason that explicitly refers to weak formal institutions, 

namely using personal relations as a 

“substitute for missing laws and regulations” 

has been considered important or very important 

by a minority (25 %) of respondents only. 

This seems to suggest that most companies in 

PRD do not see the deficiencies in the institutional 

environment but general transactions 

costs advantages of relation-based governance 

as the main reason for their use of personal relations. 

12 

Given the fact that public officials in China still 

have ample opportunities to directly or indirectly 

interfere with business operations and 

affect business success, companies may not only 

consider personal relationships with private 

economic agents important for doing business 

in the PRD but also personal relationships with 

public officials (political relations). Executives 

were therefore asked to assess the importance 

of political relations for carrying out five business 

“activities” 13 : “getting permissions for 

production/investment” (GetPermProd), “get- 

ting export/import concessions or licenses” 

(GetExImCon), getting “access to buildings 

and/or land” (AccBuild), getting “access to 

materials and resources” (AccRes), getting 

“access to financial support from government” 

(AccGovSup). Of the 212 companies that have 

answered the question, 144 companies (about 

68 %) considered political relations very important 

or important for at least one of the “activities” 

considered (Tab. 2). While more than 

half (54 %) of all respondents considered personal 

relationships with public officials very 

important or important for companies in PRD 

to get permissions for production and investment, 

only about 27 % and 31 % of them considered 

political relations important or very important 

for getting access to materials and resources 

and to financial support from 

government, respectively. The shares for the 

other two alternatives take intermediate values. 

These results suggest that political relationships 

are still important for companies to get 

access to ‘production factors’ that are crucial 

for companies’ operations and are still under 

the control of government. 

An analysis of the pair-wise correlations between 

the assessments of the alternatives from 

the preceding two questions reveals that those 

executives that considered political relations 

more important (than other executives) also 

tended to consider “missing laws and regulations” 

as a more important reason for using 

personal relations in general. This may be taken 

as an indication that firms tend to consider 

the importance of political relations a consequence 

of weak formal institutions. 

The role of personal relationships for critical 

business functions 

Getting into contact with customers: It has 

been argued that in relation-based economies 

Tab. 2: Importance of political relations – company distribution 

GetPermProd GetExImCon AccBuild AccRes AccGovSup 

1 very important 82 (40.0) 51 (26.3) 44 (22.5) 35 (18.0) 36 (18.7) 

2 important 30 (14.6) 28 (14.4) 33 (16.8) 18 (9.3) 24 (12.4) 

3 of normal importance 36 (17.6) 47 (24.2) 39 (19.9) 48 (24.7) 39 (20.2) 

4 of little importance 16 (7.8) 20 (10.3) 25 (12.8) 27 (13.9) 27 (14.0) 

5 not important 41 (20.0) 48 (24.7) 55 (28.1) 66 (34.0) 67 (34.7) 

Total 205 (100) 194 (100) 196 (100) 194 (100) 193 (100) 


Source: own survey


Heft 1-2 / 2012 

personal relations are playing an important role 

in selecting business partners, while other impersonal 

alternatives of searching for and 

screening (potential) business partners are becoming 

more important as formal information 

and contracting institutions are getting more 

effective. In order to investigate the relative 

importance of relation-based governance 

mechanisms for companies to find new customers, 

we asked the executives to assess the 

importance of four different channels for getting 

into contact with their customers. (We also 

asked them to indicate if their companies 

did no use the respective channel at all.) Two of 

the four channels are non-relation-based, 

namely “bidding competitions”, and “active 

searching (e.g., exhibitions, internet, sales 

agents)”, while the other two are relationbased, 

using “business contacts (e.g., recommendation 

from business partners)” or “private 

contacts (e.g., recommendation from family 

members and friends)”. 

The results (Tab. 3) paint a mixed picture of the 

(relative) importance of personal relations for 

getting into contact with customers. While one 

formal channel “bidding competition” was the 

least frequently used channel among the companies 

in the PRD, the other formal channel “active 

searching” was the most frequently used 

one with only 10 % of companies not using this 

channel at all. The share of executives assessing 

“active searching” as very important or important 

(65 %) is also the highest one among the 

four channels considered. Interestingly, an almost 

equal share of executives (61 %) considered 

“business contacts”, very important or important. 

In contrast, only about a third of respondents 

assigned the same importance levels 

to the other two channels, private contacts and 

bidding competition, respectively. 14 

Overall, these results suggest that for a majority 

of firms in the PRD personal relations, in 

particular existing business contacts, still play 

an important role for searching for and screening 

new customers. However, despite remaining 

deficiencies in the formal institutional environment, 

most firms do not exclusively rely 

on relation-based channels to get into contact 

with customers but make important use of 

more formal, impersonal instruments for 

searching new customers as well. 

Part of an explanation for the substantial importance 

of impersonal (formal) instruments 

for getting into contact with new customers 

may be the importance of foreign customers 

(exports) for many electronics companies in 

the PRD. Personal relations may be expected to 

be of much less importance for these customers. 

On average, firms in our sample sold 

roughly half of their products (in value terms) 

to customers in mainland China and slightly 

less than a quarter of products to “advanced 

countries” (North America, Western Europe, 

Australasia and Japan). We expect that the two 

relation-based contacting channels tend to be 

more important for companies with higher 

shares of product sales in the mainland China. 

To test this supposition, we calculated the pairwise 

Spearman correlations between the executives’ 

assessment of the importance of the two 

relation-based channels of contacting customers 

on the one hand and their firms’ shares 

of sales in mainland China on the other hand. 

The results confirm our supposition. With respect 

to the share of sales in mainland China, 

Tab. 3: Importance of channels used to get into contact with customers – company distribution 

Bidding Active Business Private 

competition searching contacts contacts 

1 very important 38 (17.4) 96 (43.6) 67 (30.5) 38 (17.3) 

2 important 26 (11.9) 48 (21.8) 67 (30.5) 36 (16.4) 

3 of normal importance 27 (12.4) 38 (17.3) 41 (18.6) 49 (22.3) 

4 of little importance 13 (6.0) 11 (5.0) 10 (4.6) 25 (11.4) 

5 not important 29 (13.3) 5 (2.3) 9 (4.1) 21 (9.6) 

Not used 85 (39.0) 22 (10.0) 26 (11.8) 51 (23.2) 

Total 218 (100) 220 (100) 220 (100) 220 (100) 


Source: own survey


both correlation coefficients are negative – 

though only the one for private contacts is statistically 

significant – suggesting that the higher 

the share of sales realized in mainland China, 

the more important the two relation-based 

channels for contacting customers. 

Getting into contact with suppliers: Similar arguments 

also apply to companies’ search for 

potent and reliable suppliers. Therefore the 

questionnaire also contained a question on the 

importance of different channels for getting into 

contact with suppliers. The same four channels 

as in the case of customers were considered 

and the same five-level Likert scale was 

applied. The responses are generally quite similar 

to those obtained for the case of customers 

(Tab. 4). 15 “Bidding competition” turns out to 

be the least frequently used channel, while “active 

searching” is the most frequently used one. 

As to the importance of the four channels considered, 

the responses suggest that “active 

searching” is the most important channel for 

getting into contact with suppliers (with about 

70 % of respondents considering this channel 

as very important or important), followed by 

“business contacts” (about 56 %). “Private 

contacts” and “bidding competition” are considered 

the least important channels. 

As for the case of customers, we expect the two 

relation-based channels of getting into contact 

with suppliers to be more important for companies 

sourcing a greater share of inputs from 

Chinese suppliers. On average, companies 

source about 73 % of their inputs from mainland 

Chinese but only 8 % from the “advanced 

countries”. To test this supposition, we calculated 

the pair-wise Spearman correlations. 

Contrary to our supposition, none of the correlation 

was found to be statistically significant. 

One possible explanation for this is that there is 

too little variation between firms with respect 

to the locations of their suppliers (73 % from 

mainland China). Differences between firms in 

the importance of the two relation-based channels 

for getting into contact with suppliers thus 

have to be attributed to differences in other 

firm characteristics. 

Financing: For relation-based economies in 

transition such as current China (or PRD) we 

expect personal relations to also play an important 

role for companies’ efforts to secure adequate 

finance and, in particular, for their ability 

to obtain short-term finance. In order to investigate 

this issue, executives were asked to 

assess the accessibility of six different sources 

for meeting their firms’ short-term financial 

needs: “Chinese banks”, “HK banks”, “foreign 

banks”, “affiliated companies/business partners”, 

“customers”, and “family members and 

friends”. The last three sourcing alternatives 

may be considered relation-based. A five-level 

Likert scale was applied, with “1” indicating 

“very easily accessible” and “5” “not accessible”. 

According to the executives’ responses 

(Tab. 5), only about 26 % of companies never 

obtained short-term finance from a Chinese 

bank, while 44.8 % and 45 % never obtained 

short-term finance from “family members and 

friends” and from “affiliated companies”, respectively. 

About 37 % never did so from “customers”. 

Generally, to obtain short-term finance 

is not an easy task for most companies. 

After all, only about 29% considered it easy or 

very easy to obtain short-term finance from a 

Chinese bank. For the other (potential) sources 

Tab. 4: Importance of channels used to get into contact with suppliers – company distribution 

Bidding Active Business Private 

competition searching contacts contacts 

1 very important 34 (15.7) 93 (42.7) 57 (26.2) 24 (11.1) 

2 important 21 (9.7) 58 (26.6) 64 (29.4) 34 (15.7) 

3 of normal importance 27 (12.4) 35 (16.1) 52 (23.9) 52 (24.0) 

4 of little importance 15 (6.9) 8 (3.7) 7 (3.2) 30 (13.8) 

5 not important 37 (17.1) 7 (3.2) 6 (2.8) 23 (10.6) 

Not used 83 (38.3) 17 (7.8) 32 (14.7) 54 (24.9) 

Total 217 (100) 218 (100) 218 (100) 217 (100) 


Source: own survey


Heft 1-2 / 2012 

Tab. 5: Short-time accessibility of finance by source – company distribution 

CNBank HKBank ForBank AffComPart Customer FamFrd 

1 very easily 

accessible 36 (17.1) 16 (7.6) 5 (2.4) 10 (4.7) 17 (8.1) 15 (7.1) 

2 easily accessible 25 (11.9) 22 (10.4) 13 (6.2) 15 (7.1) 29 (13.7) 20 (9.5) 

3 normal accessible 36 (17.1) 12 (5.7) 11 (5.2) 38 (18.0) 40 (19.0) 33 (15.7) 

4 little accessible 28 (13.3) 8 (3.8) 10 (4.7) 21 (10.0) 25 (11.9) 22 (10.5) 

5 not accessible 31 (14.7) 48 (22.8) 54 (25.6) 32 (15.2) 21 (10.0) 26 (12.4) 

Not used 55 (26.1) 105 (49.8) 118 (55.9) 95 (45.0) 79 (37.4) 94 (44.8) 

Total 211 (100) 211 (100) 211 (100) 211 (100) 211 (100) 210 (100) 


Source: own survey 

this number is even lower. To obtain short-term 

finance from family and friends was easy or 

very easy for only about 17 % of the companies. 

The corresponding numbers for customers 

and affiliated companies are 22 % and 

12 % respectively. 16 

The result that many PRD companies face substantial 

difficulties when trying to obtain shortterm 

finance from Chinese or even foreign 

banks should not be surprising, given the deficiencies 

in, e.g., accounting and credit information 

institutions. It is not generally true, 

however that it is easier for firms in the PRD, 

and therefore more widespread, to obtain shortterm 

finance by using personal relationships 

(either with family members, affiliated companies 

or customers) to. In particular, only slightly 

more than half of all firms ever obtained 

short-term finance from family members or 

friends and only about one out of six of these 

firms considered it (very) easy to obtain finance 

from this source. In the following section 

we will see, however, that there are significant 

differences between different “types” of 

firms with respect to their assessment of relation-based 

finance. 

Firm characteristics and personal 

relationships for doing business 

We expect that different “types” of firms may 

differ systematically in their use of relationbased 

versus rule-based instruments for governing 

their business operations. More specifically, 

larger firms or faster growing firms and 

foreign-owned firms in China should tend to 

make less use of relation-based governance 

than smaller, stagnant and Chinese-owned 

firms. We also expect younger, less estab- 

lished, firms to rely more on personal relations 

than older firms for getting into contact with 

new customers or suppliers or obtaining shortterm 

finance. This should be true in particular 

for private relationships with family members 

and friends. We therefore look into the empirical 

relation between the executives’ assessment 

of the importance of personal relationships (as 

reflected by their answers to the questions discussed 

above) on the one hand and their firms’ 

age, ownership structure, size, and growth performance 

on the other hand. 

Firm characteristics and personal relationships 

for doing business in general: In order to 

investigate the role of firm characteristics for 

the importance of personal relations, we first 

analyze the pair-wise correlations between 

firm characteristics and executives’ responses 

to the questions on the general role of personal 

relationships for doing business in the PRD 

and on the importance of political relations, respectively 

(cf. Tab. 1, 2). The firm characteristics 

considered are defined as follows: (1) company 

age (Age) is equal to the difference between 

the survey year (2007) and the founding 

year of a company (plus 1); (2) ownership 

(ForeignOwn) is an ordinal variable ranging 

from 0 to 3 and referring to Chinese-owned enterprise, 

Chinese-foreign cooperative joint 

venture, Chinese-foreign equity joint venture 

and wholly foreign-owned enterprise, respectively; 

(3) a first size variable (Employ) is 

equal to the average number of total employees 

during the year before the survey; (4) a second 

size variable (Sales) is an ordinal variable 

ranging from 0 to 5, with values corresponding 

to different levels of sales in 2006, defined by 

the following intervals in million RMB (0, 1),


Tab. 6: Relation between firm characteristics and the importance of reasons for relation-based 

governance – Spearman correlations 

Age ForeignOwn Employ Sales GrowSales 

SubMLaw -0.024 (179) -0.065 (177) 0.078 (177) 0.020 (175) -0.186 (172) 

ResCus 0.117* (202) 0.123** (198) 0.142** (197) 0.057 (197) -0.023 (192) 

IncFlex 0.048 (189) 0.080 (187) 0.094* (187) 0.041 (185) -0.050 (184) 

RedRisk 0.129*(188) 0.108* (187) 0.074 (186) 0.072 (184) -0.058 (182) 

AccInfo 0.062 (191) 0.176*** (189) 0.123** (186) 0.098* (187) -0.061 (183) 

SolDis 0.022 (181) 0.156** (180) 0.109* (180) 0.085 (177) 0.008 (176) 

Notes: Numbers in parentheses refer to numbers of corresponding observations. 

***/**/* refer to the 1%/5%/10% significance level in two-tailed (Age) or one-tailed significance tests. 


[1, 5), [5, 10), [10, 50), [50, 100), and [100, ∞); 

(5) growth performance is measured by an ordinal 

variable (GrowSales) with four classes (0 

to 3) for the average annual growth rates since 

2002, where classes are defined as (-∞, 0%), 

[0%, 2%), [2%, 10%), [10%, ∞) (see also the 

appendix). 

The Spearman correlations between firm characteristics 

and the importance of the six reasons 

for using personal relations are reported in 

Tab. 6. For the age variable five of the six correlations 

are positive, though only two of them 

(“responding quickly to customer demands” 

and “reducing risks and uncertainties”) are statistically 

significant. 17 Still, the predominantly 

positive correlations could be considered as 

(weak) support for the view that personal relations 

are generally more important for younger 

firms, e.g. because it is relatively more difficult 

and costly for them to use formal institutions 

and public reputation mechanisms to govern 

their business relations. 

As to the ownership structure, correlation results 

give strong support for our hypothesis 

that greater foreign participation in company 

ownership is associated with a lower general 

importance of personal relationships for that 

company. This effect may (partially) be attributed 

to the fact that foreign owners will generally 

be more (less) acquainted with rule-based 

governance (relation-based governance). Legal 

and cultural norms of the foreign owners’ home 

country may aggravate reservations against the 

use of informal, relational institutions. 

Correlation results for the size variables, particularly 

those for the employment variable, 

give support to our supposition that personal 

relations tend to be less important for larger 

firms. All correlations with respect to “Employ” 

are positive and four out of six are statistically 

significantly so. Correlations with respect 

to the other variable used to proxy firm 

size, “Sales”, are also uniformly positive, 

though only one of them is significant. As to 

firm growth there is no supportive evidence for 

our supposition of a positive relation between a 

company’s growth performance and the general 

relevance of personal relationships, however. 

Almost all relevant correlations are negative 

(though generally quite small), suggesting that 

a better growth performance of firms is, if anything, 

associated with a greater importance of 

(the various reasons for using) personal relationships. 

A possible explanation is that fast 

growing firms may have to mobilize all their 

resources, including their personal networks, 

and use all available formal and informal governance 

instruments to support their expansion. 

Turning next to the importance of political relations 

for doing business in the PRD, there 

seem to be (almost) no associations of this with 

the different firm characteristics (see Tab. 7). 

Given the severe deficiencies of the institutional 

environment in China with respect to the 

protection of private property rights against expropriation 

by government and the ample opportunities 

that public officials have to interfere 

with firms’ business operations and success, 

political relations seem to be of similar 

importance for all types of companies. 18 

Firm characteristics and the role of personal 

relationships for critical business functions: 

We, finally, investigate the association between 

firm characteristics and the importance of personal 

relations for contacting new customers


Heft 1-2 / 2012 

Tab. 7: Relation between firm characteristics and the importance of political relations – Spearman 

correlations 


GetPermProd -0.053 (203) 0.003 (200) 0.100* (199) 0.061 (198) 0.064 (193) 

GetExImCon -0.115 (192) -0.144 (191) -0.101 (190) -0.071 (188) -0.029 (184) 

AccBuild -0.165 (194)* -0.046 (192) -0.085 (192) -0.119 (190) -0.028 (186) 

AccRes -0.094 (192) -0.039 (190) -0.001 (191) 0.147** (189) 0.066 (185) 

AccGovSup -0.036 (191) 0.029 (190) 0.082 (191) 0.099* (188) 0.054 (185) 

Notes: Numbers in parentheses refer to the numbers of corresponding observations. 

***/**/* refer to the 1%/5%/10% significance level in two-tailed (Age) or one-tailed significance tests. 


and new suppliers as well as for obtaining 

short-term finance. We expect each of the firm 

characteristics – firm age, firm size, growth 

performance and foreign ownership – to be 

negatively related to the importance of relation-based 

governance instruments. (Note that 

contrary to the case of the general role of personal 

relationships for doing business we do 

expect a negative effect of age on the importance 

of personal relations here. Due to our importance 

scale, “1” being very important, this 

implies that we are expecting positive correlation 

coefficients). In order to test these suppositions, 

we calculated pair-wise Spearman correlations 

between the different firm characteristics 

and the importance of relation-based 

governance for getting into contact with customers 

and with suppliers and for obtaining 

short-term finance. 

The results (Tab. 8) suggest that firm age, in 

particular, is playing an important role for 

firms’ decisions to use relation-based governance 

in the business context considered here. 

Most age-related correlations are significantly 

positive, suggesting that younger firms tend to 

consider relation-based channels more important 

(more easily accessible) than older firms 

for getting into contact with their customers 

and suppliers (for obtaining short-term finance). 

Moreover, the correlations between 

firm age and the importance of private contacts 

to get into contact with customers and suppliers 

are (slightly) larger than the correlations 

with respect to business contacts. This suggests 

that as firms get older the importance of private 

(e.g., family) relations tends to decline faster 

than that of relations to business partners in 

general. This may reflect the simple fact that 

younger firms, can build on a limited network 

of business contacts but a relatively larger pool 

of private contacts, whereas the business network 

tends to increase as firms get older. This 

effect seems to be even substantially stronger 

for firm size. 

For both measures of firm size the correlations 

with the importance of private relations for 

making contacts with both customers and suppliers 

are positive and statistically highly significant, 

while correlations with the importance 

of business contacts are insignificant. 

This suggests that larger firms tend to rely 

more on personal contacts but no less on business 

contacts for screening new customers and 

suppliers than smaller firms. When firms are 

small, existing private contacts may be sufficient 

for supporting their business operations. 

However, as firms grow and their operations 

become more numerous and manifold, existing 

private contacts may become an insufficient 

basis for expanding the business. Contrary to 

our expectations, there seems to be no systematic 

effect of firm size on the importance or accessibility 

of relation-based sources of shortterm 

finance. In addition, as above (and possibly 

also for the same reasons) we do not find 

any support of our supposition of a negative association 

between firms’ growth performance 

and the importance of personal relations. 

As to foreign ownership, there is, again contrary 

to our expectations, no statistically significant 

effect of the ownership structure on the 

importance of private or business relations for 

contacting new customers and suppliers. At 

least the sign of the correlations suggests, however, 

that private contacts but not business contacts 

might be slightly less important for firms 

with foreign ownership participation. This may 

be interpreted as an indication of a substitutive 

relation between private and business contacts.


Tab. 8: Relation between firm characteristics and the importance of relation-based instruments 

for critical business functions – Spearman correlations 


Contacting customers 

Business contacts 0.104* (217) -0.072 (216) 0.001 (211) 0.063 (211) -0.117 (205) 

Private contacts 0.203*** (217) 0.084 (216) 0.223***(211) 0.188*** (211) -0.012 (205) 

Contacting suppliers 

Business contacts 0.161*** (216) -0.049 (214) 0.032 (209) -0.041 (210) -0.020 (202) 

Private contacts 0.185*** (215) 0.037 (213) 0.158** (209) 0.158** (210) 0.024 (204) 

Short-term financing 

AffComPart -0.043 (209) 0.040 (207) -0.085 (203) 0.060 (203) 0.054 (197) 

Customer 0.020 (209) 0.113* (207) -0.023 (203) 0.032 (203) -0.009 (197) 

FamFrd 0.124** (208) 0.234*** (206) 0.090 (202) 0.087 (202) 0.051 (196) 

Note: Numbers in parentheses refer to the numbers of corresponding observations. Coding as in Table 3, Table 4, 

and Table 5, respectively; with “not used = 6”. For further explanations see appendix. 

***/**/* refer to the 1%/5%/10% significance level in one-tailed significance tests. 


The limited number of private contacts on site 

may induce foreign-owned firms to more 

strongly rely on existing business contacts for 

extending their business to new customers and 

suppliers. With respect to financing, the effect 

of the ownership pattern is more clear-cut and 

consistent with our supposition. All three relation-based 

sources are less important for shortterm 

financing for firms with stronger foreign 

ownership interests and the coefficients regarding 

“customers” and “family and friends” are 

statistically significant or even highly significant. 

In summary, for most firms personal relationships 

with business partners and with political 

officials seem to be of substantial importance 

for doing business in the PRD in general. For 

several critical business activities – getting into 

contact with new customers and suppliers 

and accessing short-term finance – relationbased 

mechanisms and sources are not generally 

more important than more formal or impersonal 

ones, however. Finally, there is some, 

though generally rather weak, evidence that 

firm characteristics, such as company age, size 

and foreign ownership are, as expected, negatively 

associated with firms’ reliance on personal 

relationships for at least some of the 

business functions considered. In contrast, no 

systematic (negative) relation was found in 

general between firms’ growth performance 

and the importance of personal relationships. 

Conclusions 

China today may be viewed as a society that is 

in a gradual process of transition from an informal 

and relation-based to a more formal 

and rule-based governance system. At the 

macro-level of the institutional environment 

there have been, over the last decades, remarkable 

improvements of the formal contracting, 

information and (with some reservations) 

property rights institutions. This is true, in particular, 

for the province of Guangdong, which 

has been a pioneer region of economic and institutional 

reform in China, and for the PRD, 

Guangdong’s core economic region. Even 

there, however, the quality of many formal legal 

and market institutions is still far from 

what it is in most advanced economies. 

In light of the gradual character of the reform 

process and the remaining deficiencies in the 

institutional environment, theoretical considerations 

suggest that informal institutions and 

personal relations with private business partners 

and with political officials can be expected 

to be still of considerable importance for 

the firm-level governance of business operations 

in the PRD, in general. Given the continuing 

improvements of formal institutions at 

the macro-level and an increasing scale and 

scope of firms’ business operations, firms’ 

marginal costs of developing personal relations 

will increase and their benefits will decrease. 

As a consequence, firms operating in 

China will tend to gradually reduce their re-


Heft 1-2 / 2012 

liance on informal relation-based governance 

and make increased use of rule-based governance 

instruments, such as formal contracting 

and public information institutions, instead. 

Not all firms will have equally strong incentives 

to move from relation-based to more formal 

governance mechanism, however. Rather, 

we expect the incentives to reduce the reliance 

on personal relations to be stronger, in particular, 

for older, larger and faster growing firms as 

well as for firms with more international business 

contacts (international suppliers or customers) 

or with larger foreign ownership interests. 

These suppositions were confronted with firmlevel 

data obtained from a survey of 222 companies 

of the electronics industry operating in 

the PRD. Though most of the empirical results 

seem to be broadly in line with the theoretically 

founded suppositions, the empirical evidence 

is generally rather weak. This weakness 

may be partially attributed to a small sample 

size and the limited number of relevant variables 

we could construct from the available 

database. The paper should thus be taken only 

as a first, exploratory attempt to obtain (empirical) 

evidence on the relation between firm 

characteristics and the firm-level importance of 

relation-based governance during China’s institutional 

reform process. Future research may 

build and improve upon the current study by 

employing a larger and richer database on an 

issue that is of considerable importance to the 

future economic development of China and 

other transition economies. 

Acknowlegement 

Liu would like to thank the German Research Foundation 

(DFG) for its financial support of the cooperative 

projects “Informal Dynamics of Agile Firm Organization 

in the Greater Pearl River Delta” and “Regional 

Agility and Upgrading in Hong Kong and the PRD” 

(Priority Program 1233: Megacities - Megachallenge: 

Informal Dynamics of Global Change). 

Notes 

1 The Pearl River Delta (PRD) comprises nine municipalities 

of the Chinese Province of Guangdong: 

Dongguan, Foshan, Guangzhou, Huizhou, Jiangmen, 

Shenzhen, Zhaoqing, Zhongshan, and Zhuhai. 

2 Institutions that improve the availability and quality 

of information on economic agents’ past conduct 

and their ability to perform include accounting and 

auditing rules, credit rating and credit reporting institutions 

and land and liens registries. As these institutions 

also impact the cost of designing, managing 

and enforcing contractual agreements there are 

important interdependencies between information 

institutions and contracting institutions. 

3 In relation-based governance systems agreements 

are, therefore, mostly enforced by second-party enforcement 

mechanisms: each party to an ongoing relationship 

is deterred from behaving opportunistically 

and from breaching the (implicit) agreement 

by the other parties’ threat to retaliate and/or to terminate 

the relationship. Sometimes agreements and 

information about business partners’ performance 

will be made partially explicit and verifiable to 

third-parties to allow for third-party enforcement, 

which may take one of two forms. In relation-based 

third party enforcement, the deterrent to breach an 

agreement is strengthened by the threat that the miscreant 

will be barred from future business not only 

with the particular partner on which he acted opportunistically 

but with a whole group of (potential) 

business partners. This threat may be further buttressed 

by social ostracism if the group fosters social 

ties among its business members (DIXIT 2004, 27 f.). 

The second form is third party enforcement by the 

state, which will not generally be impartial in relation-based 

systems, however. Frequently, in case of 

conflict, the contracting parties’ personal relations 

with politicians or state officials will determine the 

enforcement outcome or the ex-post bargaining 

power of the parties (LI 2003, 657). 

4 The basic formal institutions of a society generally 

also tend to be quite persistent and their change 

mostly incremental. Occasionally, however, windows 

of opportunity arise, in which formal institutions 

can change very fast and in large discrete steps 

(NORTH 1990, 89 ff.). 

5 Political relations can be a ‘lubricant’ for a wide variety 

of private or business-related activities: e.g., 

obtaining driver’s licenses, getting access to medical 

treatment or to universities, gaining favorable 

verdicts in lawsuits, obtaining the permits required 

for all kind of business operations, getting access to 

scarce resources. 

6 In terms of the ease or difficulty of enforcing a simple 

commercial contract, China ranked 20th of 178 

economies in the World Bank’s report “Doing Business 

2008” (World Bank 2007). Criteria used to determine 

the ranking are the time, the cost and the 

number of procedures involved from the moment a 

plaintiff files the lawsuit until actual payment in a 

specific, well defined commercial dispute. 

7 The scope, accessibility and quality of credit information 

available through either public or private 

credit registries and their coverage are central criteria 

in the World Bank’s ease of ‘getting credit’-index. 

For this index, China ranked 84th of 178 

economies in 2007 (World Bank 2007). 

8 The power to appoint and to dismiss courts’ leadership 

rests with government or party organizations at


the same administrative level. Local governments 

also control court finances, material supplies, and 

welfare benefits for court officials (CLARKE/MUR- 

RELL/WHITING 2008, 395). Other reasons for the 

lack of efficient law enforcement are the widespread 

corruption and the generally low level of legal training 

and competence of judges (TREBIL-COCK/LENG 

2006, 1554). 

9 The openness index is defined as the value of external 

trade (exports plus imports) over GDP. Its value 

for Guangdong was 1.604 in 2006 (second only to 

that of Shanghai with a value of 1.750). 

10 The survey was carried out under the cooperative 

project “Informal Dynamics of Agile Firm Organization 

in the GPRD” financially supported by the 

Deutsche Forschungsgemeinschaft (DFG). The survey 

was conducted by our local partner, Prof. Li and 

his team from the Geography and Planning School 

at the Sun Yat-Sen University in Guangdong. 

11 This ranking of the importance of the different reasons 

is confirmed by two-tailed pair-wise Wilcoxon 

Signed-Rank Tests (WSRTs). According to these 

tests ResCus (IncFlex) is the most (second most) important 

reason for companies in the PRD to use personal 

relationships for business, while SolDis and 

SubMLaw are the two least important ones. 

12 In a related study among executives of Hong Kong 

based companies operating in the PRD (BICKEN- 

BACH/LIU 2010) institutional deficiencies were considered 

important or very important by a substantially 

larger share of executives (55 %). A possible 

explanation is that executives from Hong Kong are 

more familiar with the working of well developed 

formal rules and are therefore also more aware of 

the substitutive role of formal and informal governance 

instruments. 

13 In this question executives were asked to evaluate 

the importance of political relations in PRD in general, 

not just for their company. We chose to formulate 

this question in a less personal way as it may be 

considered highly sensitive by executives (due to a 

possible association of political relations with 

bribery and corruption). We still think that executives’ 

responses are largely determined by their own 

experience, however. 

14 Two-tailed WSRTs, considering only firms that 

make use of the respective channels, support this 

ranking: “active searching” and “business contacts” 

are the 1st and 2nd most important channels, respectively. 

The other two channels are significantly 

less important (with no statistically significant difference 

between the two). 

15 Correlation analyses between the responses to the 

questions on customer contacts and on supplier contacts 

show that executives that emphasize the importance 

of private contacts (business contacts) for 

contacting suppliers also tend to do so for contacting 

customers. 

16 Pair-wise WSRTs (considering only firms that make 

use of the respective sources) indicate that the differences 

between Chinese banks, family and friends 

and customers are not statistically significant. However, 

these three sources are statistically significantly 

easier to access than either HK banks, affiliated 

companies, or foreign banks. 

17 With respect to firm age, two-tailed significance 

tests were used, as it is unclear a priori whether we 

should expect a positive or a negative relation between 

firm age and the general importance of personal 

relationships for doing business. With respect 

to the other firm characteristics one-tailed significance 

tests were used as we have formulated unambiguous 

hypotheses about the expected sign of the 

relations. 

18 It may be worth noting, however, that all correlations 

with the age variable are negative though not 

significant (with one exception). This may be considered 

weak evidence for older firms tending to rely 

more on political relations than younger firms. 

This is different from the case of personal relations 

in general (Tab. 6), where age tends to have the opposite 

effect. 

Appendix 

Basic information on firm characteristics 

Age (Age): The youngest companies in the sample were 

founded in the year of survey (2007), the oldest one in 

1952. Half of the companies were founded after 2000, 

thus having less than 8 years of experience in doing 

business in the PRD. On average, companies interviewed 

have about 10 years of business experience in 

the PRD. 

Ownership Structure (ForeignOwn): About 57 % of 

companies are Chinese-owned companies, of which 

about 94 % are private companies (the rest being stateowned 

or collectively-owned). Among the companies 

with foreign ownership participation (about 43 % of all 

companies), 80 % were wholly foreign owned, 17 % 

were Chinese-foreign equity joint ventures, and 3 % 

Chinese-foreign cooperative joint ventures. 

Employment (Employ): The mean value is 742 employees. 

The variation of the variable is substantial ranging 

from 2 employees in the smallest firm to 30,000 employees 

in the largest (standard deviation 2,867). In 

about 85 % of companies the number of employees is 

below the average. The first, second and third quantile 

of the number of total employees of companies interviewed 

is 51, 150, and 500 persons, respectively. 

Sales (Sales): The greatest share of firms (30 %) falls in 

the category with sales between 10 million and 50 million 

RMB. The shares of companies realizing sales in 

the categories (-∞, 1), [1, 5), [5, 10), [50, 100), and 

[100, ∞) are about 9 %, 23 %, 16 %, 9 %, and 13 %, respectively. 

Growth Performance (GrowSales): The shares of firms 

in categories 0 to 3 are 3.4 %, 17.9 %, 48.3 % and 30.4 

%, respectively. This implies that for almost 80% of 

firms sales increase by an average rate of more than 2 % 

per year.


Heft 1-2 / 2012 

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Markus Keck/Hans-Georg Bohle, Bonn/Wolfgang-Peter Zingel, Heidelberg 

Dealing with insecurity 

Informal business relations and risk governance among food wholesalers in Dhaka, 

Bangladesh 

Abstract: The article investigates underlying social mechanisms that contribute to the remarkable 

resilience of Dhaka’s food system with a special focus on wholesalers and their informal business 

networks. A relational approach to the subject matter is elaborated that understands informality as 

a specific governance mode of business relations that is coined by horizontal power relations, and 

by the implicit codification, endogenous imposition, and personalized implementation of procedural 

rules. Empirical evidence is presented from recent fieldwork with rice and fish wholesalers 

that suggests that informality, in the form of trustworthy relations and social capital, has the potential 

to foster the traders’ adaptive capacities and thus not only their individual business performance, 

but also the overall robustness of the urban food system. 

Keywords: informality, embeddedness, wholesaling, food system, Bangladesh 

Introduction 

Since the 1970s, Dhaka exhibits unprecedented 

rates of population growth and spatial expansion 

that have let it become one of the largest 

cities worldwide (UN 2008). At a current 

growth rate of 3.5 % (World Bank 2007), its 

population increases by an estimated number 

of 450.000 people every year. Such a rapid urbanization 

process not only challenges governmental 

authorities –SIDDIQUI et al. (2000) attested 

the capital of Bangladesh already at the 

end of the last century a severe and extensive 

‘governance crisis’ (cf. also ISLAM 2005). It also 

brings up the question of how urban supply 

and distribution systems currently work under 

such conditions. In the following this question 

is examined by taking the food system of Dhaka 

as a case. Food systems are conceived as a 

set of activities ranging from production, processing 

and packaging, over distribution and 

retailing, to final consumption (ERICKSON 

2008, 236). Despite their overwhelming importance, 

distribution systems, particularly in the 

urban context, are least understood (BOHLE et 

al. 2009, 9). As GUYER (1987) has rightly noted, 

urban food supply and distribution is usually 

seen as a routine function in all kinds of so- 

cieties and taken for granted most of the time 

by those not directly involved. More often than 

not, it is under conditions of food crises that urban 

food supply suddenly becomes “a public 

issue which can blaze on the political agenda 

with suddenness, urgency, and often ferocity” 

(loc.cit. 1). While the persistence of famines in 

the era of global change has been discussed 

from manifold and diverse vantage points (DE- 

VEREUX 2007), the question of what social 

mechanisms exactly shape the resilience of urban 

food systems during non-famine times 

widely lacks empirical evidence in the literature. 

Our study concentrates on the entry points of 

food into the city, i.e. on the wholesale markets 

as the major distributional nodes from which 

food flows into various channels of the urban 

food system. Empirical data are presented on 

rice and fish wholesalers’ risk adaptation activities, 

with a special focus on informality. It is assumed 

that it is the continuous effort of food 

traders in general and their constant investment 

in informal business relations in particular that 

determines the food system’s overall resilience 

to a large extent.


Heft 1-2 / 2012 

The food system of Dhaka and its 

robustness 

In 1951, Dhaka had a population of 336,000 

(BBS 1951 after ISLAM 2005, 13); today there 

are roughly 14.2 million (ISLAM 2010, 6): 42 

times more inhabitants than before! While the 

first figure refers to the area of the Dhaka City 

Corporation (DCC) with an extension of 145 

km 2 , the latter number refers to Dhaka Metropolitan 

Development Planning Area (DMDP) 

with a size of 1,528 km 2 . For all those people 

who are involved in the megacity’s food system, 

the rapid urbanization means a challenge 

in economic, financial and logistical ways. 

Surprisingly, however, Dhaka’s food supply 

system has been remarkably resilient over the 

past 40 years. 

In most of South Asia, rice is the major staple 

of the people, regardless of their economic, 

social, or ethnic background. On average, the 

citizens of Dhaka meet their caloric demand to 

65 % by cereals. With an average intake of 378 

g per head and day, cereals (almost exclusively 

rice) are the most important basic food items 

for Dhaka’s and Bangladesh’s population (cf. 

BBS 2007). Bangladesh’s rice granaries are located 

in north-western and northern regions of 

the country (KECK et al. 2008, 29). Rice is 

grown mostly on small farms of less than 2.5 

acres (1 ha). Up to three harvests are possible 

per year, i.e. aman, boro and aus (AHMED 

2001, 2; DOROSH et al. 2004, 14). In the fiscal 

year 2006/07 55 % of the total rice production 

stemmed from the boro season, whereas aus 

lost its importance and plays only a marginal 

role now with hardly 6 % (FPMU 2009, 1). 

Bangladesh has been able to more than triple 

rice (paddy) production since independence in 

1971. Domestic production rose from 14.9 million 

tons in 1971 to 43.1 million tons in 2007 

and to a record harvest of 46.9 million tons in 

2008 (here and in the following “tons” refer to 

metric tons). This success was possible only 

because yields increased from 1,602 kg/ha in 

1971 to 3,995 kg/ha in 2008. Today, Bangladesh 

holds the fourth position among the 

world’s rice producing countries. But despite 

all impressive production increases, Bangladesh 

is still not in a position to feed its population. 

More than 3 million tons foodgrains had 

to be imported in 2007: 2.4 million tons wheat, 

0.6 million tons (milled) rice and 0.2 million 

tons maize (FAOSTAT 2010). In 2008 rice imports 

counted for well over 1 million tons 

(FAO 2009b, 25). 

Bangladesh’s market liberalization of the 

1990s coincided with India’s removal of export 

restrictions. India’s rice exports increased dramatically 

from 0.9 million tons in 1994 to 4.9 

million tons in 1995. India started dominating 

the rice imports of her neighbour, thus replacing 

Thailand as the major source of rice imports 

to Bangladesh (DOROSH/MURSHID 2004, 

109). One has to bear in mind, however, that 

India had been exporting rice to Bangladesh also 

before, although illegally and unrecorded. 

The long and winding border was never effectively 

controlled and whenever prices differed 

in the two neighbouring countries, large quantities 

would be smuggled across. But also after 

India started to liberalise its foreign trade, she 

continued to look at her consumers first. In 

times of high world market prices, India restricts 

her exports rather than allow her domestic 

prices to rise. As a consequence, India’s rice 

exports were reduced from 5 million tons in 

2007 (FAO 2008, 32) to 3.57 million tons in 

2008 (FAO 2009a, 29) at a time when 

Bangladesh needed to import. In 2007, floods 

and the cyclone Sidr brought devastation and 

much of the paddy crop was destroyed. Consequently, 

the country had to import large quantities 

of grain just when world market prices 

started to rise to unprecedented heights. In late 

2007, the price of the major rice exporters 

showed a pronounced increase with a peak in 

mid-2008. The price of high quality Thai rice 

almost quadrupled (!) within a period of one 

year. From August 2004 until November 2006 

it had risen from 250 US$/t to 300 US$/t, while 

afterwards it jumped up to more than 1,000 

US$/t in mid-2008. From the end of 2008 onwards 

prices fell and remained at a high level 

of around 600 US$/t (www.indexmundi.com, 

20.8.2009). The situation in Dhaka followed 

this general trend. Here, prices of low quality 

(coarse) rice, that is mainly consumed by low 

income groups, more than doubled in the mentioned 

period, i.e. from 16.50 Bangladesh Taka 

(BDT) in January 2006 to 35.00 BDT in December 

2008. Since the beginning of the year 

2009 prices have come down again to a rate of 

20.00 BDT to 25.00 BDT (ZINGEL et al. 2011, 

305; according to data provided by the Ministry 

of Agriculture, Department of Agricultural 

Marketing, Government of the People’s Republic 

of Bangladesh). 

Although this hike of world rice prices caused 

severe distortions of Bangladesh’s food security 

situation (for a discussion of its impact on

Markus Keck / Hans-Georg Bohle / Wolfgang-Peter Zingel: Dealing with insecurity 45 

Dhaka’s urban poor see ZINGEL et al. 2011), 

there has always been enough food in the city 

to secure at least a minimum supply for the urban 

population. Without wanting to downplay 

the “silent violence” (cf. WATTS 1983) that was 

caused by the food price hike, it must be mentioned 

that dispite Dhaka’s rapid growth, 

countrywide floods, the devastating cyclone 

Sidr, the global food price hikes, and political 

upheaval, the food supply and distribution system 

as a whole remained remarkably stable. 

What are the social mechanisms that made this 

system so resilient? To answer the question, 

our analysis will focus on food wholesalers 

and their informal business networks. Before 

moving to the empirical part of this paper, the 

term of informality has to be clarifyed. 

Informality – a relational approach 

Although HART (1973) and his colleagues of 

the International Labour Organization’s employment 

missions (ILO 1972) were quite 

positive about the informal sector – noting its 

efficiency, creativity, and resilience – in subsequent 

years, the concept was widely interpreted 

in negative terms. Scholars from many 

disciplinary backgrounds referred to informality 

in such a way and assessed it predominantly 

in terms of demanding, dirty, and dangerous 

labour conditions, unregistered and partly illegal 

small-scale ‘survival economies’, or marginal 

residential areas (for the informal sector 

debate see CHEN 2006). From this vantage 

point, megacities are often described as global 

risk areas (KRAAS 2008), that are menaced by 

environmental degradation, capacity overload 

of public distribution systems, marginalization, 

social exclusion, and prevailing poverty 

that all together add to the vulnerability of 

large segments of cities worldwide (KRAAS/ 

MERTINS 2008). But, despite these sad truths, 

informality in today’s megacities also bears 

the inherent potential for adaptive and efficient 

governance modes and, thus, opportunities for 

future development that should not be overseen 

(KRAAS/NITSCHKE 2006). In this article, it 

is the positive aspects of informality that are 

aimed to be put back on the agenda of the current 

debate. 

In order to elaborate a relational approach to 

informality, we draw back on the work of 

NORTH (1990) on formal and informal institutions. 

According to NORTH (loc.cit. 3), institu- 

tions are understood as all kinds of “humanly 

devised constraints that shape human interaction”, 

whereas constraints encompass obligations 

and restrictions, but also rights and privileges 

(SCOTT 2008, 50). Since human beings 

live in an uncertain world, they device institutions 

to bring about some security and to minimize 

related transaction costs (DE SOYSA/ JÜT- 

TING 2007, 31). While formal institutions are 

codified political, juridical, and economic rules 

that are outlined in constitutions, laws, ordinances, 

and all kinds of legal contracts, that are 

usually enforced by official entities such as 

parlaments, courts, bureaucrats, and other legal 

persons (NORTH 1990, 55 ff.), informal institutions 

are basically understood as uncodified social 

norms that are reproduced largely through 

self-enforcing mechanisms of mutual agreement. 

As such they comprise customs and 

habits, obligations and social entitlements, and 

all kinds of other deontic rules (loc.cit. 43 ff.). 

According to NORTH (loc.cit. 55), the difference 

between formal and informal institutions 

is a matter of degree; both kinds of rules together 

span a continuum. Consequently, social 

realities seldomly fit into either the one or the 

other category. Instead, organizations as the 

players of the game are rather embedded in an 

“institutional matrix” that comprise both formal 

and informal institutions at the same time 

(loc.cit.1990; 2005). Despite these regulative 

and normative aspects of formal and informal 

institutions (cf. SCOTT 2008), SEARLE (1995) 

convincingly addressed the underlying constitutive 

element of institutions. Based on collective 

intentionality, that is the cognitive property 

of human beings to direct their minds in 

agreement with each other at specific states of 

affairs in the world, people turn brute facts into 

institutional facts and thus produce social reality 

in accordance to the logical form of “X 

counts as Y in C”. For instance, the brute fact 

of a handshake (X) in the context of a market 

place (C) counts as the closing of a contract 

(Y), if both partners of this interaction agree 

upon it. As such, all institutional facts, e.g. 

money, marriage, business organizations or 

governments, do indeed exist only because we 

believe them to exist. 

This constitutive feature of institutions is most 

tricky (ADELSTEIN 2010, 344), especially when 

considering informal institutions. Since it is a 

matter of social consensus, first of all, different 

scales of institutions are to be distinguished, 

from mutual agreements between two partners


Heft 1-2 / 2012 

Tab. 1: Continuum of formal and informal relations 

Formal-informal 

continuum 

Institutions reproduced 

in social relations 

Strong- formal Statutory law and 

authority 

Weak-formal Market and 

delegation 

Governance and social interaction 

Explicit codification, exogenous imposition, as 

well as rigid and depersonalized implementation 

of processual rules in hierachical power relations 

Rigid and depersonalized implementation 

Weak-informal Culture and ethics Implicit codification, endogenous imposition, as 

Strong-informal Personal trust and 

friendship 

Source: LI 2007, 230; ETZOLD et al. 2009, 8 

in dyadic relationships over widely accepted 

norms of a society to nearly universalistic values 

of global humanity. Secondly, institutions 

must be perceived as being in permanent flux 

and motion, they constantly arise and vanish as 

they are the subject of permanent negotiation 

in contested political arenas (ETZOLD et al. 

2009). Taking into account GIDDENS’ (1984) 

theory of structuration and his elaboration on 

people’s agency, we can speak of a duality of 

institutions that constitutes them as both medium 

and outcome of social practices. With these 

considerations in mind, we may distinguish 

with LI (2007) between formality and informality 

as a specific governance mode of social 

interaction. Formality refers to procedural 

rules that are “explicitly prescribed, exogenously 

imposed, and rigidly enforced by vertical 

authority powers in a (sic!) universalistic 

depersonalized process”, while informality refers 

to institutions that are “implicitly assumed, 

endogenously embraced, and flexibly enforced 

by horizontal peer pressures in a particularistic 

personalized process” (loc.cit. 229). By these 

criteria, personalized trust, strong social ties, 

and affective commitment are strong-informal 

elements, while clan control, religion, culture 

and ethics are weak-informal. Similarly, law, 

state policies, legal ownership, and organizational 

hierarchies are strong-formal, while 

more or less regularized markets and delegation 

are weak-formal (see Tab.1). Such a conceptualization, 

thus, allows to apply informality 

to both the political and the economic sphere 

of society. 

With this differentiation, LI (2007) builds a 

bridge to the debates on embeddedness (cf. 

GRANOVETTER 1973, 1985; UZZI 1996, 1997) 

well as flexible and personalized implementation 

of processual rules in horizontal power relations 

Flexible and personalized implementation 

and social capital (cf. COLEMAN 1990; PUTNAM 

1993; PORTES 1998; BURT 2001; BOHLE 2005). 

With the term of embeddedness, GRANOVETTER 

(1990, 98; cited after GLÜCKLER 2001, 214) insists 

on the fact that economic action and outcomes 

“are affected by actors’ personal 

[dyadic] relations, and by the structure of the 

overall network of relations”. In this regard he 

speaks of relational and structural aspects of 

embeddedness. LI (2007, 231 ff.) also follows 

this differentiation and distinguishes between 

the structure of social relations, expressed as 

measures of network diversity and density, as 

well as positions of centrality and rank, and the 

content of social relations, expressed as measures 

of dyadic tie strength and access benefits. 

The focus of this article is on the content 

of social relations at the scale of dyadic relations 

and – more precisely – on personalized 

trust as a “mode of commitment [that] results 

from strong ties, and also results in relationship 

commitment behavior” (loc.cit. 236). By following 

GRANOVETTER (1985, 487), informality 

is thus approached empirically from the perspective 

of “concrete, ongoing systems of social 

relations”. In this regard, social capital is 

addressed as “an informal access to others’ resources 

due to social ties” (LI 2007, 231). 

To sum up, informality is a specific governance 

mode of social relations in horizontal networks, 

most prominently expressed in trustworthy 

ties, that comprise institutional 

arrangements that are implicitly codified, endogenously 

imposed, and dealt with in a flexible, 

personalized and thus particularistic manner. 

While social ties are the antecedents or 

prerequisites of relations, social practices are 

the outcome or consequence of institutions. As


such, social relations, institutions, and social 

practice together appear as an interdependent 

trialectic which is the founding pillar of the 

constant reproduction of social reality. 

Informal relations and risk adaptation 

of food wholesalers in Dhaka 

Food wholesalers in Dhaka 

As prerequisite for empirical work, the food 

system of Dhaka was analytically subdivided 

into three different layers, i.e. (i) the wholesaling 

of raw food (wholesale markets; single 

wholesale stores), (ii) the retailing of raw food 

(kitchen markets; permanent retail shops; supermarkets; 

semi-permanent and mobile hawkers), 

and (iii) the sale of cooked food (restaurants; 

canteens; street food stalls). For the 

study of the first layer, in total, 42 rice and fish 

wholesalers were consulted by means of qualitative 

interviews. In addition, certain questions 

were deepened with the help of the participatory 

tool of Venn diagrams (KUMAR 2000), that 

were undertaken with support of local market 

associations. Quantitative measures such as 

mappings and a panel survey were used to 

broaden the perspective of the study. A standardized 

random sample survey was conducted 

with 448 wholesalers (206 rice and 242 fish 

wholesalers) at 21 wholesale markets (twelve 

rice and nine fish markets) to test certain hypotheses. 

1 

Food wholesalers play a pivotal role within the 

megaurban food system of Dhaka. They are 

crucial intermediaries between providers and 

suppliers on the one hand, and retailers and 

consumers on the other. The panel survey 

(2009 and 2010) revealed that, at present, raw 

food is sold at 87 wholesale markets within the 

area of Dhaka City Corporation (DCC) (see 

Fig. 1). 2 Out of them, there are 24 rice and 13 

fish markets with an estimated total number of 

1.700 wholesalers (roughly 900 fish and 800 

rice wholesalers) who work in 90 % of the 

cases as commission agents by order of rice 

millers, pond owners or intermediary suppliers 

in rural areas (own survey 2009). Sales 

amounts of 3,800 kg rice and 800 kg fish on 

average per day, and monthly expenses of 

32.000 Bangladesh Taka (BDT) in the case of 

rice traders and 63.000 BDT in the case of fish 

traders on average are substantial compared to 

those of retailers or street food vendors. These 

sheer numbers show the traders’ significance 

within the urban food system. Nevertheless, 

there are great socioeconomic disparities amid 

the wholesalers. In terms of business volume, 

the top 10 % of Dhaka’s fish merchants sell 

39 % of the total turnover, while the bottom 

10 % sell only 2 %; respective numbers for rice 

traders are 35 % and 2 % (own survey 2010). 

Besides few ‘big fishes’ among the wholesalers, 

large millers and pond owners in rural 

areas and the emerging supermarkets with their 

much higher profit margins dominate the food 

system. 

Urban stress and business risks 

Qualitative interviews revealed a variety of insecurities 

that the merchants face in Dhaka. 

From the traders’ perspective, we can distinguish 

between the general stress that is related 

to social life in the megacity, and particular 

risks that are related to the business of wholesaling 

as such. Stress refers to negatively perceived 

long-term trends such as the accelerated 

population growth and spatial expansion of 

Dhaka especially since independence that bestows 

on customers and merchants ever increasing 

distances and travel times. In order to 

keep in step with these developments, wholesalers 

establish more and more markets at the 

urban fringe. For the merchants, this is a viable 

strategy to secure their livelihoods. For the 

city, these markets are of vital importance. Despite 

Dhaka’s rapid urbanization and a number 

of inhabitants that easily exceeds that of most 

European states, a sufficient number of markets 

guarantees enough food to be brought to 

the consumer in an efficient way. 

Other types of stress are related to the goverance 

of the megacity. The most prominent example 

is the bribing of numerous power brokers, 

such as patrolling policemen in order to 

get access to otherwise restricted roads, bureaucrats 

in order to reduce the time waiting in 

queues, or criminals that would guarantee market 

place security in return. Other examples are 

the governmental markets of the city. Wholesalers 

need to pay high advance payments in 

order to be allowed to appropriate and use 

these public places. Actually, these markets 

have been established by the municipality for 

being leased out to the merchants. However, 

more often than not, there are lessees who lease 

particular market plots in order to rent them out 

to the merchants. As such, the public markets 

of Dhaka are severely subject to rent-seeking


Heft 1-2 / 2012 

Fig. 1: Food wholesale markets in Dhaka City 

53 8 

56 

12 

50 8 

Shah Ali 

51 

35 

54 

>250 

55 

4 

57 

10 

Adabar 

52 9 

7 

15 

58 7 

6 

153 

45 

10 

46 7 

Mirpur 

Foodtype 

Rice 

Fish 

Pulses / Edible Oil 

Fruits / Vegetables / Wheat 

Animals / Meat / Eggs 

Daily Turnover in Metric Tons 

>250 Tons 

>50 - 250 Tons 

>1 - 50 Tons 

12 Name of Market 

45 Number of 

Wholesale Stores 

Settlements in Dhaka 

Metropolitan Area (2003) 

0 

Water Bodies 

Major Roads 

Railway 

1 

2 km 

Pallabi 

48 

14 

49 

12 

44 

14 

80 

23 

9 

40 

47 

7 

Karful 

Mohammadpur 

77 

8 

12 

15 

84 

45 

Dhanmondi 

15 

30 

42 

20 

83 

70 

16 

60 

40 

65 

79 

>250 

41 

5 

85 

35 

81 

15 

18 

11 

43 

5 

60 

7 

76 

20 

82 

48 

78 

>250 

Hazaribag 

Shahbag 

8 

30 

10 

14 

New Market 

100 

21 40 

11 20 

12 

8 

150 

Kamrangir 

Char 

Buriganga River 

Military 

Airport 

Lalbag 

Tejgaon 

Draft: M. Keck and S. Raupp 

Source: Author's own survey 2008-2010 

Cartography: G. Storbeck, 

Department of Geography, 

University of Bonn 

International 

Airport 

13 

63 

23 

17 100 

30 

Cantonment 

86 5 

24 

3 

61 

3 

31 

17 

25 

100 

19 

30 

87 

30 

28 

100 

33 

65 

Uttara 

Gulshan 

Tejgaon I/A 

Paltan 

32 

35 

63 

4 

70 

30 

66 

18 

67 

4 

62 

4 

69 

3 

29 

30 

22 

12 

5 

201 

Old Dhaka 

Kot- 26 

wali >250 

5 

2 

Khilgaon 

Kamalapur 

Train Station 

Motijheel 

27 

30 

Sutrapur 

3 

20 

4 

60 

59 

60 

65 

5 

64 

7 

68 

79 

71 

8 

75 

11 

Sabujbag 

74 

34 

73 

12 

34 

258 

38 

100 

36 

22 

2 

77 

Uttara 

Badda 

37 

>250 

35 Jatra- 

250 bari 

39 

35 

1 

16 

72 

8


1 Azampur Rail Gate Fish Market 

2 Sultan Shah Fish Market 

3 Tarun Mahmud Shah Fish Market 

4 BDR Wholesale Markt 

5 Narda Bazar Rice Market 

6, 7 Krishi Market 

8 New Market 

9 Hazi Sayed Hossain Fruits Market 

10 Khalil Sarder Krishi Market 

11 Nawabganj Rice Market 

12 Lalbag Fort Mor Bazar 

13 Swarighat Fish Market 

14 - 19 Moulavi Bazar 

20 Chowk Bazar 

21 Begum Bazar 

22, 23 Badamtuli / Babubazar 

24 Nazira Bazar 

25 Sadar Ghat 

26 - 28 Shyam Bazar 

29 - 33 Kaptan Bazar 

34 - 39 Jatrabari 

40 - 43 Kochukhet Market 

44 Fakirbari Bazar 

45 Mirpur 10 Rice Market 

46 - 49 Mirpur 11 Kacha Bazar 

50 - 52 Mirpur 1 Kacha Bazar 

53 Boro Bazar 

54 Gabtoli Cattle Market 

55 - 57 Dipjol Bazar 

58 Mirpur 2 Bazar 

59 Notun Bazar 

60, 61 Mohakhali Puran Bazar 

62 Modda Badda Bazar 

63 - 65 Uttor Badda Bazar 

66 Uttor Badda Rice Market 

67 Merul Badda Fruits Market 

68 Merul Badda Fish Market 

69 Rampura Bazar 

70 Chowdhuripara Rice Market 

71 Sipahibag Hotel Bazar 

72 Madertek Bazar 

73 Mugdapara Boro Bazar 

74 Mugdapara Fish Market 

75 Khilgaon Railgate Bazar 

76 Govt. Hawkers Market Tejgaon 

77 West Nakhal Para Bazar 

78 - 86 Kawran Bazar 

87 Malibag 

activities of widely unknown actors who use 

their social relations to political elites to capitalise 

on the contested public space in Dhaka. 

In terms of business risks, the wholesalers 

mentioned a range of adverse incidents that can 

be further differentiated in risks that (i) are related 

to internal affairs of a wholesaling enterprise, 

(ii) those that are related to the wholesalers’ 

suppliers and customers, and (iii) those 

that are related to the wider context of the 

megacity. Examples of the first case are the replacement 

of staff or employees’ accidents. Examples 

of the last category comprise the theft 

of goods by outsiders, the robbery on the way 

to the bank, or the eviction by state authorities. 

Inthe following the focus is on the second category 

of risks that are related to the merchants’ 

business relations to their suppliers and customers. 

Based on results of qualitative interviews, 

in the standardized survey, the traders 

were asked to appraise a selected number of 

such risks in regard to the frequency of their 

occurance, the perceived severity of their impact, 

and the time and effort that is necessary to 

cope with them. In the survey it was asked for 

six particular types of risks, i.e. the default of 

credit paybacks by customers, late delivery of 

goods, the delivery of already deteriorated 

goods, the default of an entire truck load, the 

default of the delivery of goods by a supplier 

after the wholesaler paid him in advance, and 

the closure of the shop for one day due to supply 

cuts. In relation to each of these risks, four 

related questions were asked. The first question 

was: How often did this incident happen in the 

course of the last three years?. Answers were 

predefined and ranged from never (that equals 

a value of 1), over once (2), 2-3 times (3), and 

4-5 times (4), to more than 5 times (5). In a second 

question, it was asked for the perceived 

severity of the risk impact. It was asked: How 

do you assess the severity of the impact of 

this/these event/s on your business performance?. 

Answers ranged from not severe (1) to 

extremely severe (4). The third question addressed 

the recovery time after the specific 

event occured. It was asked: After this/these 

event/s, how long did you need to recover from 

its negative impact? Similar to the questions 

before, answers were pregiven; at most a week 

was weighted with 1, a month with 2, several 

months with 3, a year with 4, and more than a 

year with 5 points. Eventually, it was asked: 

After this/these events, how much extra management 

effort did you need to overcome the


Heft 1-2 / 2012 

Fig. 2: Rice and fish wholesalers’ susceptibility to business risks 

Severity 

3.30 

2.80 

2.30 

B 

E 

F 

F 

problem? Answers ranged from no extra effort 

(1) to extreme extra effort (4). 

The results in Fig. 2 are the mean numbers, for 

rice and fish wholesalers individually. While 

the severity and frequency of the mentioned 

risks are plotted on the x- and y-axis, the recovery 

time and managerial effort are expressed 

in a combined way as cost of coping, 

that is indicated in the diagramme as symbol 

sizes. This cost of coping is calculated by summing 

the scores of recovery time (1 to 5) by the 

scores of managerial effort (1 to 4), thus resulting 

in an index with a range from 1 to 9. The 

risk appraisal from the perspective of the food 

wholesalers generally follows the logic that 

more frequent shocks are evaluated as much 

less severe (see Fig. 2). Contrary, less frequent 

shocks are assessed as being not only much 

more severe in their impact, they also involve 

much higher costs of coping for the traders. As 

such, late delivery of goods is more frequent in 

its occurance but perceived as less severe in its 

impact than the supply of already deteriorated 

goods. As the approximation curves show, fish 

business in general involves more frequent and 

D 

E 

1.80 

0.70 1.70 2.70 

Frequency 

3.70 4.70 

Source: own survey 2010, own draft 

D 

B 

C 

A 

C 

A 

Fish Wholesalers (n=242) 

Rice Wholesalers (n=206) 

A: Default of credit payback 

by customer 

B: Default of delivery by 

supplier despite advance 

payment 

C: Late delivery of goods 

D: Default of truckload 

E: Shop closure for a day 

due to supply cuts 

F: Delivery of deteriorated 

goods 

Costs of Coping: 

7.05 

2.82 

more severe risks in comparison to rice business, 

a matter that is explained by the different 

perishability of both goods. 

Nevertheless, four business related risks do not 

fit into this general trend. First of all, the risk of 

shop closure due to supply cuts equals a frequency 

of nearly zero in the case of rice traders. 

The reason behind is, that rice traders usually 

command godowns that allow rice to be stored 

at least for some days. Beside that, the risk of 

customers who do not pay back their credits is 

evaluated to be not only highly frequent, but also 

highly severe in its consequence. In case of 

fish wholesalers, the risk that suppliers do not 

deliver goods despite the fact that money was 

already paid in advance, is also assessed in this 

way. The extraordinary positions of these last 

three risks in the appraisal are seen as an indication 

for the general importance they have for 

the everyday business of the merchants. It is argued 

that it is especially these financial risks 

that make informal trustworthy relationsships 

between the traders and their suppliers and customers 

so important.


Case study: A fish wholesaler 

and his business relations 

Md. Gilgad Gazi is one of more than 270 

wholesalers of Five-Star Fish Market at 

Kawran Bazar in the heart of Dhaka City 

(market no. 78, Fig. 1). He is in his late 30s 

and comes from a small village (gram) not far 

from the city of Narail (in Narail district). Mr. 

Gazi moved to Dhaka in 1993. He lives together 

with his wife and children in a small 

appartment in Mohammadpur, some three 

kilometers away from his place of work. His 

father was a salesman for clothing and taught 

him everything he needed to know about how 

to manage a store. 

Mr. Gazi started his business in 1993 with a 

vending stall at Sonali Market (one of the five 

compounds of Five-Star Fish Market). He 

rented a second stall in 1997, and a third one 

in 2001. In 2007, he had the financial resources 

to rent three further stalls. Today, he 

runs six fish vending sites with a total number 

of 20 employees. Each one is run by a manager, 

an auctioneer and a weigher. Two helpers 

rotate between the single stalls to make shure 

that there is always enough fish to be sold 

(Venn-diagram of Mr. Gazi in Fig. 3). 

From all his employees, Mr. Gazi places one 

of his managers (1) first, giving him the highest 

score of importance. During the market 

hours, this manager is responsible for the 

same tasks as the other managers. But afterwards, 

he collects the records and earnings of 

all other managers for the central book-keeping. 

As such, he has decisive control over the 

total income of Mr. Gazi’s six vending sites. 

The six auctioneers (2) are placed second. 

From all other workers, they are most important 

due to their responsibility to realize good 

sales prices. As he explains, the auctioneers 

must be very experienced. They need to know 

the customers and their bargaining behavior, 

and they need to strategically manage the auctioning 

by forcing or reducing the pace. In 

third position are the managers of his remaining 

five vending sites and his six weighers (3). 

He underlines that all of them fulfill important 

tasks. Nonetheless, he evaluates them to be of 

lower importance compared to the hitherto 

mentioned employees. Interestingly, the night 

labourers (4), who are not directly employed 

by himself but by the market association, are 

assessed to be more important and socially 

closer to him than his own labourers (5). He 

explains this by the fact that the night labourers 

bear the responsibility for the unloading of 

the trucks and for the correct allocation of his 

supplies, a task that they perform independently 

at night when his workers are not yet at 

the market. The responsibilities of his own 

labourers are much less. 

After the explanation of the role of his employees, 

Mr. Gazi turns to his suppliers. He divides 

his 16 suppliers into three groups. Each 

group is regarded with different degrees of importance 

and placed in different distances to 

himself: “There are times, when I deal only 

with ten suppliers. But there are also times 

when I deal with up to 16 suppliers at the same 

time. Ten of my suppliers are very important 

for my business. They all deliver fish around 

the whole year. The others are far less important. 

I know them, but we do business only 

from time to time”. In fact, the first (6) and the 

second (7) group of suppliers are those whom 

Mr. Gazi provides with advance payments 

(dadon) that range from 50,000 to 150,000 

BDT per year. As return service, they are 

bound to deliver a certain amount of fish of a 

specific type in regular intervals. Every New 

Year, at hal katta, the contracts are anewed. 

With four of them (6), very close bonds exisit, 

as they stem from Mr. Gazi’s home district 

Narail. These four suppliers are those partners 

with whom he started his business. To share 

the same home district is seen as the fundamental 

pillar of these relationships. The relations 

to the six following suppliers (7) rest on 

a long joint business history. In fact, Mr. Gazi 

deals with all of them for ten years and more. 

These long-lasting business relations and the 

shared experience are enough proof for the 

good will of each of them. The remaining six 

suppliers (8) can be harked back to in times of 

need or can be dealt with in case of good offers. 

As Mr. Gazi underlines, these suppliers 

must be trustworthy as well for fullfilling mutual 

agreements. Nonetheless, these six latter 

suppliers are not as familiar to him as his other 

suppliers are. 

Mr. Gazi mentions further that there are approximately 

250 customers who come to his 

vending sites every day. He divides his stock 

of customers into two categories. The first 

category (10) consists mainly of retail shop 

owners that can be located easily. All actors of 

this first category are regular customers. They


Heft 1-2 / 2012 

Fig. 3: The Venn-diagramme of Mr. Gazi 

Source: own draft 

Employees 

Suppliers 

are well known to Mr. Gazi and his employees 

and they usually purchase large quantities of 

fish. There is usually not much bargaining 

with these customers, and most of them get 

fish on credit. The second category (11) consists 

of all casual customers who are not personally 

known to Mr. Gazi and with whom no 

social relation exists. For purchasing fish, they 

need to participate the auctions. None of them 

gets fish on credit. 

Beside his employees, his suppliers and his 

customers, Mr. Gazi mentions five more actors 

or actor groups that are of relevance for 

his business performance. The first one is his 

The sentimental and instrumental 

value of informal relations 

Market 

Association 

Mr. Gazi Scale of Social Proximity: Relevance for Business Performance: 

Close – – – – – – – – – – Distant „very low“ – – – – – – – „very high“ 

The Venn diagramms proved that food wholesalers 

in Dhaka are embedded in social networks 

linking them to various actors. The 

traders maintain ties not only to their suppliers 

and customers, but also to other wholesalers, to 

banks and local money lenders, to land lords, 

local policemen, ward commissioners and municipal 

bureaucrats. Regarding the organization 

of supply, it was found that the food traders ba- 

5 

17 

4 

Lessor, Land 

Owner 

8 

7 9 

6 

3 2 1 

16 

14 

15 

12 

13 

10 

11 

Customers 

Business 

Partner 

Bank, 

Moneylender 

Government, Dhaka City 

Corporation 

brother (12), whom he calls his closest business 

partner. The second actor is his bank (13) 

that he needs to transfer money to his suppliers. 

The third actor group is the DCC (14) and 

the central government (15), which are relevant 

for the trade license and tax that need to 

be paid. Furthermore, there is the market association 

(9), which runs a credit system. Each 

wholesaler usually pays a daily amount of 

20.00 BDT into a common pool, which is 

available as credit in case of need. The last actors 

that Mr. Gazi mentions are the land owners 

of the market (17) and his lessor (landlord) 

(16) 

Source: own interview, 23.2. 2009 

sically apply two strategies. On the one hand 

they maintain long-standing informally governed 

relations to a limited number of suppliers. 

On the other hand they maintain relations 

to a number of socially distant suppliers 

that are governed by formal arrangements. 

Even though there are businessmen who pursue 

either the first or the second strategy, in 

most cases, both are applied at the same time. 

Typically, traders are tied to a number of selected 

and socially close suppliers from whom 

they regularly receive large portions of goods.


Additionally, they maintain redundant relations 

to suppliers that may be harked back to in times 

of shortages. Even though the intimate suppliers 

are evaluated as much more important 

for the merchants’ business performance, it 

must be mentioned that both goals, a broadening 

and a deepening of their network relations, 

are on the businessmen’s agenda. 

Given the perishability and seasonality of rice 

and fish, the traders’ business performance 

turns out to be to large extent a question of the 

quality of their networks. While rice can be 

stored over months, fish rots within few hours 

if not properly cooled and looses its value 

within a single day. In the absence of cold 

stores, fish merchants bear a much higher risk 

of making losses. This fact makes fish wholesalers 

even more reliant on strong, trustworthy 

business relations and ongoing, frictionless 

supplies. A young shop owner explains the 

consequences of supply shortfalls: “Sometimes 

all of my three suppliers can not deliver fish at 

the same day. This happens around 90 days a 

year! I can not do business then in these days” 

(Interview 3.4. 2009). 

The way how business is carried out is shaped 

by the immanent institutions which constitute 

the relation. The statement of another fish merchant 

helps to understand the difference between 

formal and informal relations that holds 

relevance for their dealings with both suppliers 

and customers. On the informal relations to his 

customers he states: “I usually call my permanent 

customers to sell them their preferred fish. 

Occasional customers come to me independently. 

They buy fish only in case they can 

make profit. I have a pure business relation to 

them. With my permanent customers this is different. 

I tell them the purchase price and my 

expenses. I add my personal profit and tell 

them the price. And they have to buy [the fish] 

for that price. Even though other wholesalers 

here at the market have better prices, they 

would never buy fish from someone else. Because 

they have 100 % trust in me!” (Interview 

3.4. 2009). 

This statement should not be misinterpreted in 

the sense that an attitude of individual profit 

maximization would dominate only the formal 

market arrangements.An attitude of profit maximization 

can also be found in informal relationships. 

The above mentioned statements show 

that formal market relationships are mainly 

maintained to floating customers and to additional, 

sometimes redundant suppliers. Since 

both exchange partners hardly know each other, 

the transaction is agreed upon on the sheer basis 

of prices. In stark contrast to that, the traders 

share much more information with their close 

exchange partners, such as on the conditions of 

acquisition and the quality of goods, their personal 

expenses and profit margin. Furthermore, 

in formal relationships the exchange partners 

themselves as well as the relations to them are 

appraised as being of no special value. In fact, 

the traders have no special word for this kind of 

relationsships; they are either called pure business 

relation or it is stated that there would not 

exist any relation at all. On the contrary, the 

traders evaluate the relationships to their close 

partners as being of severe importance. This is 

expressed in their everyday language as they 

circumscribe these relations with several words 

such as trust or faith (biswas), commitment 

(protigha or protisruti), courage (utshaho) or 

honesty (dan). 

It is argued here that basically two aspects are 

responsible for this value enhancement of informal 

relationsships, that is their sentimental 

and their instrumental significance (cf. LI 

2007, 236). In regard to the sentimental dimension 

of informality, a rather short statement of 

a rice trader may serve as eye-opener. On the 

question of how he perceives his five most important 

suppliers he answered briefly: “To 

some extent, we are businessmen. But we are 

also brothers [bhai, which literally means 

brother, but is generally used to express social 

proximity]. We are both, brothers and businessmen.” 

(Interview 7.4. 2009). What is designative 

in this statement is the fact that the 

trader does not perceive the two roles of businessman 

and brother as two opponents. He 

does not draw a clear cutting line that would 

separate them. It is rather both roles that are accepted 

as being constitutive of the relationship. 

If we consider formal relations as being basically 

uni-dimensional, as allowing only few 

scope for abnormal behaviour between, for instance, 

a seller and a buyer, informal relationships 

are more diversified and basically multidimensional. 

By the means of iterative interaction, 

a pure businessman may thus become 

gradually a person with various social roles 

such as family head, friend, neighbour, religious 

fellow and supplier, each one bringing up 

another logic and code of conduct. In this context, 

LI (2007, 239) speaks of the versatility of


Heft 1-2 / 2012 

Table 2: Assessment of Business Relations, Rice Wholesalers 

Tab. 2: Assessment of business relations, rice wholesalers 

“Please consider the relations to your customers and suppliers: What role plays ... for these relations?” 

In Relations to Regular In Relations to Occasional Difference 

Business Partners (Mean) Business Partners (Mean) (Mean) 

The quality of goods Very important (1.00) Very important (1.00) 0.00 

To push prices for personal gain Important (2.18) Important (2.32) 0.14 

To follow same religion Not important (3.81) Not important (3.96) 0.15 

To be relatives Not important (3.60) Not important (3.88) 0.28 

To share same home district Not important (3.67) Not important (3.99) 0.32 

The reputation of your partner Very important (1.15) Important (1.86) 0.71 

To get credit* Important (2.48) Not important (3.60) 1.12 

To understand other’s business* Important (2.01) Rather not important (3.48) 1.47 

To do each other a favour* Very important (1.47) Rather not important (3.03) 1.56 

To help in difficult times* Very important (1.50) Rather not important (3.09) 1.59 

The balance of favours* Important (1.59) Rather not important (3.43) 1.84 

To give credit* Very important (1.42) Rather not important (3.41) 1.99 

Source: Own Survey 2009�2010 

informal relationships. It is argued that the sentimental 

value of informal relations is rooted in 

this versatility. 

The instrumental value of informality gets 

clear, for instance, in cases of supply cuts. In 

times of low amounts of available goods, suppliers 

apply their credo ‘first partners first’ and 

deliver their goods to their most valued customers 

only, whereas others are missed out. 

Thus, informal business relations help the merchants 

to get their goods even in difficult times, 

when not only the general supply but also the 

number of available suppliers decreases. Similarly, 

informal relations are helpful in times of 

financial shortfalls. Drawing on joint experiences 

with another wholesaler at the same market, 

whom he calls a business partner, a fish 

trader declares: “In case I run out of money today, 

I can go to him and borrow some. The next 

day I will give it back, no problem” (Interview 

3.4. 2009). It is argued here, that it is this “joint 

problem solving attitude” (cf. UZZI 1997, 42 

ff.) and a behaviour that is first and foremost 

committed to maintain and prolong the relationship 

to the partner (cf. LI 2007, 236), that 

constitutes the instrumental value of informal 

relations in Dhaka. 

Source: own survey 2009-2010 

Note: The single-factor (one-way) analysis of variance (ANOVA) revealed a significant difference between relations 

to regular and occasional business partners in regard to the inherent “joint problem solving attitude” with p


Table 3: Assessment of Business Relations, Fish Wholesalers 

Tab. 3: Assessment of business relations, fish wholesalers 

“Please consider the relations to your customers and suppliers: What role plays ... ?” 

In Relations to Regular In Relations to Occasional Difference 

Business Partners (Mean) Business Partners (Mean) (Mean) 

To be relatives Not important (3.59) Not important (3.57) �0.02 

The quality of goods Very important (1.00) Very important (1.07) 0.07 

To follow same religion Not important (3.71) Not important (3.82) 0.11 

To push prices for personal gain Important (2.12) Important (2.33) 0.21 

To share same home district Rather not important (3.25) Rather not important (3.49) 0.24 

The reputation of your partner Very important (1.35) Important (1.74) 0.39 

To get credit* Important (2.46) Not important (3.64) 1.18 

The balance of favours* Important (1.71) Rather not important (2.92) 1.21 

To understand other’s business* Important (2.17) Rather not important (3.39) 1.22 

To do each other a favour* Important (1.55) Rather not important (2.92) 1.37 

To help in difficult times* Very important (1.33) Rather not important (2.76) 1.43 

To give credit* Important (1.58) Rather not important (3.47) 1.89 

Source: Own Survey 2009�2010 

stand each other’s business’, ‘to take credits’, 

‘to give credits’, ‘to help each other in difficult 

times’, ‘to do each other a favour’, and ‘the 

balance of favours’ were evaluated as very important 

or important in strong relations, wheras 

they played only a marginal or no role in weak 

ones. These differences in the evaluation of 

business relations to regular and occassional 

suppliers and customers clearly indicate the 

difference of governance modes that are inherent 

in both types of relationships. As such, 

these numbers clearly back an understanding 

of informal relations that exhibit a profound 

relevance for the traders’ adaptive capacities. 

To sum up, in terms of quantity, rice and fish 

wholesalers in Dhaka operate only a small 

amount of exchanges via formal market relations, 

while the majority of transactions is organized 

through informal, trust-based relations. 

Based on the empirical evidence presented 

above, two basic characteristics of such 

relations have been revealed, namely their sentimental 

and their instrumental value. The sentimental 

value is based on the sharing of more 

detailed information and a higher degree of 

mutual knowledge. It gradually leads to an ever 

growing versatility of relationships and thus to 

flexibility, options for action, and an atmos- 

Source: own survey 2009-2010 

Note: The single-factor (one-way) analysis of variance (ANOVA) revealed a significant difference between relations 

to regular and occasional business partners in regard to the inherent “joint problem solving attitude” with p


Heft 1-2 / 2012 

analysis has extented to the food system of 

Dhaka City only as far as food is brought to the 

urban markets, not to the ability of final consumers 

to buy food. It has been assumed that it 

is the continuous effort of food traders and in 

particular their constant investment in informal 

business relations, that determines the food 

system’s robustness to a large extent. Following 

LI (2007), informal relations have been understood 

as comprising institutional arrangements 

that are implicitly codified, endogenously 

imposed, and dealt with in a flexible, personalized 

and thus particularistic manner. Informality 

is most prominently expressed in 

trustworthy relationships. Informal relations 

are related to specific transaction qualities and 

an inherent value enhancement that stems from 

their sentimental and their instrumental character. 

In case of Dhaka’s rice and fish wholesalers, 

the sentimental value of informal relations 

have been shown to stem from their inherent 

versatility, whereas the instrumental 

value has been found to originate from the 

traders’ joint problem solving activities and 

their commitment to maintain and prolong the 

relationship to their partners. As such, informal 

relations owe the merchants stable and longterm 

returns and thus contribute to their overall 

business performance. By adding to the traders’ 

adaptive capacities, it is the web of mutual 

trust and social capital that keeps the food system 

of Dhaka running. 

Especially in megacities, informality is often 

interpreted in negative terms as a clear indicator 

for an upcoming or even already prevalent 

governance crisis. Such a conceptualization, 

however, bears the risk to neglect the inherent 

potential of informal governance modes for 

people’s adaptive capacities and cities’ future 

development. If we want to achieve a better understanding 

of the social mechanisms that foster 

societies’ resilience, we need to take into 

account also those activities of people which 

are not formally regulated by the market or 

state and which sometimes even circumvent 

statutory measures and policies. 

Notes 

1 Fish markets that were studied are Kawran Bazar, Jatrabari, 

Merul Badda, Sultan Shah, Mugdapara, Dipjol 

Bazar, Kochukhet, Kaptan Bazar, and New Market. 

Rice markets that were studied are Badamtuli, Mohakali, 

Jatrabari, Kochukhet, Mirpur 1, Kawran Bazar, 

Uttor Badda, Krishi Market, Boro Bazar, Modda Badda, 

West Nakhal Para and Mirpur 10 (see Fig. 1). In 

addition to the study on food wholesalers, a second 

study focused on the third layer of the food system, 

with a specific focus on street food vendors, their 

livelihoods, and their daily struggles for accessing 

public space (see ETZOLD et al. 2009). A third study 

was undertaken on poor slum dwellers, their food consumption 

patterns, and the impact of the recent food 

price hike on their livelihoods (see ZINGEL et al. 2011). 

Unfortunately, results of these latter two studies exceed 

the scope of this paper. 

2 Wholesalers are defined as business organizations 

(ADELSTEIN 2010) that are dedicated to the sale of 

products to retailers, street food vendors or restaurant 

owners, or more generally, to anyone other than final 

consumers. Usually, rice is sold in 50 to 80 kg sacks 

rather than in smaller portions; fish is sold in bundles 

of baskets or drums, not per piece or per kg. – Markets 

are defined as a composition of wholesalers in direct 

spatial proximity to each other at a specific place. In 

Dhaka, these markets are sometimes precisely bordered, 

as it is the case if they are planned and installed 

by the municipality. Sometimes they are somewhat 

fuzzy in their extent, as it is the case if they are privatly 

installed with shops that are stringed along a road. 

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Pamela Hartmann Kilian, Köln/ Daniel Schiller, Hannover/ Frauke Kraas, Köln 

Workplace quality and labour turnover in the electronics industry 

of the Pearl River Delta, China 

Contrasting employer and employee perspectives 

Abstract: Export-oriented manufacturing firms in developing countries need to be highly flexible 

in order to respond to demand changes in volatile global markets. By using a modified version of 

Atkinson’s flexible firm concept as a framework, it is the aim of this paper (i) to describe the impact 

of workplace quality on labour turnover and (ii) to derive implications of this relationship for 

upgrading processes. Empirical data are combined from two surveys of migrant workers and electronics 

firms in the Pearl River Delta, China. 

Keywords: flexible firm, upgrading, workplace quality, labour turnover, China 

Introduction 

Since the implementation of China’s opening 

policy (1978), the Pearl River Delta in the 

southern region of the country has developed 

into the so-called ‘factory of the world’ for 

flexible and wage-sensitive production in 

labour-intensive sectors of light industry (EN- 

RIGHT et al. 2005). One of the most important 

sectors involved in this rise is the electronics 

industry, which is responsible for approximately 

39 % of the value added of the region 

(GDSTATS 2010) and is particularly tightly integrated 

into globally organised value chains 

(MEYER et al. 2009; MEYER et al. 2012; STUR- 

GEON 2002). The Pearl River Delta, with its 

large growth dynamic for industrial value 

added and its flexible production model, is subject 

to strong cyclical deviations, both seasonal 

and related to its dependence on exports. 

During the most recent global economic and financial 

crisis, the growth rate of the gross domestic 

product (GDP) in Guangdong fell from 

10.5 % in 2008 to 5.8 % in the first quarter of 

2009 (YU/ZHANG 2009) – and in Dongguan 

even more so, from 14.0 % to -3.5 % (YU/ 

HUANG 2009). 

Moreover, the shortage of workers, which was 

already a problem before the crisis (HE 2006; 

YANG 2005), has now been making headlines 

once again since 2010 following a short interruption 

during the crisis years (The Economist 

29.7. 2010, KNIGHT et al. 2011). The financial 

crisis was only temporarily able to mask the 

demographic effects of the one child policy, 

which are becoming apparent in that the 18-24 

years age group, which is so important for industrial 

companies, is shrinking. An additional 

problem is the fact that the economic development 

of the inland regions of China is providing 

increasingly attractive job opportunities for 

migrant workers in their home provinces, and 

the demands of the younger generation of 

workers are beginning to increase. The current 

generation is less willing than previous ones to 

accept the low quality of jobs, i.e. the often 

monotonous, physically straining and dangerous 

working conditions, in relation to the financial 

rewards, further benefits and qualification 

requirements (YUE et al. 2010). Companies 

are thus complaining of high rates of 

labour turnover, with a personnel substitution 

rate of 30-40 % per year being a fairly midrange 

figure (HÜRTGEN et al. 2009, 226); for 

companies with foreign investment, the 

turnover rate is estimated to be between 30 % 

and 90 % (PUN/SMITH 2007, 36 ff.), since job 

changing, i.e. employees moving to another 

company, is triggered initially by minimal differences 

in wage costs, and is also generally 

possible without any significant difficulties 

due to homogeneous and weak regulation, low 

qualification requirements and low demands of 

the positions on workers.

Pamela Hartmann Kilian / Daniel Schiller / Frauke Kraas: Workplace quality 59 

Against this background, CHAN (2010a) speaks 

of a Chinese paradox consisting of a shortage 

of migrant workers in the coastal provinces 

and a surplus of labour supply in the rural regions. 

In his opinion, the Lewisian turning 

point (LEWIS 1954), at which the unlimited 

supply of labour from rural areas dries up and 

wages steadily begin to increase, has not yet 

been reached. The Hukou system and an increased 

demand for workers in rural areas 

stemming from the 2009 economic stimulus 

package have had a particularly distorting effect 

on price formation on the job market. The 

former worsens the negotiation position of rural 

workers in the coastal regions, while the latter 

has led to a temporary rise in the number of 

non-agricultural job possibilities in rural regions. 

CHAN (2010b) does not expect the situation 

of workers or the stability of working conditions 

to change unless the access to a local 

Hukou at the job location is simplified. The 

first signs of this are evident in the province of 

Guangdong, which is most heavily affected by 

the current shortage of workers, in that it is 

aiming to provide 1.8 million qualified migrant 

workers with a local Hukou within the next 

three years (CHAN 2010a). 

In the following hypothesis it will be examined 

that the labour market in the region is caught in 

an inefficient ‘lock-in’ situation, i.e. trapped in 

a situation in which the incentive structures do 

not lead to investment in qualification on the 

part of companies and workers. Workers are 

not primarily interested in long-term qualifications, 

but rather in short-term income maximisation. 

Companies make virtually no investment 

in qualification measures and improved 

working conditions, since these are not honoured 

by increased loyalty on the part of workers, 

and, due to the short-term orientation of 

the business model, are not necessary either. In 

the long term, however, this hampers – and 

sometimes even blocks – the upgrading process 

towards better quality production and 

qualification as well as more stable employment 

conditions. 

Two questions are at the centre of this investigation: 

– To what extent do the quality of jobs and 

employee characteristics influence job 

changes undertaken by employees and the 

labour turnover in companies? 

– Does a qualification lock-in exist in the electronics 

industry of the Pearl River Delta in 

the area of labour-intensive and wage-sensitive 

production, and if so, how can this be 

overcome? 

Firstly, basic theoretical principles concerning 

the connection between flexibility and company 

success will be discussed, and determinants 

for job change will be demarcated. Quantitative 

survey data from companies and workers 

will be combined methodically. On this basis, 

workplace quality and its variation as well as 

the influence of workplace quality on the employee 

turnover rate of the companies will be 

determined, followed by a summary of the results 

and a derivation of policy recommendations. 

Flexible company organisation 

and labour turnover 

The term flexibility established itself in this 

context in the 1980s and was taken up by international 

organisations (e.g. OECD, IMF) 

and governments from the 1990s onwards. 

This promoted a normative research dialogue 

regarding the necessity of flexibilisation of 

company organisation and the erosion of normal 

working conditions in the course of a farreaching 

flexibilisation of companies. As a 

counterpoint to this, REILLY (1998) called for a 

more detailed differentiation of flexibility requirements 

and the empirical investigation of 

flexibility potential at the individual, company 

and regulation levels. 

The flexible firm in the Chinese context 

Flexibilisation in the Western context aims to 

increase adaptability within an existing political-economic 

system. However, this development 

must be categorised very differently in 

the Chinese context with its gradual socio-economic 

transformation to a market economy. 

There, the newly formed private economic sector 

has been geared towards a high degree of 

flexibility from the beginning. It is clearly evident 

that the organisation of manufacturing 

companies in the Pearl River Delta is characterised 

by a tight integration into global production 

processes. The volatility of demand 

connected to this requires a high degree of 

flexibility in terms of production volumes. But 

how do these market requirements translate to 

the level of company organisation?


Heft 1-2 / 2012 

Fig. 1: The flexible firm in the context of Chinese low-cost production 

Source: own draft, based on ATKINSON 1984, 29 

ALBRECHT (2002, 2005) has produced studies 

on flexibilisation in German-speaking geography 

which refer in their typology of flexibility 

to earlier works from the field of company research. 

ATKINSON (1984) developed the first 

typology of flexibility forms within companies. 

According to him, various workforce 

groups contribute in different ways to increasing 

the flexibility of a company through their 

own flexible deployment: the core workforce 

of long-term employees should be flexible in 

the carrying out of their function. The peripheral 

workforce, which makes up the largest 

number of employees, is affected by numerical 

and financial flexibility (Fig. 1). Numerical 

flexibility refers to a varying number of employees 

depending on the needs of the company; 

financial flexibility concerns the wage policy 

of the company being linked to fluctuations 

in demand, and in the Western context, 

also measures such as commission on profits. 

Under certain circumstances though, the advantage 

of an efficiently controllable person- 

nel volume, which may be achieved through 

flexible company organisation, can actually become 

a disadvantage. Numerical flexibility, for 

instance, involves considerable costs for recruitment 

and training. Even though WHITELEY 

et al. (2000) estimate these costs to be lower 

than those for a regularisation of the workforce, 

a high fluctuation can prove to be a liability 

for companies in China, especially in a 

situation of job surplus and labour shortage 

(JIANG et al. 2009). 

ATKINSONs flexibility typology has, until now, 

only been further differentiated for the Western 

investigation context (e.g. REILLY 1998; VAL- 

VERDE et al. 2000), which is of little use for the 

Chinese context. For example, subcategories of 

the peripheral workforce, which are widespread 

in the context of the USA and Europe, and particularly 

in The Netherlands and Great Britain 

(part-time and formalised temporary work, job 

sharing, as well as publicly subsidised professional 

training within companies), are still


generally absent from the manufacturing companies 

in China. There, a third, purposely unregulated 

segment of the labour market is developing 

in the course of the transformation process 

between a rural and urban economy: a 

market segment of migrant workers (míngōng) 

(HEBEL/SCHUCHER 2006). This initiative designed 

to mobilise labour resources is well 

known as a success factor for China’s economic 

boom, but at the expense of social security, 

since the migrant workers, of which there 

are more than 200 million, must retain their 

primary residence in their home towns under 

this so-called Hukou system. This means that 

access to the social security system at their 

work locations has so far remained blocked for 

them (health insurance, pension schemes, unemployment 

insurance and the subsidised 

accommodation market, along with school 

education). This results in much lower personnel 

costs for companies for these migrant 

workers than those for the locally registered 

workers, but in wages which are still much 

more attractive for the migrant workers than 

those in their home regions, thus creating the 

basis for the competitive advantage of Chinese 

production companies over other production 

locations. Activities in low-cost production requiring 

little or no qualification, which form 

the focal point of employee-based investigations, 

are almost exclusively carried out by migrant 

workers. Such employment arrangements 

are often short-term (up to one year, linshi 

zhigong) and rarely mid to long-term (changqi 

zhigong) (STAIGER 2008). These considerations 

lead to a modified conception of the flexible 

firm (Fig. 1). 

Due to the high degree of quantitative flexibilisation 

in the production companies, it is to be 

expected that the workforce is strongly segregated, 

also in terms of qualifications. Qualification-based 

segregation is defined in this case 

as the concentration of employees with a certain 

qualification level within a company, although 

differing qualification standards certainly 

exist between companies (GERLACH et al. 

2002). Through outsourcing of production activities, 

qualification-based segregation is generally 

on the increase (TSERTSVADZE 2005). 

Because of the specialisation of Chinese companies 

in simpler production activities, segregation 

within the global value chain means that 

in China, a very small proportion of highly 

qualified core workers is juxtaposed in the 

manufacturing industry with a large proportion 

of poorly qualified migrant workers in the peripheral 

workforces for simple production activities. 

In contrast, the globally active customer 

firms in industrial countries are characterised 

by an increasing proportion of highly 

qualified employees. 

The effects of qualification-based segregation 

in internal company learning processes have 

not yet been empirically verified. From a conceptional 

perspective, however, it can be assumed 

that a functional and qualification-based 

specialisation that is too one-sided will have 

negative effects on learning and will make the 

transition of employees from the peripheral to 

the core workforce more difficult. Such mobility, 

however, would be a starting point for 

technological and organisational upgrading 

processes, since the building up of basic technological 

capabilities is often a result of continual 

incremental improvements and knowledge 

stemming from experience (KIM 1997), with 

the increase of absorptive capacity through 

qualified human resources also playing a decisive 

role (COHEN/LEVINTHAL 1990). The empirical 

investigation of this research project thus 

concentrates particularly on the examination of 

the peripheral (production and migrant workers) 

and their potential role for upgrading 

processes. 

In accordance with the segregation theory, an 

observation of the Chinese electronics industry 

clearly shows that the sector is characterised by 

a high degree of heterogeneity. On the one 

hand, there is the small number of technologically 

very active companies which receive almost 

unlimited support from the state and have 

established international innovation activities, 

while on the other hand, there is the vast majority 

of companies which possess virtually no 

technological competences or absorptive capacity 

(ERNST/NAUGHTON 2008). The two sectors 

of the branch coexist almost entirely separate 

from one another, meaning that knowledge 

spillover and the development of a coherent innovation 

system cannot realistically be expected 

(KROLL/SCHILLER 2011). 

Flexibility, workplace quality and labour 

turnover 

Against the background of the transformation 

processes in China and their overriding influence 

on increased labour turnover, possible determinants 

for a change of jobs at the company 

level will be discussed, both from an employee


Heft 1-2 / 2012 

(supply) and employer (demand) perspective. 

Employer perspective: In accordance with the 

flexibility maxim, a company aims for an efficiently 

directed personnel volume suited to the 

current demand situation. The varying need for 

labour must thus be seen as the most important 

determinant from the company point of view 

for labour turnover. In this specific context, it 

is managed through contracts and simplified 

through a weakly regulated environment (SHEN 

2007; LÜTHJE 2008; HÜRTGEN et al. 2009). The 

conditions determining workplace quality are 

geared to a large extent towards financial flexibility, 

and are thus only marginally focused on 

the provision of consistent social welfare measures. 

Cost advantages are the principal determining 

factor behind decisions and generally 

entail an achievement-based wage policy in 

companies. 

Of particular importance in terms of upgrading 

processes from the company perspective are 

also the human resources available and the 

qualification of workers present within the 

company. Qualification measures consist here 

of education programmes upon entry into the 

company or both internal and external further 

education programmes provided by the firm. 

Qualification of workers in the production area 

is potentially beneficial for a transition to the 

core workforce and for the reduction of labour 

turnover through greater job security, more diverse 

spectra of activity and improved income 

possibilities. For the empirical investigation, 

on the other hand, it can be suspected that the 

probability of a job change increases if the expected 

educational benefits following a qualification 

initiative do not materialise for an individual 

employee. Particularly for large labour 

markets – such as the Pearl River Delta – the 

expectation is that the incentive for companies 

to invest in further education diminishes, since 

changes in personnel increase following further 

education due to the larger number of alternative 

employment options for workers, and 

because the relevant qualification requirements 

can be obtained by companies through the 

labour market (BRANDT 2009). However, an 

empirical investigation is still required in order 

to determine whether this hypothesis derived 

from the Western context can be applied to the 

Chinese situation. 

Employee perspective: Employees (Fig. 1, peripheral 

workforce), a heterogeneous research 

group, may be categorised according to characteristics 

such as age, gender, education and occupation. 

When considering labour turnover, 

one must take into account how important various 

company benefits are to the different 

groups of employees and what benefits they indeed 

encounter in companies. The conditions 

provided in companies can be categorised according 

to physical, social and organisational 

factors, as well as the company benefits mentioned 

above. 

In the context of Chinese companies, three aspects 

are of particular importance for the understanding 

of workplace quality and labour 

turnover. Firstly, there has been a change in the 

attitude among migrant workers, which still 

constitute the largest proportion of poorly qualified 

employees. In this case, however, it is not 

so much the Lewisian ‘turning point’ which is 

able to explain the shortage of labour and rising 

wages (CHAN 2010a), but rather the increased 

demands of the second generation of 

migrant workers in terms of their working conditions 

and environment, since alternative vocational 

possibilities are now emerging in the 

peripheral regions and there is a current tendency 

towards a reduction in the importance of 

family support in favour of other migration 

motives and strategies (FAN 2008; YUE et al. 

2010). Secondly, wages are the central argument 

for the selection or change of jobs, although 

it is not only the amount which plays a 

significant role, but also the reliability of wage 

payments, since non-payment of wages is the 

most common cause of industrial conflict 

(SHEN 2007). Thirdly, social welfare benefits 

must be categorised differently in China to the 

way in which this is done in Europe. Accommodation, 

food and recreational activities are 

often all provided by the company, although 

this is primarily done for the purpose of exercising 

better control over employees on the 

company site (PUN 2005). Against the background 

of the changing attitude of migrant 

workers, this old model of total provision of 

amenities is starting to become less attractive. 

Data and methods 

The data used for the present investigation encompass 

the perspectives of both the companies 

and the employees and were gathered using 

two standardised questionnaires. These 

were carried out in cooperation with the De-


partment of Urban and Regional Planning of 

Sun Yat-sen University in Guangzhou and were 

completed at the beginning of 2008. The coupling 

of the two sets of survey results is a particularly 

fruitful endeavour, especially as it allows 

for the capturing of both workplace quality 

and job change from the perspective of 

employees, as well as the company view of the 

workforce and the effects of job changes on the 

companies themselves. Several different parameters 

were investigated in the course of the 

surveys, among both companies and workers 

(e.g. wage levels, other benefits, qualification), 

in order to achieve a validation of the data 

through a comparison of results. 

Company data 

The data for the company perspective were 

taken from a standardised survey of 222 electronics 

firms in the Pearl River Delta. The survey 

was conducted in cities with a large proportion 

of companies from the electronics industry. 

The data set encompasses 90 companies 

in Dongguan and 116 in Guangzhou. The companies 

in Dongguan were selected using the 

Guangdong Electronics Company Catalogue 

2007; in Guangzhou, a list of companies from 

the Municipal Bureau of Statistics was used. 

300 questionnaires (150 per city) were distributed 

to randomly selected companies following 

an introductory telephone conversation in advance. 

The response rate was 59 % for Dongguan 

and 77 % for Guangzhou. Telephone follow-up 

efforts were successful in raising the 

quality of survey answers and in reducing the 

number of unanswered questions to a minimum. 

Due to a lack of structural company information 

(e.g. size or owner) in the lists used 

to select the samples, a test of representativeness 

was not possible. The high response rate, 

however, reduces the danger of a systematically 

distorted non-answering of questions. 

The section of the company survey pertaining 

to employees, which is relevant for this study, 

contained only closed questions in order to 

make it easier to provide answers by telephone 

or post. The companies were particularly asked 

to make statements about the workers identified 

as belonging to the peripheral workforce, 

which, in the Pearl River Delta, mostly consists 

of migrant workers. Furthermore, a distinction 

was often made in the data set during the analysis 

between the 114 private Chinese firms and 

the 102 foreign companies (including Hong 

Kong and Taiwan), since a further aim was to 

determine whether the two groups also differ in 

terms of workplace quality and flexibility as 

they do in terms of technological competences 

(SCHILLER 2011). 

Employee data 

The primary data used for the employee perspective 

were taken from a social geography 

field study which consisted of both a standardised 

survey of 585 workers (of which 566 cases 

were suitable for analysis) and a qualitative 

collection of data. The latter included 35 interviews 

with migrant workers, representatives of 

authorities, organisations and employment 

agencies as well as participating and non-participating 

observations in the factories and the 

working environment of low-cost manufacturing. 

Considering this large amount of data, this 

study will concentrate on the survey data. 

The decisive criteria for the selection of the investigation 

area and the sample were that it 

should be a manufacturing location with a large 

proportion of low-cost production in the electronics 

industry where the above-mentioned 

data could be gathered. This selection process 

was faced with the following limitations: 1. a 

target group, which can only be captured exploratively 

(migrant workers); 2. politically related 

restrictions for domestic and foreign 

scholars, as well as for the investigation group 

in China. 

Migrant workers are highly mobile, meaning 

that only a small proportion of them are covered 

statistically by local authorities, with the 

majority only being registered with the companies 

which employ them. The choice was made 

not to seek access to the subjects via companies, 

for example those participating in the 

above-mentioned company survey, since no 

guarantee could be made that company management 

would not influence the statements of 

respondents. However, the alternative methods 

of gathering data, i.e. in the public sphere, required 

legitimisation from public authorities. 

The Chinese partner institute of the study 

maintains research contacts with Tangxiazhen 

in Dongguan, which legitimised the gathering 

of the data. With the knowledge that other locations 

in the Delta are also specialised in the 

electronics industry (e.g. Shilong, Chang’an), 

Tangxiazhen was deemed suitable for the data 

collection, since the industry there is dominated 

by low-cost manufacturing for the export 

economy with a large proportion of electronics


Heft 1-2 / 2012 

companies. The industrial, demographic and 

accompanying socio-economic transformation 

processes there are typical for the eastern axis 

of the Pearl River Delta (KILIAN et al. 2010). 

The sample selection took place in two steps: 

First, two areas dominated by the electronics 

industry were selected (cluster sampling). The 

inner-city industry district 138 (304 valid 

questionnaires) has been well established 

since the middle of the 1990s. The peri-urban 

district Keyuancheng (262 valid questionnaires) 

has been occupied by companies since 

2005 and is still undergoing development. In 

the second step, migrant workers were handed 

a questionnaire on the way from the company 

site to the shopping street which they filled out 

on the spot and returned immediately. Of those 

who accepted the questionnaire, the response 

rate was 100 %, although some of the questionnaires 

were not filled out completely. The 

scope of the sample is thus individually labelled. 

Workplace quality and labour 

turnover 

Company perspective 

In accordance with the distinction mentioned 

above, workplace quality from the company 

perspective is measured using the factors income, 

social welfare benefits, the design of 

employment contracts, training and further education 

programmes, and qualification of 

workers. The flexibilisation of working conditions 

is then investigated using the turnover 

rate, the variation in the number of workers 

throughout the year, the length of time required 

to increase the number of employees by 

10 %, as well as typical problems with the 

workforce. A differentiation is made between 

Chinese and foreign companies, as well as between 

Chinese companies at different locations 

and of different sizes for selected indicators. 

Workplace Quality: The average monthly 

wages of the companies surveyed, at approximately 

1,300 Yuan, were found to be well 

above the legal minimum wage of 780 Yuan in 

Guangzhou and 680 Yuan in Dongguan at the 

time of the survey (2007). This suggests that 

the labour shortage discussed in the introduction, 

which has created particularly strong 

competition for qualified workers and for pay- 

ment benefits not affecting the basic minimum 

wage, for example for overtime, night shift 

bonuses, gratuities, had already driven wages 

upwards prior to that time. As of May 2010, the 

minimum wage was adjusted once again to 

1,030 Yuan in Guangzhou and 920 Yuan in 

Dongguan (HKTDC 2010). In the survey data, 

no significant differences can be found between 

Chinese and foreign companies, which 

contradicts the frequently proposed assumption 

that foreign companies have an advantage 

when competing for labour resources due to 

higher wages. 

Questions about five benefits provided by 

companies over and above the standard wages 

revealed that almost 90 % of companies offer 

accommodation in a company residential 

home, and nearly as many also provide meals 

as well as health and accident insurance. Paid 

holiday and gifts on festive occasions, especially 

at New Year, are much less widespread, 

but nevertheless standard at least for half of the 

companies surveyed. The social welfare benefits 

provided by foreign companies tend to be 

slightly greater than those of Chinese companies, 

although the differences are only significant 

for health and accident insurance. When 

combining wages and social welfare benefits, 

therefore, only a marginal advantage for foreign 

companies could be found. At this point it 

must be taken into consideration that the social 

welfare benefits investigated here must be interpreted 

differently within the Chinese context 

from the way in which they are seen in Europe. 

In this regard, PUN (2005) points to the controlling 

function of company residential 

homes. A high degree of social benefits of this 

kind thus characterises those companies which 

still follow the classical production model, 

which is increasingly coming to be considered 

unattractive by the younger generation of migrant 

workers. 

Two-thirds of employment contracts were individually 

negotiated and concluded in written 

form. The practice of verbal contracts, which is 

illegal under the new Chinese employment 

contracts law of 2008 (GEFFKEN et al. 2010) is 

now very rare, even among Chinese companies, 

although it is still significantly more important 

in these firms than in foreign companies. 

Due to the minimal importance of verbal 

contracts, no investigation has been made as to 

their effects on the rate of labour turnover.


Tab.1: Selected indicators of workplace quality from the company perspective 

Indicator Chinese Foreign 

Monthly wage in Yuan 1,304 1,250 

F-test (sign.) 0.440 

Social welfare benefits 

Meals 86 % 79 % 

X 2 -test (sign.) 0.192 

Accommodation 90 % 87% 

X 2 -test (sign.) 0.595 

Health/accident 

insurance 74 % 86 % 

X 2 -test (sign.) 0.024 

Paid holiday 68 % 75 % 

X 2 -test (sign.) 0.279 

Gifts on festive 

occasions 45 % 53 % 

X 2 -test (sign.) 0.256 

Employment contracts 

individual written 64 % 66 % 


Individual verbal 11 % 5 % 


Collective 7 % 15 % 


Employment agency 

and others 9 % 15 % 


Source: own calculation, company survey 2008 

Concerning training and further education, the 

following results emerged: much fewer than 

half of the companies offer training and further 

education measures very frequently. Training 

and learning phases occur most often when 

new workers commence employment with the 

company, while further education is only regularly 

offered internally in every fifth company 

and externally by every tenth company. Foreign 

companies offer significantly more possibilities 

in this area of formal training, as well as 

in cooperation with external providers of further 

education. In the areas of informal training 

and internal further education, the differences 

are not significant. 

Indicator Chinese Foreign 

Training and further 

education programmes 

Formal 

training very often (5) 50 % 63 % 

programme sometimes/ 

for new often (3-4) 31 % 29 % 

employees never/ 

rarely (1-2) 19 % 8 % 

X 2 -test (sign.) 0.035 

Informal very often (5) 45 % 47 % 

training of sometimes/ 

new often (3-4) 41 % 45 % 

employees never/ 

rarely (1-2) 14 % 8 % 

X 2 -test (sign.) 0.356 

Internal very often (5) 22 % 22 % 

further sometimes/ 

education often (3-4) 33 % 40 % 

programmes never/ 

rarely (1-2) 45 % 38 % 

X 2 -test (sign.) 0.499 

External very often (5) 11 % 13 % 

further sometimes/ 

education often (3-4) 30 % 42 % 

programmes never/ 

rarely (1-2) 59 % 45 % 

X 2 -test (sign.) 0.104 

n = 114 n = 102 

With regard to educational qualifications as an 

indicator for the qualification of employees, it 

could be determined that the group of poorly 

qualified workers with no more than a completed 

intermediate school education is in the 

majority. Approximately another quarter have a 

completed secondary school education, with 

roughly the same number having a vocational 

school qualification, while fewer than 10 % 

have a university degree. A surprising finding 

was that Chinese companies have more highly 

qualified employees on average. The differences 

are particularly significant in the area of 

vocational school qualifications. This may possibly 

be explained by the fact that foreign com-


Heft 1-2 / 2012 

Tab. 2: Selected indicators of job flexibility from the company perspective 

Indicator Chinese Foreign Indicator Chinese Foreign 

Turnover rate 32 % 40 % Problems with the workforce (continued) 


Job change very often (5) 12 % 13 % 

Time required following sometimes/ 

for a 10% increase participation often (3-4) 35 % 37 % 

in the number of in company never/ 

employees in days 23 22 further rarely (1-2) 54 % 50 % 

F-test (sign.) 0.797 education 

X 2 -test (sign.) 0.848 

Variation of the 

number of employees Low degree 

throughout the year in % 45 % 41 % of loyalty very often (5) 10 % 7 % 

F-test (sign.) 0.379 sometimes/ 

often (3-4) 33 % 38 % 

never/rarely 

Problems with the workforce (1-2) 57 % 56 % 

X 2 -test (sign.) 0.629 

Lack of very often (5) 29 % 26 % 

availability sometimes/ High wage very often (5) 6 % 8 % 

of poorly qualified often (3-4) 46 % 47 % demands sometimes/ 

workers never/ often (3-4) 43 % 40 % 

rarely (1-2) 25 % 27 % never/ 

X 2 -test (sign.) 0.899 rarely (1-2) 51 % 52 % 

X 2 -test (sign.) 0.754 

Lack of very often (5) 25 % 19 % 

availability of sometimes/ High level of very often (5) 7 % 7 % 

qualified workers often (3-4) 50 % 54 % absenteeism sometimes/ 

never/rarely 26 % 27 % often (3-4) 27 % 21 % 

(1-2) never/rarely (1-2) 66 % 71 % 

X 2 -test (sign.) 0.579 X 2 -test (sign.) 0.649 

n = 114 n = 102 


panies rarely locate their more valuable functions 

in China, rather tending to do so in their 

native countries or in Hong Kong. 

Labour turnover as an indicator for numerical 

flexibility: The empirical data produced an average 

fluctuation rate of 36 % which roughly 

concurs with the values found in the relevant 

literature for China. Compared with reference 

values from Germany, this figure is very high. 

The German Federal Employment Agency 

(2010) quotes a figure of 15 % in 2009 for the 

manufacturing industry in Germany. This confirms 

that the labour market in the Pearl River 

Delta is indeed characterised by a high rate of 

turnover. Whether this is a result of the shortage 

of workers on the supply side and a high 

labour turnover rate due to differences in 

wages, or whether it is to do with the demand 

side because of a high degree of uncertainty regarding 

job security, cannot be answered at this 

stage, but will be addressed again later using 

the results of the regression analysis. 

The fluctuation rate in foreign companies is significantly 

higher than in Chinese companies 

(Tab. 2). This is also in line with the results of 

previous studies (PUN/SMITH 2007) and underlines 

the reliability of the survey data. This discrepancy 

is primarily a result of the extremely 

high rate of fluctuation in Taiwanese companies 

(52 %) which display a significantly different 

result from other foreign companies. This constitutes 

a preliminary indication that foreign 

companies, and particularly Taiwanese companies, 

are obviously unable to compensate for 

the disadvantage in wage levels through additional 

social welfare benefits or qualification


measures: Chinese workers apparently react 

primarily to monetary incentives, while traditional 

forms of social welfare benefits, especially 

company residential homes, are no longer 

perceived as being attractive. 

The level of employee numbers also varies 

considerably and, seen over the course of the 

entire year, is situated within a corridor of variation 

which is, on average, 43 % of the average 

number of employees wide. A large proportion 

of production in the electronics industry is seasonal 

business, since a significant share of 

sales turnover in the industrial countries occurs 

during the Christmas period. There is no significant 

difference between Chinese and foreign 

firms in this regard. Larger companies 

with more than 500 employees can absorb 

these fluctuations better; their volatility, at 

34 %, is significantly smaller than for companies 

with fewer than 100 employees, which arrive 

at a value of 54 %. The electronics companies 

in the Pearl River Delta generally have 

the ability to adapt very quickly to fluctuations 

in demand. For a 10 % increase in the number 

of employees, they require an average of only 

23 days. 

A further indicator for workplace quality and 

flexibility is provided by the frequency with 

which companies report having problems with 

the workforce (Tab. 2). The most common 

problem mentioned was the shortage of poorly 

qualified workers, which was more frequently 

spoken about than the problem of acquiring 

qualified workers. This confirms the shortage 

of all labour resources in the region. Chinese 

companies are slightly more frequently confronted 

with these two problems, but the difference 

is not significant. The third most frequent 

problem mentioned by companies was 

job change following participation in a further 

education programme. This underlines the considerable 

readiness to change one’s job based 

on wage discrepancies, especially when newly 

acquired qualifications open up possibilities to 

receive higher wages. The question of whether 

there is truly a positive statistical connection 

between qualification measures and fluctuation 

which ‘punishes’ those companies which invest 

in further education will be addressed at a 

subsequent point in the investigation. 

Employee perspective 

As the presented results demonstrate, the 

labour turnover discussed from the company 

perspective does not affect all employees in the 

same manner. First, the sample of 566 migrant 

workers surveyed must be described: 52 % 

originate from Henan, Hebei and Hunan, three 

inland provinces of China, where the minimum 

wage is approximately one-third lower than in 

Dongguan (CLB 2008). This considerable 

wage gap between the regions of origin and occupation 

illustrates the attractiveness of the 

Delta as a destination for vocational migrants. 

57 % of the migrant workers are female, and 

only 28 % are married, which is not surprising 

considering the low average age (23.8 years). 

These figures all roughly correspond to those 

found in other studies on migrant workers in 

Shenzhen (e.g. WANG/WU 2010). The qualification 

level of the workers surveyed is also 

similar to that found in the company survey; 

the majority (53 %) had completed an intermediate 

school education. 

A comparison of the two data catchment areas 

reveals the following differences: Older, male 

and married workers are significantly more frequently 

found in the inner city district than in 

the newly developed peri-urban area, as are 

those employed as salaried workers. The workers 

in the peri-urban industrial area, who are 

2.5 years younger on average, have more frequently 

held a larger number of jobs in the 

past, and their current employment relationship 

has existed for seven months fewer than that of 

those in the inner city industry district. The 

peri-urban industrial area thus tends to employ 

a younger and also more mobile worker generation 

than the inner city industry district 138. 

This result may indeed extend the discussion 

on the new generation of workers in terms of 

their preferred working location (PUN/LU 2010; 

YUE et al. 2010). 

Flexibility and company benefits: In approximately 

two-thirds of cases (66 %), there is a 

fixed written contract between employees and 

companies, although contracts are often concluded 

for a period of only one year (Fig. 1, linshi 

zhigong). Long-term employees only received 

a contract with the passing of the revised 

version of the employment contracts law 

(2008), even though they had mostly already 

worked for several years in the same company. 

47 % of the sample participants were aware of 

the new employment contracts law. Their opinion 

of it varied in roughly equal numbers between 

scepticism regarding the implementation 

at the company level and enthusiasm due to the


Heft 1-2 / 2012 

Tab. 3: Selected employee characteristics 

Variables Characteristic Frequency Distribution across industrial χ 2 (sig.) 

features areas (%) 

Inner city Peri-urban 

Occupation* Industrial workers 367 50 50 0.110 

(n=444) Salaried employees 77 60 40 

Gender Male 243 66 34 0.001 

(n=565) Female 322 44 56 

Family status Married 160 63 37 0.060 

(n=564) Unmarried 404 50 50 

Age up to 18 81 42 58 0.001 

(n=555) 19 to 24 296 50 50 

25 to 29 81 54 46 

30 and older 97 72 27 

Education Max. intermediate 316 55 45 0.550 

(n=561) school qualification** 

Above intermediate 

school qualification 245 52 48 

* analogous to blue-/white collar workers; 

** analogous to the Chinese chu zhong, nine compulsory years of schooling 

Source: own calculation, employee survey 2008 

promise of the eagerly awaited regulation and 

strengthened social security. At any rate, the 

contracts seemed to provide no effective barrier 

concerning numerical flexibility at the time 

of the survey, i.e. the rapid entry to and exit 

from an employment relationship. 

The wage level was found to be lower than in 

the company survey; in both survey areas and 

occupational groups, it was reported to be 

around 1,140 Yuan. For this payment, however, 

the inner city employees work fewer hours 

than those in the peri-urban district (on average 

9.6 vs. 9.8 hours/day; with 4.7 vs. 4.0 free 

days/month). The conventional assumption, 

that a higher level of education and a higher 

age are honoured with higher wages was found 

to be applicable to this sample as well. Furthermore, 

long-term employees earned significantly 

more than those employed for a short 

period (r = 0.54). A very small, but also significant 

correlation (r = 0.13) exists between the 

number of previous jobs and the entry wage 

level (margin of error of 0.01% in each case). 

The wages were reported to be paid punctually 

in 80 % of cases. 

The industrial conflicts and strikes covered in 

other studies (e.g. PUN/LU 2010; SMITH 2006) 

are not reflected in these data. However, the 

wages do vary depending on the company’s order 

situation. The level of monthly wages fluctuates 

between the minimum and maximum 

figure with an average difference of around 

550 Yuan, i.e. approximately half of the average 

wage level. In only 18 of 566 cases is the 

wage level constant from the beginning. For 

65 % of workers, the average wage is above 

their starting wage level; 19 % actually earned 

more at the beginning of their employment relationship 

than their current monthly average. 

An explanation for this could be, that in times 

of high sales demand, workers are attracted by 

offering higher effective wages, which are then 

reduced in times of low demand to the level of 

the minimum wage. In this manner, company 

flexibility externalises market-related uncertainties 

by transferring them to workers. The 

determinants and fluctuations of the effective 

monthly wage will be revisited in the course of 

the discussion on reasons for job change. 

The spectrum of company benefits (Fig. 2) is 

mostly filled with accommodation and meal solutions, 

with transport and childcare being a rare 

occurrence. In more than 50 % of cases, health


Fig. 2: Company benefits 

Insurance 

Meals 

Further education 

n = 566 

Accomodation 

Ventilation 

During overtime 

Breakfast 

Dinner 

Lunch 

Equipment 

Gloves 

Work clothing 

Protection masks 

Goggles 

Insurance 

Accident insurance 

Health insurance 

Unemployment insurance 

Pension 

Other social welfare benefits 

Technical training 

Vocational training 

Other qualifications 

Other 

Goods for day-to-day use 

Transport 

Childcare 

Other provisions 


25 

23 

5 

23 

60 

103 

82 

12 

80 

106 

153 

150 

127 

16 

70 

242 

241 

239 

187 

176 

97 

246 

259 

316 

274 

and accident insurance is offered, and 35 % and 

40 % of cases involve offers of company-supported 

retirement schemes and unemployment 

insurance respectively – a figure which could 

conceivably have been much lower. 

Further education measures are in place in 

around 40 % of cases - a high figure considering 

the expectation that unqualified workers 

would generally receive no training. Moreover, 

training for industrial workers is similarly 

common to that for salaried employees. This 

49 

62 

49 

336 

80 

46 

73 

106 

46 

66 

348 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 

97 

142 

253 

110 

263 

238 

free of charge must be paid for not available 

132 

276 

273 

286 

179 

247 

216 

251 

45 

228 

206 

176 

195 

190 

199 

98 

106 

includes all categories imaginable, from initial 

training to further education programmes, 

which must be more subtly differentiated for a 

more in-depth interpretation. 

79 % of those surveyed were living in residential 

homes provided by the company, with a 

similarly high proportion receiving meals from 

the company canteen. As was the case with 

wages though, both figures lie beneath those 

resulting from the company survey, but both 

reveal the same tendency. A dominant charac- 

70 

81 

62 

23 

28 

23 

18


Heft 1-2 / 2012 

Fig. 3: Evaluation of workplace quality by employees 

Wage level 

Meals 

Accommodation* 

Reliability of payment 

Free time 

General satisfaction 

Relationship with superiors 

Industrial safety 

Relationship with colleagues 

n = 566 

58 

60 

86 


130 

129 

137 

147 

196 

teristic of the Chinese manufacturing sector is 

the integration of living and working on the 

company site. It is disputable, however, to 

what extent accommodation and meals may 

truly be seen as social welfare benefits. Here, 

one must not only consider the above-mentioned 

function of these services as an instrument 

of control over the workforce, but also 

the fact that meals, work clothing and accommodation 

all quite frequently require payment 

on the part of workers, as well as goods for daily 

use, although salaried workers do pay meal 

costs themselves significantly more frequently 

(0.05) than industrial workers. Over and above 

the question of payment, company benefits also 

partly serve as a system of occupational 

control over workers, an aspect which is dealt 

with in detail in studies on the so-called dormitory 

labour system (cf. LEE 2005, 17; PUN/ 

SMITH 2007). 

The facilities provided at the company site may 

also be counted among company benefits in the 

wider sense. An employee of a Japanese company 

spoke of table tennis tables, karaoke machines, 

free internet access and television. 

Courts with basketball hoops are very often to 

be found, although their use could only be documented 

in one case; the supposed sport field 

342 

380 

382 

386 

326 

288 

339 

316 

286 

161 

98 

104 

70 

81 

95 

66 

35 

52 

34 

0% 20% 40% 60% 80% 100% 

satisfactory acceptable unsatisfactory 

seemed to be used more for the purposes of assemblies. 

This leisure programme, as is the 

case with other free benefits, can be interpreted 

as an incentive measure, although the former 

certainly seems to be aimed at the 

younger, more mobile generation of workers. 

The company benefits differ between the two 

data catchment areas in that meals and uniforms 

are more often free of charge for workers 

in the peri-urban industrial area than in the 

inner-city district, the former being significant 

(0.01). This possibly constitutes an attempt to 

compensate for the peri-urban location and the 

lack of alternative accommodation. 

Evaluation of workplace quality and priorities 

of employees: Workplace quality was investigated 

using nine of the categories found to be 

relevant in a preliminary study (Fig. 3). In the 

case of wage levels, the absolute proportion of 

unsatisfied workers is the highest, and is also 

proportionally greater than that of satisfied 

workers (18 % to 11 %). When one takes into 

account the wage fluctuations presented earlier, 

this is hardly surprising. Furthermore, the 

quality of meals was the second most common 

question to be answered with ‘unsatisfied’ 

(19 % unsatisfied to 11 % satisfied). Considering 

the fact that many employees receive their


Fig. 4: Subjective priorities for selected aspects of the workplace 

Workplace cleanliness 

Harmonic working environment 

Opportunities for advancement 

Flexibility of job entry and exit 

Participation in decision-making processes 

n = 566 

Workplace safety 

Training possibilities 

Planning security 


entire nutrition from the company canteen, it 

indeed seems plausible that low quality of 

meals could be a further important determinant 

for labour turnover, particularly in the case of 

physically exhausting work. This theory, however, 

would have to be qualified using a 

weighting of various problem areas by the employees. 

The employees surveyed appeared to be most 

frequently satisfied with the company climate 

among colleagues. Safety at the workplace – in 

contrast to blatantly negative media reports – 

took second place. The relationship to superiors 

was evaluated slightly more conservatively, 

but nevertheless very positively. The safety 

standards at the workplace were either very 

high, or the survey participants had experienced 

a comparatively poorer conditions previously. 

In the inner-city industrial district, respondents 

reported significantly more frequently being 

unsatisfied with wage levels (0.01) and accommodation 

(0.06) than in the peri-urban district. 

In the interpretation of these evaluations, one 

must take into account which characteristics of 

the workplace are indeed important (Fig. 4). 

The previously mentioned security aspect and 

cleanliness are of immense importance for 

workers. The third most important aspect is 

training possibilities, and the fifth is opportuni- 

461 

408 

388 

385 

318 

246 

243 

205 

179 

187 

239 

150 

103 

109 

118 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100% 

very important important not important no opinion 

ties for advancement, a sign that even – or perhaps 

especially – the unqualified industrial 

workers would at least ideally like to realise 

the ambition of a career. The participation in 

decision-making processes was most rarely reported 

to be very important, although a right to 

participate would possibly be considered to be 

more important now following the recent increase 

in public reporting. This all indicates in 

which areas an adaptable management could 

act to reduce a labour turnover rate which is 

clearly too high. 

Effects of workplace quality on labour 

turnover 

Determinants of the turnover rate at the company 

level 

The conceptional preliminary discussion revealed 

a connection between the flexibility of 

employment and company success. Positive effects 

of this flexibility are particularly due to 

the ability to adapt to fluctuations in the market. 

Negative effects arise from the loss of 

knowledge and abilities through frequent job 

changes. It is thus worthwhile to conduct an 

analysis of the indicator of this turnover rate 

and its explanation in a multiple regression 

model with regard to workplace quality and 

flexibilisation. Workplace quality and flexibilisation 

are operationalised using the indicators 

63


Heft 1-2 / 2012 

Tab. 4: Descriptive statistics for the variables of the regression model 

n Min Max Mean Standard Explanation 

deviation 

Dependent variable 

Turnover rate 200 0 100 36.08 31.74 Employees leaving the company as a 

percentage of the total number of 

employees 

ln (Turnover rate) 200 0 4,61 3.06 1.20 Natural logarithm of the turnover rate 

Workforce-related 

variables 

Monthly wage 216 600 3,000 1,270 423.39 in Yuan 

Number of social 

welfare benefits 222 1 5 3.71 1.12 Number 

Training for new 

employees 222 1 5 4.05 1.05 Intensity of formal and informal 

education 

Further education 222 0 5 2.53 1.43 Intensity of internal and external 

further education 

Problems with employees 221 1 5 2.86 0.94 Average frequency of six problems 

Employees with tertiary 

education 212 0 100 32.26 30.65 as a percentage of the total number of 

employees 

Flexibility-related variables 

10 % increase in the 

number of employees 209 1 100 22.80 21.96 Duration in days 

Fluctuation of the 

number of employees 195 0 100 42.96 27.33 Spread of the number of employees 

as a percentage of the average 

number of employees 

Turnover percentage of 

industrial countries 211 0 100 27.76 37.93 as a percentage of total turnover 

Number of employees 213 1 3 1.91 0.78 1:-1-99, 2: 100-499, 3: 500 and 

above 


introduced above. An overview of the variables 

of the model can be found in Tab. 4. 

For several dimensions, average values were 

created from various component indicators: In 

the group of independent variables, one can 

thus find the number of social welfare benefits 

offered, an education index for formal education 

(double weighting) and training of new 

employees (simple weighting), a further education 

index for internal (simple) and external 

(double) further education programmes offered 

and a problem index (average value) of the frequency 

of the six problems with workers. 

In addition to the indicators of flexibilisation 

already mentioned, the importance of industrial 

countries as a key market (as a percentage of 

total sales turnover) and the number of employees 

are included in the model. The natural 

logarithm of the labour turnover rate is used as 

a dependent variable, since exponential rather 

than linear relationships were found between 

many variables during the data exploration. An 

investigation of the correlation coefficients between 

the independent variables showed that 

these are generally uncorrelated with each other. 

Only two coefficients are above 0.3. The 

highest coefficient of 0.352 is attained by the 

training and further education indices. 

For the explanation of the turnover rate, three 

multiple regression models were calculated in 

which a differentiation was made between 

labour resource-related and flexibility-related 

variables. The intention here is to pursue the


Tab. 5: Determinants of the labour turnover rate using a multiple regression model 

Independent variables All variables Workforce-related Flexibility-related 

variables variables 

stand. stand stand 

beta sign. beta sign. beta sign. 

Monthly wage -0.135 0.073* -0.136 0.060* 

Number of social welfare 

benefits 0.112 0.121 0.106 0.128 

Training for new employees 0.148 0.049** 0.150 0.042** 

Further education -0.030 0.699 -0.033 0.648 

Problems with workers 0.175 0.015*** 0.197 0.004*** 

Employees with tertiary 

education -0.226 0.005*** -0.238 0.001*** 

10 % increase in the 

number of employees 0.114 0.107 0.188 0.010** 

Fluctuation of the number 

of employees 0.158 0.029** 0.158 0.036** 

Turnover share of industrial 

countries 0.234 0.001*** 0.269 0.000*** 

Number of employees -0.116 0.140 -0.014 0.858 

(constant) 0.000*** 0.000*** 0.000*** 

Dependent variable ln (Turnover rate) ln (Turnover rate) ln (Turnover rate) 

R² 0.300 0.179 0.138 

corrected R² 0.254 0.152 0.118 

F-Test (sign.) 0.000 0.000 0.000 

Number of observations 164 192 171 

Significance levels: *** p < 1%, ** p < 5%, * p < 10% 


question arising from the conceptual section of 

whether labour turnover is caused more by a 

surplus of demand for workers and job change 

stemming from this, or whether it is more a result 

of flexible production methods and the 

short-term employment relationships connected 

to this. The summarised results of the regression 

analysis (Tab. 5) show that the labour 

resource-related variables possess a slightly 

higher explanation power than those related to 

flexibility. Altogether, however, the results 

point to the fact that both factors exert an influence 

on labour turnover, as indeed was expected. 

The explanation power of the complete 

model is, at 25.4 %, acceptable for survey data. 

The following individual results are particularly 

noteworthy against the background of the 

current situation in the Pearl River Delta. 

Among the labour resource-related variables, a 

higher average monthly wage reduces labour 

turnover, as is to be expected. More surprising 

is the fact that employees with a tertiary education 

(university or polytechnic) change jobs 

less frequently than poorly qualified workers. 

Generally, one could have assumed that more 

highly qualified workers have a wider range of 

employment options. But because of the general 

shortage of workers, it seems to be actually 

poorly qualified workers in the Pearl River 

Delta who react to minimal differences in 

wages by changing jobs.


Heft 1-2 / 2012 

The most interesting results are those for training 

and further education as well as social welfare 

benefits. The more comprehensive a training 

or education programme offered to new 

employees is, the higher the labour turnover 

rate. Workers obviously exploit the additional 

qualification gained to receive higher wages at 

other companies. Further education does not 

reduce fluctuation either, indeed having no significant 

influence. Social welfare benefits also 

prove not to be a substitute for higher wages. 

Their influence on labour turnover is positive, 

but not significant. This result rather confirms 

that the total provision of services for employees 

based on the notion of control is indeed becoming 

less attractive for the younger generation 

of migrant workers. 

Among the flexibility-related variables, the 

marketing orientation of companies towards 

industrial countries possesses the greatest explanation 

power. The standardised beta coefficient 

is also higher than that of every individual 

workforce-related variable. The integration 

into global value chains thus seems to demand 

a particularly high degree of short-notice adaptation 

ability from electronics firms in the Pearl 

River Delta, which have a direct effect on 

labour turnover. Companies whose employee 

numbers fluctuate more strongly during the 

year because of seasonal influences naturally 

have a higher rate of labour turnover. Despite 

the significant differences in the turnover rate 

between Chinese and foreign firms (Tab. 2), 

these differences disappear in the regression 

model when other independent variables are 

used (Tab. 5). An additional model calculated 

with an owner dummy did not lead to an improvement 

of the explanation power or to a significant 

influence of the dummy. 

In summary, the results of the regression analysis 

lead to the conclusion that wage levels are 

the principal tool for companies when it comes 

to establishing a stable stock of workers. Social 

welfare benefits designed to exercise control 

over workers and qualification initiatives, on 

the other hand, lead to a higher rate of labour 

turnover, and are thus not worthwhile for the 

company that carries the costs for these measures. 

Since companies with more highly qualified 

workers are less vulnerable to high labour 

turnover rates, a freeloader pattern of behaviour, 

in which other companies or the state 

fund the qualification of workers, is probably 

the most successful strategy in the short term. 

In the case of one-sided orientation towards 

global markets, which have proven to be particularly 

susceptible to strong fluctuations in 

demand, a diversification into the Asian or local 

market seems to have a balancing effect. 

These preliminary explanation attempts will be 

elaborated upon in the continued course of the 

research project along with findings on the 

connection between jobs and job changes from 

the employee perspective. 

Workplace-related job change and mobile 

workers 

Job change and worker characteristics: The 

duration of employment and the number of 

previous jobs held are indicators for the mobility 

or ‘readiness to change’ of workers. 17 % of 

those sampled reported an employment period 

of up to two months. This figure must be 

viewed in connection with the date of the survey 

(22/23 March), which is shortly after the 

spring festival (7-10 February), since the 

spring festival is a time which often sees significant 

job changes. Altogether, 51 % of the 

workers had been working for the same company 

for a maximum of six months, while only 

8 % had been doing so for more than three 

years. It is noticeable that the average duration 

of employment was longer in the inner-city district 

than in the peri-urban district (18.9 vs. 

11.2 months) – a discrepancy which is intensified 

by the higher average age. 

At first glance, the number of jobs has a positive 

connection with age, as was expected 

(Tab. 6). Among the relatively young workforce 

– only 17 % are older than 29 years – the 

number of previous jobs held varies in a nonlinear 

fashion between the age groups: the 19- 

24 age group reported more frequently a larger 

number of previous jobs than the 25-29 age 

group. Although the average age in the innercity 

district is significantly higher, the workers 

there reported that they had a similar number 

of previous jobs (1.5 in the inner-city district 

vs. 1.6 in the peri-urban district). The mobility 

of the younger workers is thus generally 

greater. The group of more highly qualified 

workers was also found to have a larger number 

of previous jobs than those with a lower education 

level (Tab. 6), although one must take 

into account the fact that education reforms 

have led to a generally higher standard of education 

for younger workers, and that the shortage 

of workers has only been beneficial for 

worker mobility since 2004.


Tab. 6: Number of previous jobs, differentiated according to age and education level 

Previous jobs (%) absolute 

0 1 2 >3 numbers 

Age 

up to 18 71 17 11 1 76 

19-24 66 20 11 3 284 

25-29 51 30 13 5 76 

30 and older 68 20 7 5 93 

Total 

Education level* 

Maximum of an intermediate school 

65 21 10 4 529 

qualification 

Minimum of a secondary school 

68 19 10 3 300 

qualification 61 23 11 5 235 

Total 65 20 10 4 535 

*The differences between the two groups are weakly significant on the basis of the Chi²-Test (6 % margin of error). 


With these results, however, one must take into 

account the job market-related conditions in 

the Pearl River Delta. An increased shortage of 

workers has emerged there since 2004. This has 

led to a situation in which younger workers 

have a wider range of jobs to choose from, 

which is a very desirable development from the 

point of view of employees. From the perspective 

of the companies affected, a high turnover 

rate must be considered problematic, particularly 

in the case of more highly qualified workers, 

since it creates a tendency for more knowledge 

to be lost and, in some cases, for greater financial 

investment in further education which eventually 

proves to be useless for the employer. 

Reasons for changing jobs: The company survey 

suggests a connection between labour 

turnover and wages as well as education level; 

secondary data also indicate a surplus of vacant 

jobs. In addition, the employee survey provides 

reasons for changing jobs on the part of the 

workers themselves (Tab. 7). These are related 

to workplace quality and flexible company organisation, 

but are also partly linked to the residency 

status of the workers. 

The most common reason for employees to 

change jobs was found to be fluctuation of effective 

monthly wages. The second most common 

reason was poor hygiene at the workplace 

(23 %), with the third being a return to one’s 

home region for the period of the Chinese New 

Year festival (18 %). This is not surprising for a 

number of reasons, but particularly because the 

number of vacation days was not contractually 

regulated in the private sector until the introduction 

of the employment contracts law. Each 

worker was entitled to only three days during 

the period of the New Year festival, which, in 

most cases, was not even enough to cover the 

travel time to the workers’ home regions. Most 

employees thus consider their employment relationship 

to be terminated automatically once 

the number of vacation days is exceeded. The 

official end of a contract or the acquisition of 

another job through friends or relatives were 

named less frequently as reasons for a change 

of jobs (7 % and 8 % respectively). 

The answer frequencies differ between the two 

investigation areas only in the point ‘ending of 

the contract’, which was named much more 

frequently in the inner-city district as a reason 

for changing jobs than in the peri-urban district 

(10 vs. 43 mentions). More highly qualified 

workers responded similarly to poorly qualified 

workers. As expected, employees in a 

salaried position most rarely named workplace 

hygiene (16 %) as the reason for their last job 

change. More interesting is the distinction between 

men, who much more frequently cited 

low wages and workplace hygiene (151 and 90 

mentions respectively), and women (128 and 

78 mentions). Women, however, much more 

frequently cited the journey home for the 

spring festival as a reason for the change in 

jobs (86 vs. 41 mentions). Of all the age-


Heft 1-2 / 2012 

Tab. 7: Reasons for changing one’s previous job 

Job change due to … (multiple answers) Frequency Percentage Percentage of cases 

low wages 280 39 54 

poor workplace hygiene (noise, smell, 170 23 33 

light, temperature) 

end of the employment relationship because of trip 

home for the spring festival 127 18 25 

acquisition of a new job through friends or relatives 56 8 11 

end of the contract 53 7 10 

other reasons 40 5 8 

Total number of answers 726 100 141 


groups surveyed, furthermore, those over the 

age of 30 most frequently gave low wages as a 

reason (45 %). This group is obviously the 

least ready to accept wage disadvantages; its 

members probably more frequently have to 

support a family with their income than 

younger, single workers. 

Conclusion and policy 

recommendations 

The presentation and contrasting of the empirical 

results prove that the electronics industry 

in the Pearl River Delta is indeed characterised 

by a high degree of labour turnover: It could be 

confirmed, firstly, that flexibility in the sense 

described by ATKINSON (1984) is a means of organising 

companies, which is particularly 

made use of by companies embedded in global 

value chains. Secondly, workplace-related 

characteristics of labour turnover, employee 

characteristics and personal reasons for job 

change were found to be important determinants. 

Altogether, the two influencing factors 

were found to be of similar importance. 

In the area of workplace quality, wage levels 

were found to be the central criterion for 

changing jobs. Due to low wages, which are, 

on average, well above the legal minimum 

wage, but subject to very severe fluctuations, 

workers in the lower-income sector react to 

even a small difference in wages by changing 

employers. The shortage of workers, which is 

identified as a central problem by companies, 

intensifies this situation. Company benefits do 

not offer any significant incentive to remain at 

a firm for longer periods of time either - here, 

accommodation and meals are most commonly 

provided, although meals in particular are very 

frequently deemed to be insufficient by employees. 

The qualification initiatives offered at the 

workplace in the form of training and further 

education, which are of importance with regard 

to labour turnover and for technological upgrading 

processes of companies, possibly also 

contribute to a further increase of labour 

turnover at the company level. Education level 

and low age increase the probability of job 

change at the individual level. This connection 

seems to be due mostly to the high degree of 

sensitivity of workers to wage differences and 

the size of the labour market coupled with the 

simultaneous shortage of workers. Since it is 

not worthwhile in such a situation for an individual 

company to provide qualification measures, 

an explanation must also be found here 

for the low frequency with which training and 

further education programmes are offered. The 

empirical investigation provided evidence to 

suggest that in the electronics industry of the 

Pearl River Delta, a qualification lock-in indeed 

exists in the area of labour-intensive and 

wage-sensitive production. Frequent job 

changes and few possibilities for further qualification 

strengthen each other reciprocally, 

since workers change employers both in seeking 

higher wages and because of the opportunity 

achieve this more effectively following the 

attaining of a qualification. 

In summary, three bundles of causes, all connected 

with one another, could be found for 

worker shortage and a high rate of labour 

turnover:


– company influences, shaped by a company 

organisation system aiming for numerical 

and financial flexibility and reacting to the 

necessities of being embedded in global value 

chains; 

– assessment of the workplace quality determined 

by individual characteristics of the 

workers (lower age groups, education level, 

gender) and their subjective priorities and 

evaluations (stage of life, promotion orientation, 

family support payments), and 

– regional influences shaped by the dynamic, 

globalised development of the Pearl River 

Delta and its socio-demographic transformation 

(internal migration led by migrant 

workers), which were not explicit subjects of 

this investigation, but are nevertheless important 

for the interpretation of the results. 

One of the decisive questions for the maintenance 

of competitiveness in the region through 

upgrading processes is that of how the high 

labour turnover rate can be generally reduced 

and more smoothly organised for both companies 

and workers, and how the significance and 

value of qualification can be increased at the 

same time. Several state-subsidised flagship 

companies have, without doubt, already been 

successful in producing considerable technological 

innovation (KROLL/SCHILLER 2010), 

without the large number of small and medium-sized 

companies being able to keep up with 

this development. One possibility to change 

this lies in the strengthened use of intermediates 

on the job market, which are beginning to 

appear in the form of a private sector-organised 

employment agency and temporary labour 

agency branch (XUE et al. 2010). During the 

preliminary selection of potential employees, 

the organisation of security collateral and the 

provision of social welfare benefits, these 

agencies could make a mediation contribution 

and could also take on responsibilities in the 

area of qualification. Over and above this, a 

progressing regulation of work at all education 

levels would be profitable for both the employee 

as well as the employer side of the equation 

by increasing the continuity of employment relationships. 

This, however, would be a development 

which would tend to move away from 

the concept of a flexible firm, and which may 

not be possible for firms to implement due to 

the rapid adaptation required within the global 

value chain. Flexibility and upgrading, howev- 

er, are connected in an interdependent relationship. 

Only a strategic reorientation of companies 

towards long-term-focused business models 

will be able to lead to appropriately large 

investment being made in education and employee 

binding, with numerical flexibility no 

longer being used as the only option for adapting 

to global market fluctuations. 

In the case of education and qualification, due 

to its character as a public resource, state institutions 

are also obliged to a certain degree to 

provide or support appropriate programmes. 

Here, at the district level, this would be a starting 

point for cooperation between companies 

and education institutions in the form of regional 

qualification alliances. As part of a research 

project currently in progress, for example, 

a cooperation between ThyssenKrupp in 

Zhongshan and a local public further education 

institution is being investigated (interview 

10.4. 2010). Here, basic questions pertaining to 

the organisation of the Chinese education system 

are addressed which go beyond the scope 

of this paper. The attractiveness of the working 

and living environment (“soft location factors”) 

are also increasingly moving into the focus 

of the second generation of migrant workers, 

and particularly of more highly qualified 

workers. 

The empirical results of the research project 

form an image of the specific situation of the 

electronics industry in the Pearl River Delta at 

the time of the survey. Further research is necessary 

in several areas, especially concerning 

the importance and organisation of internal and 

external company further education, in the 

course of which the perspective of companies 

should be connected with that of employees. 

From the point of view of companies, a more 

exact investigation of the effects of labour 

turnover and qualification on upgrading 

processes and company success would be interesting. 

From the point of view of employees, 

a focus on more highly qualified workers in the 

core workforce would provide a valuable 

knowledge supplement. In addition, external 

providers of training and further education 

should be included as a target group in an investigation. 


The authors would like to thank two anonymous reviewers 

for their helpful comments on an earlier version 

of this paper and Kerry Jago for the translation of the


Heft 1-2 / 2012 

original manuscript. The empirical research used in this 

paper was carried out within the Priority Programme 

(SPP) 1233 “Megacities – Megachallenge: The Informal 

Dynamics of Global Change” funded by the German 

Research Foundation (DFG), whose support is 

thankfully acknowledged. 

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Wenying Fu, Guangzhou (China)/ Daniel Schiller/ Javier Revilla Diez, Hannover 

Strategies of using social proximity and organizational proximity 

in product innovation 

Empirical insight from the Pearl River Delta, China 

Abstract: In this paper we investigate how the innovation behavior of firms to capitalize on social 

proximity with independent firms and organizational proximity with parent companies and 

foreign customers contributes to innovation in the Pearl River Delta (PRD), China. While traditional 

views often hold that Chinese firms rely heavily on organizational proximity with parent 

companies and foreign customers to gain access to knowledge, we aim for insights into whether 

localized learning mechanisms based on informal social relations have emerged in the region after 

more than thirty years of industrialization. Based on a questionnaire survey of 359 innovative 

electronics firms, this paper demonstrates that firms which use social proximity to foster innovation 

are emerging in the PRD, and that it is mainly applied by domestic firms as a ‘spying device’ 

to catch up with the latest technology and market preference in order to trigger new product ideas. 

Nevertheless, the achievements of product innovation performance made by applying social proximity 

in interactive learning are fairly small, which underpins the instability of the trust-based interactive 

learning between firms in the region. The results of the paper provide insight into the development 

stage of the regional innovation system in the Pearl River Delta, calling upon an effective 

governance infrastructure to be put in place to stabilize interactive learning on the local 

scale. 

Keywords: social proximity, organizational proximity, guanxi, product innovation 

Introduction 

Since the opening policy was introduced in 

1978, China has seized the opportunity of the 

global industrial shift, and some areas along 

the eastern coast have experienced dramatic 

economic growth. The Pearl River Delta, 

which is located on the south-east coast of the 

Guangdong province, has developed into one 

of the biggest production sites for computers 

and electronics due to its advantage of low-cost 

and flexible production. The electronics industry 

in this region is very export-oriented. The 

region manufactures over 50 % of the world’s 

desktop computers and 40 % of PC components, 

such as PC heads, PC cases and other 

semi-manufactured products (see http://www. 

gdiid. gd. gov.cn/gdiid /billion /lay2-3.htm). 

Moreover, many domestic brands in the Pearl 

River Delta have rapidly developed and taken 

a considerable share of the global market. The 

literature on the regional industrial develop- 

ment in latecomer countries such as China emphasizes 

the role of multinational enterprises 

and the global production network, which they 

have organized in the regions (DICKEN, 1976; 

DOLLAR, 2005; MORRISON et al., 2008; YEUNG, 

2009). In the initial industrializing process 

which took place in the Pearl River Delta, it is 

indisputable that technology transfer and learning 

relied heavily on global lead firms. The low 

absorptive capacity of the young local firms in 

the Pearl River Delta led to the limited size and 

variety of knowledge and expertise on the local 

scale, which, as a whole, hindered the interactive 

learning among the firms and hence the 

opportunities to benefit from each other’s ideas 

and skills. Due to the limited expertise and 

know-how in the initial industrialization phase, 

firms had no opportunity to implement active 

innovation and upgrading strategies. Moreover, 

the abundance of cheap land and labor 

left no incentives to initiate risky innovation 

activities. However, the high-speed growth,

Wenying Fu / Daniel Schiller / Javier Revilla Diez: Strategies of using social proximity 81 

driven by foreign direct investment (FDI), has 

gradually exhausted the cheap land and labor 

in the Pearl River Delta, and has been greatly 

constrained by both internal and external factors 

in recent years. On the one hand, the high 

inflation rate, which leads to the continual 

pressure of rising costs, is gradually eroding 

the competitive edge in low-cost production. 

On the other hand, the export firms are faced 

with more trade obstacles in the developed 

market due to the protection of the local employment 

market after the financial crisis. 

Firms either have to meet the high standards of 

safety and quality in order to maintain the market 

share in developed countries, or they have 

to exploit the new market opportunities in the 

domestic economy. Against this background, 

innovation and upgrading are high on the agenda 

of both firms and the government. Furthermore, 

conditions for interactive learning and 

systemic innovation have developed, with the 

electronics firms in the Pearl River Delta having 

accumulated a certain amount of knowledge 

after thirty years of processing operations 

and having diversified into numerous product 

niches in the electronics industry. It is therefore 

important, at this point, to investigate whether 

firms are capable of exploiting and commercializing 

the knowledge stock through reciprocal 

interactive learning. The raising of this 

question corresponds to the literature on regional 

competitiveness which emerged in the 

1990s arguing that the enduring competitiveness 

of regions lies in the socialized embedded 

process of knowledge production, exploitation 

and dissemination. 

In the following it is attempted to approach this 

question using the concept of proximity. As 

MASSARD/MEHIER (2009) suggest, it provides a 

conceptually more sound measurement of accessibility 

than the concept of the externality 

of simply being there. Other than physical distance, 

relational space based on rules, contracts 

and informal social interaction has been taken 

into comprehensive consideration. By assessing 

the strategies and capability of firms to 

capitalize on social proximity via informal 

guanxi-networks to foster innovation, rather 

than on organizational proximity with parent 

companies or foreign customers, insights into 

the evolving production system in the Pearl 

River Delta from a platform driven by foreign 

direct investments to a regional innovation system 

are expected during the course of this investigation. 

The use of social relations is a strategic move 

by firms to achieve trust and understanding 

among independent business partners. ZHOU et 

al. (2003) demonstrate that firms in the Pearl 

River Delta have to maintain intensive interpersonal 

interaction with customers due to the 

unreliable institutional system. Moreover, informal 

and continual interaction among various 

economic players, embedded in guanxinetworks, 

is an important method of doing 

business in Chinese society (LOVETT et al. 

1999). Rather than simply applying informal 

practice in flexible production to save transaction 

costs and thus react quickly to market 

needs (NORTH 1990; MEYER et al. 2009), the 

capacity to capitalize further on informal social 

relations in order to generate and foster innovation 

outcome is critical for the emergence of 

a regional innovation system in the Pearl River 

Delta. However, this localized learning process 

based on social assets does not take place automatically 

and is under constant pressure of 

destruction. Information sharing can be reduced 

or biased, as each seeks to gain the most 

at the other’s expense, especially for uncertain 

and risky innovation activities (CHESBROUGH/ 

TEECE 1996). The formation and stabilization 

of interactive learning in the business sector 

depends on market conditions and should be 

strengthened by public initiatives and supporting 

infrastructure (HEIDENREICH 2004). By 

identifying strategic firm behavior of using 

proximities to foster innovation, we want to 

contribute to the understanding of the innovation 

activities in the Chinese context and shed 

light on the direction of policy initiatives to 

strengthen the interactive learning activities in 

the business sector of the electronics industry 

in the Pearl River Delta. 

It should be noted that this paper does not intend 

to explore exclusively the role of the five proximities, 

i.e. geographical proximity, cognitive 

proximity, organizational proximity, social proximity 

and institutional proximity, as defined by 

BOSCHMA (2005). Instead, it focuses on organizational 

and social proximity, which are deemed 

to be most relevant to the previous discussion of 

regional development in the context of latecomer 

countries. Moreover, these two forms of proximity 

may be addressed by conscious firm 

strategies and can thus be achieved through the 

efforts of individual firms. In addition, the effect 

of geographical and cognitive proximity is controlled 

to a certain degree by placing the focus of 

the empirical investigation on firms belonging


Heft 1-2 / 2012 

to the same electronics sector and co-locating in 

the same mega-urban region in China. 

Organizational and social proximity in 

innovation – the Chinese context 

The concept of proximity developed in the 

1990s by the French School contributes to the 

understanding of the mechanisms behind the 

interactive process of knowledge transfer (KI- 

RAT/LUNG 1999; TORRE/GILLY 2000; TORRE/ 

RALLETT 2005; BOSCHMA 2005; MENZEL 

2008). Proximity is a concept that is usually 

discussed with innovation, since it plays an 

important role in promoting the trust and understanding 

when undertaking complex and 

highly risky innovation activities. Proximity 

carries a plural sense. It goes beyond geographical 

proximity, which has a limited role 

without the support of other proximities. With 

respect to firm strategies in the Chinese context, 

firms can, on the one hand, rely on organizationally 

proximate partners, such as parent 

companies and foreign customers, to gain information, 

ideas and supported knowledge 

which transcend the limits of geographical 

proximity. On the other hand, firms can also 

establish trust-based social networks with geographically 

proximate independent business 

partners, such as domestic customers, univer- 

Fig. 1: Knowledge transfer across firm 

boundaries 

Source: own draft 

sities, research institutes and market agencies, 

seeking information and knowledge within social 

proximity. How information and knowledge 

are transferred across firm boundaries to 

support the complex innovation process is 

shown in Fig. 1. The knowledge transfer organized 

within social and organizational proximity 

facilitates communication and strengthens 

cooperation owing to understanding and trust 

within the proximity boundary. 

Organizational proximity 

Organizational proximity refers to the sharing 

of reference space and knowledge that is 

strengthened by hierarchy and control within 

the same organization, such as firm, group and 

cooperation networks (BOSCHMA 2005). With 

the development of information, communication 

and transportation technology, simple colocation 

is no longer a necessary determinant 

for knowledge transfer. Networks, which even 

transcend the boundary of countries, begin to 

play a role as vehicles of knowledge diffusion. 

In the third wave of globalization in the 1980s, 

the bulk of foreign capital flowed to developing 

countries in the form of direct investment 

in manufacturing (DOLLAR 2005). Meanwhile, 

forms of network coordination involving a 

large number of participants have taken the 

place of integrated organizational boundaries 

at transnational corporations, which ERNST 

(2005) specifically described as a “global flagship 

network”. This network links the flagship’s 

own subsidiaries, affiliates and joint 

ventures with its subcontractors, suppliers and 

service providers, as well as with partners in 

strategic alliances (ERNST 2005, 91). 

In order to reduce costs and stay flexible towards 

market demands, the flagship organizations, 

including the brand firms, contract manufacturers, 

first-tier suppliers and large trade 

companies, strengthen the core competencies 

and, at the same time, outsource volume manufacturing 

and other functions along the globally-organized, 

networked value chain (ERNST/ 

KIM 2002). Three factors determine the methods, 

that these flagship organizations apply 

in order to govern the network (GEREFFI et al. 

2005): the complexity of transactions, the ability 

to codify knowledge and the capabilities of 

the supply base. 

New Institutional Economics relates transaction 

cost to the institutional environment 

(NORTH 1990). When the rules are not guaran-


teed by formal institutions such as laws and 

regulations, organizational proximity appears 

as a reasonable governance mode to curb the 

opportunist behavior of business partners, such 

as distorting business information, failing to 

fulfill commitments or malicious imitation 

(HENNART 1993). As a result of incomplete institutional 

protection, most of the firms in the 

developing countries conduct innovation ‘inhouse’ 

instead of licensing and assigning contractual 

arrangements to unaffiliated firms 

(SCHMITZ 1995; SCHMITZ/NADVI 1999). For the 

global flagship that organizes production in developing 

countries, organizational proximity is 

not only conducive to reducing opportunist risk 

related to physical and human capital investment, 

but also enables the efficient downward 

transfer of knowledge, especially the tacit 

knowledge owing to the path-dependent nature 

of firm routine development (NELSON/WINTER 

1982) towards the suppliers and subcontractors 

with underdeveloped technological and managerial 

capabilities. 

Accordingly, organizational proximity provides 

two advantages for firms in latecomer 

countries. It provides them with access to 

knowledge, especially tacit knowledge in the 

advanced technological field. The flagship typically 

provides the organizationally proximate 

subsidiaries, suppliers and subcontractors with 

machinery, blueprints, production and quality 

control manuals, product and service specification 

and training handouts. YEUNG (2009) 

states the importance of external network 

building in acquiring capabilities in the Asian 

context and introduces a concept called “strategic 

coupling” to understand better the evolution 

of local and regional firms in their dynamic 

articulation in the global production network. 

MORRISON et al. (2008) also show that 

firms gain technological capabilities from participating 

in global value chains. Not only that, 

firms in latecomer countries also join the international 

production network in order to acquire 

tacit knowledge, which is necessary to absorb 

and exploit the encoded knowledge, by having 

the engineers and managers from foreign partners 

train on site. Furthermore, IVARSSON/ 

ALVSTAM (2005) demonstrate that geographical 

proximity with foreign transnational corporations 

is crucial for local suppliers to absorb external 

technology through regular and ongoing 

interaction with their primary foreign customers. 

It is possible that the suppliers upgrade and coevolve 

with the buyer when the technological 

and organizational change enables a more sophisticated 

supply chain (YEUNG 2009). In 

2004, Lenovo bought the PC operation from 

IBM and upgraded from an original equipment 

manufacturer (OEM) to an own brand manufacturer 

(OBM). In 2004, TCL (Shenzhen) coestablished 

a mobile phone joint venture with 

Alcatel. In 2007, China Electronic Cooperation 

subsidiary Sungfei (Shenzhen) acquired 

the mobile phone operation from Phillips. 

These are examples of upgrading by enhancing 

internal absorptive capacity and strategically 

recognizing the coupling chances with global 

lead firms. However, organizational proximity 

alone has a limited role in upgrading and innovation. 

Firstly, many brand owners arrange the 

global strategic layout in such a way that 

strategic research and development (R&D), 

marketing and management are located in their 

home countries or in regions in developed 

countries where innovation partners and reliable 

institutions are available (FEINBERG/GUP- 

TA 2004), while functions such as production, 

sales and logistics are located in developing 

countries (PAN/CHI 1999). Although the internationalization 

of R&D activities has grown 

significantly since the 1990s (OECD 1998), 

technology and knowledge to which domestic 

firms have access is still limited and mostly 

low-end. Secondly, global buyers tend to promote 

incremental product and process upgrading 

and oppose upgrading if this creates opportunities 

for suppliers to acquire a broader range 

of customers (HUMPHREY 2004). Consequently, 

the global buyers and traders might be bypassed 

by suppliers if the latter gain the ability 

to work directly with brand companies in developed 

countries. 

In the electronics industry, there is a trend of 

applying fewer hierarchy relations in the global 

chain governance mode. Maturing technology 

such as module production that enables the 

codifying of knowledge is one of the factors 

behind this trend. Moreover, as long as local 

firms establish core competences that ensure 

the reciprocity of knowledge sharing, it is quite 

possible that they are able to capitalize on the 

use of social proximity to exploit knowledge 

and foster innovation. Social proximity can 

thereby be used as a complementary strategy in 

fostering innovation in order to overcome the 

shortcomings of organizational proximity.


Heft 1-2 / 2012 

Social proximity 

Social proximity relates to trust and commitment 

based on kinship, friendship and cooperation 

experience (BOSCHMA 2005). It is secured 

through informal daily face-to-face interaction 

such as meeting, chatting, eating together and 

joint entertainment. Trust and commitment are 

gradually established in the social interaction 

process, which contributes to interactive learning 

and cooperation. Social networks are not 

spatially bound, but can be sustained and produced 

by the ongoing collective interaction of 

players located close to each other (BOSCHMA 

2005). 

Social proximity does not only foster the communication 

of tacit knowledge which is difficult 

to trade in the market, but also reduces opportunist 

behavior through the establishment of 

durable relations. Social ties and relations 

thereby have an influence on economic outcomes 

(GRANOVETTER 1985). Guanxi, as an 

informal way of doing business in China, has 

received growing attention in the recent organizational 

literature (PARK/LUO 2001; RAMA- 

SAMY et al. 2006; ZHANG/ZHANG 2006). Similar 

to the concept of social proximity, guanxi 

refers to informal interpersonal relationships 

and exchanges of favors for the purpose of doing 

business in traditional Chinese society 

(LOVETT et al. 1999). PENG (2003) points out 

that the reciprocal and utilitarian types of 

guanxi are becoming more important than the 

obligatory type in times of institutional transition. 

In reciprocal guanxi between friends and 

colleagues in particular, the implicit rule of 

‘paying back favors’ (Chinese: renqing), due to 

the fear of damaging one’s social reputation 

and prestige, actually strengthens the constant 

social interaction through the idea of exchanging 

favors. In the Chinese business world today, 

guanxi plays an important role in facilitating 

economic exchanges and overcoming administrative 

costs in the face of a deficient 

institutional framework (PARK/LUO 2001), 

such as when starting the business, concluding 

contracts, acquiring institutional protection and 

responding flexibly to changing demands. 

However, its role in innovation has not yet 

been analyzed. 

The changing role of guanxi, i.e. the Chinese 

way of establishing and maintaining social 

proximity, in business performance has important 

implications for the dynamic regional 

competitiveness. The socially and territorially 

embedded, collectively interactive learning 

process is becoming a prominent feature of 

competitive industrial clusters even in a globalized 

era (MASKELL 1998; ASHEIM/ISAKSEN 

2002). The approach of regional innovation 

systems assumes that the localized assets and 

processes are the primary source of the innovation 

capabilities of the firms. (COOKE et al. 

1997; DOLOREUX/PARTO 2005). In a well-functioning 

regional innovation system, the local 

firms are capable of capitalizing on social 

proximity not only to facilitate effective 

knowledge transfer, but also to generate innovation 

outcomes. However, the prerequisite for 

this is that firms are willing and able to apply 

social proximity to foster innovation. If clustering 

firms all compete fiercely in identical 

standardized products, the regional knowledge 

base becomes low-level and homogeneous. 

Firms are often reluctant to share knowledge 

because the imitation cost is low and reciprocity 

of interaction is marginal. In this case, social 

proximity, such as that between customers 

and suppliers, can only be used as a way of sustaining 

a flexible and responsive production 

system. As a result, the role of social proximity 

in fostering innovation is limited, which 

leads to rather loose local innovation networks. 

When firms are willing to undertake interactive 

learning and share knowledge with each other, 

guanxi helps in curbing the risk of opportunism 

related to innovation, which is specifically defined 

by STANDIFIRD/MARSHALL (2000) as the 

risks of asset specificity, behavioral uncertainty 

and environmental uncertainty. First of all, 

guanxi with managers of business partners may 

reduce the risk of asset specificity, which refers 

to the circumstance in which partners who do 

not own and invest specific assets switch suddenly 

to other partners in the process of innovation. 

Reciprocal guanxi with business partners 

is path-dependent to some extent, because 

people are less disposed to ruining the precious 

guanxi networks for quick profit. Long-term 

guanxi acts as a constraint for opportunism, 

and this brings mutual trust and assurance for 

cooperation. Secondly, guanxi networks with 

other partners can reduce the risk of behavioral 

uncertainty when sharing knowledge and ideas 

with cooperation partners. As an old Chinese 

saying goes, ‘you will never be defeated if you 

know everything about your opponent’. For 

example, if the cooperation partner in innovation 

activities wants to steal ideas to develop a 

new product ahead of you, and the contracts


and legal systems are not able to help or cost 

too much, it is safer to know ex ante about the 

background, reputation and capacity of your 

cooperation partner through the guanxi network 

from other managers (as intermediaries) 

in the industry. Thirdly, guanxi with government 

officials can reduce the risk of environmental 

uncertainty, as innovation policies are 

always unsteady and vague in China. Managers 

and entrepreneurs cannot simply rely on government 

bulletins as their information channel. 

They actually rely more on guanxi when 

searching for and confirming information. 

They often obtain key information and a detailed 

explanation of the policies through 

guanxi. Information sorted through guanxi networks 

is more reliable and trustworthy, and 

thus allows for better informed decisions on investment 

in innovation. 

However, guanxi networks carry the risk of a 

negative lock-in effect. As guanxi networks depend 

on the constant exchange of favors, they 

are also fragile once the exchange stops. Firms 

are locked in with current business partners, 

fearing that the destruction of the subtle guanxi 

network with a single business partner would 

induce the loss of all other partners who are related 

to this partner. In this case, firms do not 

act as profit-maximizing entities, but rather as 

guanxi-satisfying ones. Outdated production 

modes and product types might persist and are 

harmful for upgrading and innovation (HSU/ 

SAXENIAN 2000). 

Brief summary 

For Chinese firms, organizational proximity is 

of particular importance. In the early phase of 

development, the capability of local firms is 

not fully developed due to the weak industrial 

base, thus resulting in an ill-functioning 

knowledge spillover mechanism on the local 

scale. In this phase, hierarchy and control in 

the same organizational framework by the foreign 

parent company or OEM customer is essential 

for organizing production relations, and 

this becomes the primary source for local firms 

to gain codified and tacit knowledge, mostly in 

a passive way. However, organizational proximity 

in this phase is not able to trigger innovation 

with low-skill assembly operation 

around standardized products among the local 

firms. 

With the development of the local production 

system, local firms have accumulated a certain 

level of capability which enables them to absorb 

and exploit knowledge. In this case, firms 

can either use organizational proximity to seize 

the opportunities of value chain upgrading with 

the sophistication of the supply chain and technological 

diversification, or they can capitalize 

on social proximity to form reciprocal innovative 

synergy with organizationally distant partners 

that have diversified into specific product 

lines and market segments. Particularly for 

small and medium-sized firms, the collective 

learning facilitated by social proximity is essential 

for their survival and growth, and is also important 

for the development of a self-sustained 

local production system (CAPELLO 1999). The 

use of organizational and social proximity by 

firms is mutually reinforcing. On the one hand, 

the ability of local firms to use social proximity 

and transform it into innovative synergy and 

profit provides a greater incentive for foreign 

firms to transfer more advanced technology and 

activities to their organizationally proximate 

partners in developing countries. Moreover, this 

grants the local firms and governments more 

bargaining power to negotiate with foreign partners, 

which results in more stable manipulation 

of strategic coupling. On the other hand, new 

information on markets and technology that is 

pumped into the local system by firms using organizational 

proximity with geographically distant 

partners makes local collective learning 

more dynamic (BATHELT et al. 2004). This conceptual 

process concerning the dynamic interaction 

of organizational and social proximity is 

illustrated with Fig. 2. 

Fig. 2: Dynamism of proximity in regional 

development 

Source: own draft


Heft 1-2 / 2012 

Based on the discussion on the role of organizational 

proximity and social proximity as a 

firm strategy to foster innovation, the following 

hypotheses are formulated: 

Hypothesis 1: By developing internal capacity 

and strategic coupling within the global production 

network, it is possible for firms in latecomer 

countries to capitalize on organizational 

proximity in order to foster innovation and 

upgrading. However, firms that rely only on a 

vertical hierarchy with global lead firms to 

foster innovation have limited potential for upgrading 

their position in the value chain. 

Hypothesis 2: Most Chinese firms are engaged 

in guanxi networks, which are an ongoing 

mode of interaction for maintaining social 

proximity between business partners. Firms 

with limited capabilities and short-term strategies 

are only able to capitalize on guanxi for 

low-cost and flexible production. On the other 

hand, in a mature regional innovation system, 

firms are capable of using social proximity to 

facilitate the complex interaction in the innovation 

process and to foster the innovation 

outcomes. 

Data and methodology 

The electronics industry in the Pearl River 

Delta, has been selected as the research area 

for this study. The empirical data used to answer 

the research question were taken from a 

standardized survey of electronics firms in the 

Pearl River Delta, Guangdong province, China. 

The industrial development in the Guangdong 

province is the outcome of a subtle mixture 

of global networks, public institutional 

framework and unexplored socio-cultural contexts 

(BELLANDI/TOMMASO 2005). In this 

study, survey data from the firm level are used 

to explore the strategies of firms to use social 

proximity - i.e. embedded in guanxi networks 

between independent business partners - as 

well as organizational proximity to global 

firms in fostering product innovation. In doing 

so, insights are expected to be gained with respect 

to the role of ‘global pipelines’ and ‘local 

buzz’ that contribute to the innovation dynamics 

in this region based on the previous 

discussion. 

The company survey targeted electronics 

firms in four cities in the eastern part of the 

Pearl River Delta, where the electronics industry 

is dominant (as in Shenzhen and Dongguan) 

or developing very quickly (as in 

Huizhou and Heyuan). In total, 422 electronics 

companies were interviewed during a threemonth 

period from September to November 

2009. Of the surveyed firms, 359 are undertaking 

product innovation activities. These firms 

are the analytical basis of this article. Among 

these innovating firms, 62 % are domestic 

firms and 38 % are wholly foreign-owned 

firms or joint ventures. The company survey 

was conducted by telephone and post. Questionnaires 

were addressed to CEOs or senior 

executives of the companies. The telephone 

and post method was complemented by a telephone 

follow-up aimed at reducing the number 

of unanswered questions. The response rate 

was 53 %. 

Due to a certain amount of missing data, the 

sample number in the following analysis is 

slightly reduced. The issue of unanswered 

questions among the surveyed firms along with 

refusals led to the sample selection bias. Firms 

that were willing and able to answer the questionnaires 

completely usually had a higher level 

of human capital or a more formal organizational 

routine, which eases the understanding 

and communication between firms and the universities 

conducting the survey. Moreover, 

these firms were more interested in the strategic 

plan we promised to provide after the survey, 

than the firms that refused or left too many 

questions unanswered, which reflects their upgrading-oriented 

strategy. In fact, this selection 

bias controls for the technological level of the 

surveyed firms, ensuring that the innovation 

activities they undertake are not limited to lowvalue 

innovation and thus require more coordination 

and learning in the innovation process. 

In order to test the hypotheses, typical innovation 

behavior that makes use of the two proximities 

in the product innovation process was 

firstly identified based on the theoretical discussion 

(Tab.1). Firms were asked to rank the 

importance (on a scale of 1 to 5 with increasing 

importance) of interaction with business partners 

in different aspects with regard to acquiring 

new innovative ideas and obtaining codified 

and tacit knowledge. By means of factor 

analysis, two dimensions of proximity for the 

interaction with different players were identified. 

The results clearly show that the firms are 

not only acquiring codified knowledge and tac-


Tab. 1: Operationalization of analysis on proximity use in product innovation 

New product 

ideas (NPI) 

Obtaining 

codified 

knowledge 

(NPCK) 

Obtaining tacit 

knowledge 

(NPTK) 

Interaction 

mode 

(NPInteraction) 


Internal efforts 

From organizationally 

proximate partners 


distant partners 

Internal efforts 




distant partners 

Active learning 

Received from organizationally 


Received from organizationally 

distant 

partners 

Informal guanxi 

network 

Active searching 

Remarks Explained 

variance 

of each 

factor 

Own development of ideas; selfabsorption 

and learning through 

license purchasing and reverse 

engineering 

Interacting with parent companies and 

foreign customers 

Interacting with domestic customers, 

foreign customers, universities, research 

institutions and sales agents 

Self-purchasing of equipment and 

software 

Interacting with parent companies and 

foreign customers 

Interacting with domestic customers 

and foreign customers 

Sending staff to domestic customers or 

leading domestic firms, foreign customers 

or leading foreign firms, and 

universities for training 

Receiving training and know-how 

from people sent by parent company 


Receiving training and know-how 

from people sent by domestic customers 


Interacting through guanxi, for 

example gaining information on the 

reputation and capacity of innovation 

partners from other business partners, 

relatives and friends in the innovation 

process 

Searching for information on partners 

via internet, exhibition and sales 

agents in the innovation process 

Total 

explained 

variance 

15 % 60 % 

12 % 

33 % 

24 % 85 % 

27 % 

34 % 

44 % 74 % 

13 % 

17 % 

52 % 79 % 

27 %


Heft 1-2 / 2012 

it knowledge from parent companies and foreign 

customers, but that they are also interacting 

with external partners beyond the organizational 

hierarchy, for example domestic customers, 

universities, research institutions and 

sales agents, to obtain new ideas and required 

knowledge. The organizational proximity 

with parent companies and foreign customers 

is closer than that with domestic customers 

and external institutes in the context of latecomer 

countries, as previously discussed. Also, 

the social proximity with domestic customers 

and external institutes can substitute 

for the lack of organizational proximity 

among independent firms and organizations to 

some degree in order to enhance trust and understanding 

in the innovation process. Combined 

with the general question pertaining to 

the use of social relations with all business 

partners (interaction mode), insight into the 

degree of proximity use in the innovation 

process can be secured. 

In the empirical test, cluster analysis uses the 

items shown in Tab. 1 to identify different patterns 

of capitalizing on social and organizational 

proximity. In cluster analysis, there is 

rarely one single best solution. A good cluster 

analysis should firstly use as few clusters as 

possible, and secondly capture all statistically 

and empirically important clusters. We follow 

a four-step procedure to ensure the internal 

validity of the clustering result (DELMAR et al. 

2003). First, hierarchical clustering with 

Ward’s method and squared Euclidean distances 

was conducted to assess the possible 

clustering results. In this step, we arrived at 

two to six cluster solutions and derived each 

centroid from each cluster solution. The second 

step was to use the centroids derived in 

the first step to perform the K-means cluster. 

The result of the K-means cluster was compared 

with that of the hierarchical cluster using 

cross tabulation. A significant level in 

Lambda lower than 0.05 is considered to be 

able to verify the relative stability of the cluster 

results across samples. After running these 

two procedures, we settled on three clusters 

that are internally stable and easy to interpret 

from the perspective of innovation behavior 

with respect to the use of proximities. 

We applied regression analysis to explore further 

the exact relationship of the use of proximities 

and product innovation performance 

by controlling for firm-specific characteristics 

such as size, ownership, age and internal absorptive 

capacity. The dependent variable in 

the regression model is product innovation performance. 

In questionnaire data, especially in 

developing countries, it is always difficult to 

obtain an exact measurement of new products 

that is reliable and comparable. Therefore, we 

asked firms to evaluate the degree of improvement 

of two aspects of production innovation 

performance, i.e. product function expansion 

and product categories upgrading (on a scale of 

one to five with increasing degrees of improvement). 

The dependent variable in the regression 

is the average score of these two 

items. A shortcoming of this variable is that it 

has a bound value of one to five. The problem 

here is that it is based on a subjective evaluation, 

and that those firms that marked the same 

score might not be completely similar in their 

achievement. The distribution of the composite 

score of innovation performance is shown in 

Fig. 3. The censoring of the data set can be 

clearly seen, since there are far more cases with 

scores of three to five, which is to be expected 

in questionnaire answers because the firms all 

attempt to make a good impression. With this 

particular issue of censored data, ordinaryleast-squares 

(OLS) regression provides inconsistent 

estimates of the parameters (LONG 

1997). Therefore, we applied a Tobit regression 

which is unaffected by this issue. The independent 

variables are defined in Tab. 2. 

Fig. 3: Histogram distribution of product 

innovation outcome 

Source: own survey


Tab. 2: Independent variables in product innovation outcome regression 

Firm characteristics 

Absorptive capacity 

Innovation behavior 

1 Specific classification of products into the different levels could be referred to appendix C. 


Empirical results 

Use of proximity in innovation: the overall 

pattern 

The results of the cluster analysis, which differentiates 

between three types of innovation 

behavior related to the capacity of capitalizing 

on social and organizational proximity in the 

process of product innovation, are demonstrated 

in Tab. 3. 

Indicators Description 

Defined according to Chinese firm size standard, 1 

as large firms with no less 300 million Yuan sales 

Size 

and no less than 2000 employees, otherwise as 

small and medium-sized with the value of 0 

Ownership 

– Socially embedded innovator: Firms in this 

group interact frequently with external partners 

in combination with their internal capability. 

With regard to obtaining codified and 

tacit knowledge in the product innovation 

1 as firms with foreign participation (wholly owned 

or joint venture), 0 as firms with 100 % domestic 

participation 

Age Years since establishment of the firm 

Level of technical staff 

Percentage of technical staff that have bachelor 

degree or above multiplied by training frequency 

Level of managerial 

staff 

CEO education 

Development capability 

Initial product 

technology 

Behavior of using 

different proximities 

Percentage of managerial staff that have bachelor 

degree or above multiplied by training frequency 

1 as CEO below bachelor degree 

2 as CEO with bachelor degree 

3 as CEO with graduate degree (master or doctor) 

4 as CEO with bachelor or above combined with 

overseas experience 

1 as having product development capability, 0 as 

not 

Defined according to International Standard Industrial 

Classification of all Economic Activities, Rev 

31, 1 as producing low-tech products when starting 

business, 2 as producing medium-tech products 

when starting business; 3 as producing high-tech 

products when starting business 

Defined by the cluster analysis in the next part; included 

in the model as a series of dummy variables. 

process, firms of this kind tend to rely more 

on customers and use the active strategy of 

sending people to business partners for acquiring 

tacit knowledge. In the interaction 

process with these partners, firms in this category 

flexibly combine formal active 

searching and informal networks (guanxi 

with family members, friends and business 

partners) when interacting with partners in 

the innovation process. Although it is not 

possible to specify exactly which interaction 

method is applied by the firms when interacting 

with each partner (because the related 

matrix would be too complex to be answered 

by the firms), it is possible to conclude indirectly 

that firms in this group rely on social


Heft 1-2 / 2012 

Tab. 3: Results of cluster analysis* 

Socially embedded Organizationally Lame 

innovator dependent innovator innovator 

NPI_external partner 0.54 0.25 -0.32 

NPI_internal 0.52 0.07 -0.31 

NPCK_customer 0.60 -0.15 -0.34 

NPTK_passive from customer 0.46 0.07 -0.22 

NPTK_active learning 0.58 -0.12 -0.35 

NPInteraction_informal 0.60 -0.06 -0.33 

NPInteraction_formal searching 0.26 -0.01 -0.17 

NPI_parent comp. & foreign -0.11 1.01 -0.12 

NPCK_parent comp. -0.38 1.96 -0.27 

NPCK_self purchase -0.17 0.12 0.10 

NPTK_passive from parent comp. -0.47 2.06 -0.16 

Number 

* Ward’s method/squared Euclidean distance 


104 41 171 

proximity to external partners in general during 

the process of product innovation to a 

greater degree than firms in the other two 

clusters. They are actually socially embedded 

innovators, and social proximity is not 

only used as a way of acquiring codified and 

tacit knowledge by interacting with external 

partners, but also as a way of triggering new 

product ideas, which is a feature of capable 

firms in a well-functioning regional innovation 

system. 

It is worth mentioning that although these 

firms are already able to extend the scope of 

interactive learning in the innovation process 

to capitalize further on social proximity, they 

still rely on organizational proximity with 

foreign customers to a certain degree in order 

to acquire codified and tacit knowledge. 

This again supports the mutual reinforcing 

effect of social and organizational proximity. 

Socially active innovators tend to apply 

mixed strategies in using proximity to facilitate 

interactive learning. 

– Organizationally dependent innovator: In 

contrast, organizationally dependent innovators 

rely heavily on organizational proximity 

to gain access to and absorb knowledge. 

They turn to their parent companies to obtain 

codified and tacit knowledge in the process 

of product innovation, i.e. in a more passive 

way due to the hierarchical control. The new 

product ideas originate mainly from parent 

companies as well as from powerful foreign 

customers. 

What is again noteworthy is that organizationally 

dependent innovators show a certain 

tendency to interact with external partners to 

prompt product innovation, although to a 

lesser degree than socially embedded innovators. 

However, the much lower value in informal 

interactions indicates that these firms 

are not able to capitalize on social proximity 

to foster innovation as well as their socially 

embedded counterparts. Moreover, their 

method of interacting with innovative partners 

is not characterized by any particular 

feature, which indicates a more passive attitude 

towards product innovation compared 

to socially embedded innovators. 

– Lame innovator: Compared to the previous 

two kinds of firms, lame innovators have 

low values for all the indicators that are related 

to product innovation. Lame innovators 

are not actively involved in triggering 

new ideas of innovation, nor do they strive to 

search for codified and tacit knowledge, 

which is important for positive product innovation 

outcome. Moreover, they are quite 

vague and unsettled in their ways of interacting 

with partners in the innovation 

process. In short, they are not able to interact 

with external players to initiate innovation


Tab. 4: Difference in innovation behavior between large firms and small and medium sized 

enterprises (SME) 

Firm ownership Socially embedded Organizationally Lame innovator Total 

innovator dependent innovator 

Domestic firms 73 (37 %) 17 (9 %) 105 (54 %) 195 

Foreign firms 31 (26 %) 23 (19 %) 66 (55 %) 120 

Total 

χ 

104 (33 %) 40 (13 %) 171 (54 %) 315 

2 =9.434, p=0.009 


and do not have the capacity to organize internal 

learning. 

A look at the number of firms in each cluster 

shows that the number of lame innovators exceeds 

the sum of socially embedded and organizationally 

dependent innovators in our sample. 

This is proof of the immature internal absorptive 

capacity of most firms in the Pearl 

River Delta to benefit from external interaction 

in order to trigger innovation. However, the 

number of socially embedded innovators is two 

times higher than the number of organizationally 

dependent innovators. This seems to be an 

indication of a maturing regional innovation 

system in the Pearl River Delta, where some 

local firms are capable of benefiting from localized 

knowledge sources by capitalizing on 

informal social relations. But it also reflects the 

difficulty of most firms in the Pearl River Delta 

to ‘couple strategically’ with global firms to 

upgrade their position in the value chain. By 

studying the relocation issue of Taiwanese personal 

computer firms, YANG (2009) also pointed 

out that Taiwanese firms in the Pearl River 

Delta are less oriented towards the strategic 

coupling of local and global knowledge 

sources than their counterparts in the Yangtze 

River Delta. 

Use of proximity in innovation: difference 

between domestic and foreign firms 

In the interest of a deeper insight into innovation 

behavior in terms of proximity use among 

the electronics firms in the Pearl River Delta, 

investigations of the domestic and foreign 

firms were conducted separately. Tab. 4 shows 

the distribution of the above-mentioned clustering 

groups for domestic and foreign firms. 

At first glance, it can be seen that the domestic 

and foreign firms do not differ from each other 

in the inclination to undertake interactive 

learning aiming at fostering product innovation 

outcomes. However, the strategies of using 

proximity as a way to ensure trust and understanding 

in interactive learning differ between 

these two groups of firms. Domestic firms 

tend to interact with other independent business 

partners through the use of social proximity 

to gain reliable information and support, 

while foreign firms resort more to their organizationally 

proximate parent companies and 

foreign customers to gain access to innovation-related 

knowledge. 

The different behavior of using proximities in 

different processes of product innovation between 

domestic and foreign firms is demonstrated 

in Fig. 4 more thoroughly. As shown by 

the left part of the figure, foreign firms use 

much more organizational proximity to foster 

innovation, especially in terms of acquiring 

new product ideas. The reason for foreign 

firms interacting more with their parent companies 

and foreign partners to trigger innova- 

Fig. 4: Use of proximities for domestic and 

foreign firms 

Source: own survey


Heft 1-2 / 2012 

Tab. 5: Tobit regression on innovation outcome 

Independent variables (1) Product innovation (2) Product innovation 

outcome1 (average score outcome1 (average score 

of evaluation) of evaluation) 

Constant 3.01*** 2.64*** 

(0.282) 6 (0.281) 

Level of technical staff 0.0006 0.0006 

(0.001) (0.001) 

Level of managerial staff 0.0008 0.0008 

(0.001) (0.001) 

CEO education 0.16** 0.16** 

(0.065) (0.065) 

Development capability 0.52*** 0.52*** 

(0.188) (0.188) 

Medium-tech vs. 0.19 0.19 

Initial low-tech2 (0.174) (0.174) 

product High-tech vs. 0.54** 0.54** 

technology low-tech2 (0.251) (0.251) 

Overall effect5 —* —* 

Ownership -0.26** -0.26** 

(0.127) (0.127) 

Firm size -0.12 -0.12 

(0.293) (0.293) 

Firm age 0.005 0.005 

(0.010) (0.010) 

Organizationally Organizationally 

Innovation dependent vs. -0.15 dependent 0.23 

behavior socially embedded3 (0.246) vs. lame4 (0.234) 

Lame vs. socially -0.37** Socially 0.37** 

embedded3 (0.170) embedded vs. lame4 (0.170) 

Overall effect5 —* —* 

Prob > chi2 0.0006 0.0006 

Pseudo R square 0.047 0.047 

Number of observations 233 233 

1 Product innovation outcome refers to improvement in product quality, product function and product categorical 

upgrading 

2 Initial product as low-tech as the default group, which means low-tech as 0, the other as 1 

3 Socially embedded innovator as the default group, which means socially embedded innovator as 0, the other as 1 

4 Lame innovator as the default group, which means lame innovator as 0, the other as 1 

5 T test of whether the overall effect of the categorical variable is statistically significant 

6 Standard errors in parentheses; *p


only as a ‘spying device’ to catch up with the 

latest technology and market preferences in order 

to trigger new product ideas. The more underdeveloped 

firm capabilities of domestic 

firms compared to those of foreign firms, resulting 

in less gain from reciprocity than the 

cost of spillover, inhibit them from cooperating 

in the product innovation process to share each 

other’s codified and tacit knowledge. 

Impact of proximities on product innovation 

performance 

The results of the Tobit regression with innovation 

performance as the dependent variable and 

innovation behavior and other control variables 

as independent variables are shown in Tab. 5. 

The results of the cluster analysis are used to 

define the innovation behavior as: 1 - socially 

embedded innovators, 2 - organizationally dependent 

innovators and 3 - lame innovators. 

The chi-square likelihood ratio has a p-value of 

0.002, which tells us, that the model as a whole 

fits significantly better than an empty model. 

The main focus of the research question is the 

impact of the use of proximity on product innovation 

performance. Equation 1 and equation 

2 are quite similar, with the exception that 

the default group of each dummy variable in 

the innovation behavior category is adjusted to 

compare the impact of each type of innovation 

behavior on innovation performance. If control 

variables for firm characteristics and absorptive 

capacity are included in the model, socially 

embedded innovators possess a better product 

innovation outcome than lame innovators 

on a significant level of 0.02, while organizationally 

dependent innovators do not outperform 

the lame innovator in a significant way. 

This verifies the second hypothesis that social 

proximity is an asset that firms are able to capitalize 

on in complex innovation processes. 

With the development of local capabilities in 

the Pearl River Delta after thirty years of industrialization, 

firms are gradually accumulating 

the capacity to capitalize on social proximity 

to foster product innovation and upgrading. 

Nevertheless, it also suggests that firms that 

apply the strategies of capitalizing on organizational 

proximity to foster innovation encounter 

the difficulty of achieving satisfied innovation 

outcomes. The limited potential for upgrading 

the position in the value chain is revealed for 

organizationally dependent innovators, supporting 

the first hypothesis. 

Nevertheless, it is necessary to examine cautiously 

the magnitude of improvement by applying 

social proximity in interactive learning. 

The coefficients in model 1 and model 2 all 

point to a 0.37 degree of improvement on the 

average score of evaluation on production 

function expansion and category upgrading. To 

place it in a practical context, this means that 

applying social proximity in interactive learning 

promotes the innovation outcome either in 

function expansion or category upgrading by 

nearly one degree (e.g. from not significant to 

slightly significant or from significant to very 

significant). In short, the improvement made 

by applying social proximity compared to applying 

nothing is rather small. Moreover, socially 

embedded innovators, which interact 

with domestic customers and other knowledge 

institutions in the process of product innovation, 

do not differ significantly from organizationally 

dependent innovators in terms of product 

innovation performance. 

The results reveal an intriguing feature of the 

recent development stage of the regional innovation 

system in the Pearl River Delta. Although 

socially embedded firms are emerging 

in this region, which altogether increases dynamic 

innovative synergies on the local scale, 

their capacity to transform this social asset fully 

into a high innovation performance is not yet 

sufficient. Recalling the results in the previous 

section which revealed that domestic firms are 

reluctant to share codified and tacit knowledge 

in the innovation process, this all underpins the 

instability of innovative synergies in emerging 

regions where small achievements are not sufficient 

to compensate for the risk and cost related 

to innovation activities. It might be due to 

the fact that trust building requires time, especially 

in innovation activities that are highly 

complex and risky and involve a high level of 

spillover effects. All in all, a regional innovation 

system is only just burgeoning in the Pearl 

River Delta, and calls for a stable and efficient 

governance infrastructure to be put in place to 

strengthen and stabilize interactive learning in 

the business sector. 

Discussion and conclusion 

The fact that the local firms are interested and 

able to capitalize on social proximity to foster 

innovation signifies the maturing of a regional 

innovation system (COOKE et al. 1997; REVIL- 

LA DIEZ 2000). Moreover, the use of organiza-


Heft 1-2 / 2012 

tional proximity feeds dynamism into the local 

production system as a way of avoiding negative 

lock-in effects (ASHEIM/ISAKSEN 2002; 

BATHELT et al. 2004). In the context of China, 

where low-cost is the common strategy and innovation 

capability is doubted, this paper provides 

the theoretical implications of the role of 

proximity in fostering innovation activities 

when sufficient absorptive capacity is gradually 

enhanced. The line of thinking that social 

capital is an important asset for organizing interactive 

learning and markets is well covered 

by the institutional and cultural turn in many 

disciplines. In new growth theory, productive 

new ideas are endogenously shaped by institutional 

contexts (ROMER 1986). The approach of 

innovation systems proposes that social capital 

induces widely spread interactive learning in 

the whole economy, hence creating more net 

wealth (LUNDVALL 2005). Likewise, the new 

institutionalism in economic geography also 

embraces the context-dependent epistemology, 

considering the possibility that various social 

institutions in places determine the evolution 

of the economic landscape (CLARK et al. 2003). 

As demonstrated by the empirical investigation 

in this paper, the informal guanxi networks in 

the Chinese context are important social assets 

that firms can take advantage of in ensuring effective 

interactive learning. 

By examining the questionnaire data collected 

for the electronics industry in the Pearl River 

Delta, the following trends are captured in this 

electronics cluster. Firstly, as organizational 

proximity plays a limited role in promoting innovation, 

the electronics firms have extended 

the use of social proximity from low-cost production 

activities to undertake interactive 

learning in the product innovation process. Despite 

the formation of a group of socially embedded 

firms, the effect of social proximity in 

fostering fruitful interactive learning is still 

marginal. Secondly, social proximity is applied 

more by domestic firms than by foreign firms, 

especially in terms of triggering new product 

ideas. However, it is applied less by the domestic 

firms to gain support in the innovation 

process, such as necessary machinery and technical 

know-how. Altogether, social proximity 

not only produces marginal effects, but also 

has limited scope in strengthening the interactive 

learning in innovation, which all points to 

the instability of innovation synergies that is 

stressed in the regional competitiveness literature. 

Even before the financial crisis in 2008, governments 

at different levels (province, city, district) 

in the Pearl River Delta felt that the strategy 

of low-cost production was losing its competitive 

edge and had been eagerly promoting 

industrial upgrading and innovation. As interactive 

learning processes based on social relations 

need stabilizing regional orders from the 

supporting governance infrastructure (HEIDEN- 

REICH 2004), policy focus may be devoted to 

widening the scope of social proximity in interactive 

learning and improving the effect of 

social proximity in fostering innovation, which 

has been pointed out from the empirical results 

as a weakness of the regional innovation system 

in the Pearl River Delta. Actions can be 

taken by means of supporting agents or organizations 

to foster cooperation among local players 

as well as with external players, institutionalizing 

the exchange and learning between industry 

and academia, regulating the domestic 

market which stabilizes the reciprocal learning 

among the firms, and providing innovation 

funds to resource-limited small and medium 

enterprises. 

The theoretical literature has extensively discussed 

the issue of proximity and its relationship 

with learning and behavior, but the empirical 

evidence is not yet sufficient to support its 

role in innovation in different contexts, especially 

that of developing countries. This paper 

takes the step of measuring the use of the two 

most relevant proximities – organizational 

proximity and social proximity – in the context 

of China. By responding to the call of researching 

the knowledge transfer and learning 

process at global and local scales (BUN- 

NELL/COE 2001; ASHEIM/ISAKSEN 2002; FREE- 

MAN 2002; FROMHOLD-EISEBITH 2007) light 

was thrown on the role of proximity on both 

scales in attaining trust and understanding in 

the process of product innovation. However, 

the complementary role of organizational proximity 

with global partners and social proximity 

with local partners is not simple. As demonstrated 

by HUMPHREY/SCHMITZ (2002), different 

degrees of organizational proximity, i.e. 

different methods of integration into the global 

production system, actually influence the local 

upgrading strategies. Therefore, qualitative 

studies such as company interviews should be 

conducted to provide further insight into the 

strategic combination of different proximities 

to achieve the optimal innovation outcome.



The research underlying the results presented 

in this paper received funding from the German 

Research Foundation (DFG) under grant 

RE 1720/11-1 within the priority programme 

SPP 1233 “Megacities – Megachallenge: Informal 

Dynamics of Global Change”. The authors 

would like to thank two anonymous referees 

for their comments on the paper. 

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Friederike Schröder / Michael Waibel, Hamburg 

Urban governance and informality in China’s Pearl River Delta 

Investigating economic restructuring in Guangzhou 

Abstract: Against the background of current economic upgrading trends in China’s so called “factory 

of the world“, the Pearl River Delta, this paper adopts an analytical urban governance perspective 

to investigate the role of informality in urban affairs. In the wake of dynamic economic 

and urban growth coinciding with rising environmental and social issues, local governments increasingly 

re-orientate their urban development strategies and apply flexible modes in responding 

to these challenges. The main hypothesis of this paper is that informality in particular is used as a 

tool of flexibility and that experimental policies as typical characteristics of the transitional 

process in China are widely applied nowadays to attract knowledge-intensive and service-oriented 

industries as well as a highly educated, and presumably creative, workforce. The hypothesis is 

validated by empirical research analyzing governance processes in development and locational 

policies of Guangzhou Science City. 

Keywords: urban governance, informality, economic restructuring, Guangzhou. Pearl River Delta 

Introduction 

The Pearl River Delta (PRD) as the “factory of 

the world” and frontrunner of China’s reform 

and opening process witnesses a new phase in 

the gradual transition process. Immense efforts 

have been done to move from a mere focus on 

growth and spatial expansion towards restructuring 

of the existing urban fabric and the cities’ 

economic base. There is a policy shift away 

from labor-intensive production towards higher 

value-added manufacturing and service industries 

and to a more knowledge-based economy 

in general. This has been going on for some 

years already, but gained substantial impetus 

due to the global financial crisis, which can be 

seen as an important catalyst for economic restructuring 

and upgrading in the PRD region. 

The growth of the tertiary and quarternary sectors 

calls for constant economic and urban redevelopment 

processes and adaptation strategies 

that allow for different spatial economic 

entities to be attractive for companies and the 

global as well as the domestic workforce. 

Economic restructuring and changing urban development 

strategies entail the thesis that these 

transformations also bring about a change in ur- 

ban governance modes or the way a city or urban 

area is governed. Therefore, the underlying 

assumption is that a diversifying society, and 

particularly the ongoing economic restructuring 

process in the PRD, require new formal and informal 

institutional arrangements, i.e. changing 

modes of urban governance and specific sets of 

stakeholder coalitions. We presume that in this 

process informality, understood here as a mode 

rather than a sector (ROY/ALSAYAD 2004), is increasingly 

used as a tool of flexibility, testing, 

and learning, whereas informality – used as a 

substitute to fill institutional gaps in the early 

phase of transition – has diminished over time 

in the course of the reform process. 

Economic restructuring implies a re-production 

of space. In the PRD, it takes place by comprehensive 

planning approaches loosening the 

strict division between industrial and urban 

space, integrating various urban functions and 

by upgrading the urban fabric intended to raise 

urban liveability. How is urban space developed 

and reproduced? And how are locational policies 

implemented against the background of a 

changing economic base? These are the main 

questions to be answered in this paper. They include 

questions of who is involved in planning


Heft 1-2 / 2012 

and implementation and what are the objectives. 

Following these questions, our overall 

aim is to analyze urban governance processes 

in Guangzhou, China. As an analytical tool, the 

integrated framework of urban governance developed 

by DIGAETANO/STROM (2003) will be 

applied and consequently adapted to the Chinese 

context. 

For the case study, Guangzhou Science City 

(GSC), particularly its physical development 

and locational policies as a high-tech park and 

urban environment, have been chosen. The role 

of informality as potentially flexible device in 

these processes will be of special interest. As 

priority project of Guangzhou’s municipal 

government, designed to upgrade the economic 

structure along the value chain, GSC is an extraordinary 

example for the interplay of economic 

upgrading and comprehensive urban development 

strategies. It is currently one of the 

most ambitious and prominent urban development 

projects in the PRD since the construction 

of flagship high-tech industrial parks has been 

promoted by the National Development and 

Reform Commission in 2008 as a key strategy 

of the regional upgrading of Guangdong 

province. 

The questions and arguments are analyzed and 

presented in three main parts. The first analyzes 

economic restructuring in the PRD. The second 

discusses the concepts of governance and informality 

and relates both to the context of China. 

The third section applies our research approach 

to the case study of Guangzhou Science City 

and discusses the role of informality in urban 

governance processes in the field of urban economic 

restructuring. 

Economic restructuring in the 

Pearl River Delta 

In Europe and North America economic restructuring 

has mostly been a necessity of the 

fall of regional economies or declining of industrial 

centers (HASSINK 2005, 571, FAINSTEIN/ 

CAMPBELL 2002, 6). In China, and particularly 

in the Pearl River Delta with average yearly 

GDP growth rates of 14 % between 2000 and 

2009 (Tab. 1), rising salaries and living standards, 

and a fast growth in urban population 

one can barely speak of a declining region. 

However, high speed economic and urban development, 

hastily built-up infrastructure, the 

superimposition of new and old physical structures, 

traffic congestion, environmental degradation, 

spatial fragmentation and social segregation 

take their toll. These processes call the 

need for restructuring of the existing urban fabric 

and economic base. 

The PRD has experienced tremendous economic 

growth and spatial transformation since the 

late 1970s. It differs from the Yangtze Delta 

River (YDR) in the way that its economic development 

and urbanization process is mainly 

the result of exogenous forces, such as foreign 

direct investments (FDI), influences from the 

Chinese diaspora of Hong Kong, Singapore, 

and other parts of the world, and small to medium-sized 

labor-intensive processing manufacturing. 

In contrast, the development pace of the 

YDR rather results from endogenous dynamisms 

and agglomeration advantages from 

the major city of Shanghai (HE et al. 2006, 

431). Though dominated by external forces, internal 

factors – apparently affecting all regions 

of China – also play a role in the PRD’s development, 

i.e. institutional changes and innovations, 

fiscal decentralization and fierce inter-urban 

competition. It is the interdependency of 

different structural, cultural, and political forces 

that have unevenly transformed the economic, 

social, physical and spatial landscapes in the 

PRD (HE et al. 2006, 436; SHEN 2002, 92) – and 

transformation is still going on. 

Agricultural diversification and industrialization 

of the 1980s and 1990s gives way to a new 

phase of economic restructuring with a deliberately 

induced shift away from labor-intensive 

manufacturing towards knowledge-intensive 

industries and a growth of the tertiary sector. 

“Building a modern industrial system” (NDRC 

2008, 15) is the programmatic device to prioritize 

the PRD’s development of modern service 

industries (e.g. finance, convention and exhibition 

services, scientific research and development), 

modernizing and advancing capital- and 

technology-intensive manufacturing industries 

(e.g. automotive, nuclear and wind power 

equipment), and vigorously develop high-tech 

industries (biotechnology, pharmaceutical 

products, new materials, computer, electronic 

and optical products) (loc. cit.). This new phase 

of economic restructuring can be dated back to 

China’s accession to the World Trade Organization 

(WTO) in 2001. The implementation of 

economic restructuring policies has gained substantial 

impetus in the wake of the “financial

F. Schröder / M. Waibel: Urban governance and informality in China’s Pearl River Delta 99 

tsunami”, as the global financial crisis was labeled 

in the PRD, that has laid off thousands of 

mostly migrant workers in the labor-intensive 

industries of textile, toys, and electronic production. 

Chinese governments at the national, provincial, 

and local levels (i.e. municipal and district-level 

governments) have recognized in recent 

years that the economic boom of the last 

three decades caused environmental costs and 

has raised social exclusion. Thus, there is a tendency 

away from a mere focus on economic 

growth towards policies promoting an improved 

quality of the urban economic and living 

environment and of social, health, and educational 

infrastructure. 

Recent statements made by party leaders illustrate 

the political momentum for economic upgrading. 

For example, Guangdong Communist 

Party Secretary Wang Yang maintained: “Our 

growth model of 30 years, which enriched us 

rapidly, has come to the end of its cycle. … Our 

mission is a tough one. We must convince them 

that we must change. The old ways of consuming 

resources and importing labor will not 

work. Even if we wanted to continue with it, 

we would be unable to do so – we are running 

out of resources and environmental capital.” 

And the Guangzhou Party Secretary Zhu Xiao- 

dan argued in a similar way: “We’ve paid a 

heavy price for rapid growth. (…) We will support 

companies at the high end of the value 

chain and use industrial parks as a driving 

force.” (KUHN 2009a-e) The deeper meaning of 

these quotations becomes clear when one considers 

the latest ideological framework formulated 

by the Communist Party of China (CPC) 

in 2003. In order to adapt and adequately cope 

with economic and socio-political challenges 

on the one hand as well as to maintain supreme 

authority and political legitimacy on the other, 

the CPCoffers rathervague, but formative ideological 

guidelines phrased under the concept of 

“Socialism with Chinese characteristics”. Under 

this framework, Hu Jintao, General Secretary 

of the CPC and President of the PRC, has 

been promoting a new approach to developement, 

i.e. the “scientific development concept”. 

The stated idea behind this concept and behind 

scientific development is to “take people as the 

main thing, establish a concept of comprehensive, 

coordinated, sustainable development, and 

promote comprehensive economic, social, and 

human development” (FEWSMITH 2004, 3). 

Hence, “scientific development” is ultimately 

to lead to the construction of a “harmonious society” 

and will thus officially change China’s 

focus from mere economic growth to promoting 

economic, social, and environmental development 

(HEBERER/SCHUBERT 2008, 203; 

Tab. 1: GDP growth and per capita GDP in the Pearl River Delta and its two major cities 

Guangzhou and Shenzhen 

2000 2005 2006 2007 2008 2009 

Pearl River Delta (total) 

GDP growth (compared 

to previous year, %) 

Per capita GDP 

13.7 15.7 16.8 16.3 12.8 9.4 

(in Chinese Yuan) 

Guangzhou 


20,280 40,336 47,241 55,048 63,065 67,407 

to previous year, %) 


13.3 12.9 14.9 15.3 12.5 11.7 


Shenzhen 


25,626 53,809 63,184 72,123 81,941 89,082 

to previous year, %) 15.7 15.1 16.6 14.8 12.1 10.7 



32,800 60,801 69,450 79,645 89,587 92,772 

Source: Guangdong Statistical Yearbook 2010


Heft 1-2 / 2012 

SCHOON 2011). Evidently, those slogans are still 

underfed with a great deal of propaganda, but 

the implementation of economic restructuring 

policies can be certainly regarded as an essential 

step towards an economy that is less polluting 

and offers a higher quality of life. 

Trickled down to the provincial level, the new 

guiding principle has led to the most important 

cornerstone of economic upgrading and restructuring 

in the PRD, the “Plan for the reform and 

development of the Pearl River Delta (2008- 

2020)” issued by the National Development 

and Reform Commission in December 2008 

(SCHRÖDER/WAIBEL 2010, 2). Its main aim is to 

build up a maturing industrial system by prioritizing 

the development of modern service industries, 

as well as vigorously speeding up the 

development of advanced manufacturing with a 

focus on high-tech development. The plan promotes 

to substantially increase “gross domestic 

expenditure on research and development” 

(GERD) investments. Embedded into the central 

government’s initiatives such as the 

Eleventh Five Year Plan for National Economic 

and Social Development of PR China or the 

Program for Mid- and Long-term Development 

of Science & Technology (2006 to 2020) this 

means an envisaged increase of research and 

development (R&D) intensity to 2.5 % of GDP 

until 2020 1 (loc.cit.). 

With regard to this paper’s question of how urban 

spaces are developed and locational policies 

are implemented against the background of 

economic restructuring, a very important and 

often underestimated factor of relevance for 

China’s rapid and constantly high economic 

growth over the last 30 years is the pragmatic 

and flexible experimental approach. It has been 

introduced by the post-Mao regime to test economic 

reforms in distinct spatial entities first 

and, in the case of success, extend them to other 

regions in the country. In the Western conventional 

understanding, legislation takes place 

in advance of implementation. In China (and in 

other transitional countries such as Vietnam), 

the mode of testing or experimenting and therefore 

implementation before formal legislation 

has proved a pragmatic tool in this rapidly 

changing and highly heterogeneous spatial, 

structural, and socio-economic environment (LIN 

2001, 387; NG/TANG 2004, 181). Reformer Deng 

Xiaoping famously characterized this experimental 

approach as “groping the stones while 

crossing the river”. Experimental forms of gov- 

ernance mostly include the informal testing of 

strategies or tools before formalizing them. The 

Pearl River Delta region is a perfect showcase 

for this experimental strategy. 

This has also wider implications in terms of urban 

governance. As our research shows, the development 

of Guangzhou Science City (GSC) is 

accompanied by a high flexibility and experimental 

character that involves a change in the relationship 

between private companies and the local 

state. This change became necessary because 

state officials needed to cooperate with private 

companies to achieve their predetermined development 

goals. Before going into the case study, 

we will have a closer look at the concepts of urban 

governance and informality illustrating their 

value for analyzing economic restructuring and 

the reproduction of space in Guangzhou. 

Narrowing the understanding of urban 

governance and informality 

Governance is an ambiguous concept developed 

from a discourse mainly in North America and 

Western Europe. It deals with socio-economic 

interdependencies that have been changing 

since the late 1970s (JESSOP 1995, 309; KOOI- 

MAN 2005, 150; MAYNTZ 2005, 13). It emphasizes 

that the idea of the state as key actor in political 

decision-making, its exclusive responsibility 

for fulfilling state functions and duties, as 

well as its influence on the economy and society 

is increasingly changing. This often implies a 

shift in understanding of political processes 

away from government towards governance. 

Whereas government denotes decision-making 

that lies solely within the state and its institutions, 

governance refers to altered interrelations 

between state, society, and the economy and the 

increasing importance of less directive forms of 

political regulation (cooperative and non-hierarchical), 

e.g., political coordination or negotiation 

in networks (PIERRE/PETERS 2000, 12). 

Can such an admittedly fuzzy concept, stressing 

the increasing role of non-hierarchical forms of 

regulation, help to understand highly state-controlled 

processes in urban China? The authors 

believe that this question must be answered in 

the affirmative. First of all, the emergence of the 

governance paradigm stands for the adoption of 

a wider analytical perspective in political science. 

Secondly, it is maintained that understanding 

it as an analytical concept (rather than as


manifestation of a postulated changed global reality) 

(PIERRE 2005, 451ff.) can create an awareness 

of structures and processes influencing policymaking 

that would otherwise be overlooked. 

Processes describe what actors can do, i.e., regulation 

(via incentives or hierarchical command) 

or coordination (BENZ et al. 2007, 16; PIERRE/ 

PETERS 2000, 22). Structures are understood here 

as institutional contexts in which actors are able 

to operate (hierarchies, markets, networks, communities, 

associations). This allows analyzing 

how regulation and coordination occur within a 

defined policy field, such as economic restructuring, 

or in a spatially distinguished area. With 

regard to China’s gradual transition process and 

its highly dynamic urban development processes 

serving as arena for current economic upgrading 

processes, this analytical governance approach 

helps to entangle the complex forces underlying 

urban affairs in China. 

Urban governance 

In comparative urban politics, governance is 

conceived as a coordination process of political 

Fig. 1: Integrative model of urban governance 

Source: DIGAETANTO/STROM 2003, 372; modified 

decisions in the urban and economic spheres. 

Derived from the structural perspective of political 

economy, it is based on the notion that governing 

procedures at the national, regional, and 

local levels; market forces; and economic as 

well as social structures set the context of urban 

governance (DIGAETANO/STROM 2003, 362). 

However, an exclusively structural approach often 

lacks an encompassing consideration of the 

complex set of influences and processes in urban 

affairs, such as cultural impacts as well as 

the different actors and stakeholders involved. 

This is particularly problematic in China, which 

is influenced, among other aspects, by a long 

tradition of cultural factors and the influential 

role of powerful leaders (such as Mao Zedong or 

Deng Xiaoping). The significant deficiency of 

single-level explanation is surmounted by the 

comprehensive approach of DIGAETANO/STROM 

(2003), the biggest advantage of which is the integration 

of three middle-range theories, i.e., 

structuralism, culturalism, and rational choice. 

With its merit as integrative analytical tool, this 

approach will be subject to our analysis of go-


Heft 1-2 / 2012 

verning structures in terms of economic restructuring 

in Guangzhou. 

DIGAETANO/STROM (2003) have highlighted the 

importance of each approach, structural, cultural, 

and rational-choice, as well as their dynamic 

interdependencies. Therefore, they have endeavored 

to integrate all three into a single 

framework. As an outcome, three interrelated 

levels of analysis are identified: (1) The structural 

context (e.g. political decentralization, 

transition, economic globalization) frames political 

decision-making, including over time; (2) 

political culture (beliefs, values, symbols) gives 

meaning to political organization and decisionmaking 

2; and (3) political actors who attempt to 

influence governmental decision-making in 

ways that benefit themselves and the interests 

they represent. In this context, political actors 

include all actors participating in urban governance 

processes, i.e., public as well as private 

and social actors or stakeholders. The three 

spheres of analysis trickle down to influence the 

institutional milieu, understood as the set of all 

formal and informal institutions that moderate 

the different analytical spheres and are crucial 

for their integration (Fig. 1). 

The role of informality 

Informality plays a crucial role when looking at 

governance processes, since it is evident that no 

political system, not even in the liberal democracies 

of Western Europe, functions solely on 

the basis of formal structures and processes 

(DANIELS 2004). Decision-making or political 

systems are not only the sum of formal institutional 

structures, but a mixture of formal and informal 

institutions (DIGAETANO/STROM 2003, 

363). We understand institutions (both formal 

and informal) with regard to the work of NORTH 

(1990: 3) as “rules of the game in a society or 

[…] the humanly devised constraints that shape 

human interaction”. 

Informality in urban and economic development 

processes takes place within a complex set of relationships 

between different actors, regulations, 

and ways of decision-making. It is thus understood 

here as interaction-related institution 

defining informality according to social or economic 

interaction. This interaction-related informality 

is associated with “contractual relationships 

between different individuals or organizations 

(tiers of government may be among them, 

but do not embody the state as producer of legal 

norms)” (ALTROCK et al. 2008, 5). It describes 

all forms of political activities that are not traceable 

and laid down in written documents. These 

may be debates and discussions that find consideration 

in decision-making processes beyond 

a legal framework as well as all interaction between 

individuals and organizations, that accompany 

planning processes or contracts, but 

are not written down. Interaction-related informality 

can contribute to mutual understanding 

without explicit interaction and thus reduce 

complexity while enhancing flexibility (loc. 

cit.). 

Despite a seemingly clear distinction between 

formal and informal constraints, no single political 

procedure can be characterized as being of 

either formal or informal character altogether 

(KIRCHBERGER 2004, 10). Thus, informality is 

not necessarily contradictory to formal processes 

or official rules, neither should it be understood 

as a deviation from the norm (i.e., formal 

institutions). Close and complex links between 

and overlaps of formal and informal spheres exist 

in all political systems. This makes it rather 

difficult to distinguish clearly between formal 

and informal (loc.cit. 11), a factor that has to be 

kept in mind when investigating decision-making 

processes. Governance analysis reveals the 

specific strength of the formal-informal modes 

of a political system, as well as their interrelations, 

which shed light on the „real function“ 

(KÖLLNER 2005, 27) of a political system and 

are therefore of eminent importance for analysis. 

To understand how a city is governed with 

its different policies and strategies can only be 

understood when both formal and informal rules 

and negotiations are analyzed (loc.cit.; see also 

KIRCHBERGER 2004). 

Informality – part of the game in 

the Pearl River Delta 

In the Pearl River Delta (PRD), a very active 

state has been experimenting with flexible 

deregulation within rigid institutional settings 

since the start of the reform process more than 

30 years ago. As a result, informality is constantly 

being produced, which underlines ROY’s 

(2009, 826) argument that informality is located 

within the scope of the state rather than outside 

of it. Though formal political institutions mature 

and become increasingly effective, informality 

remains robust and important in Chinese socioeconomic 

politics (FUKUI 2000). However, informal 

institutions, like any socio-economic


phenomenon, have changed and have been 

transformed over time and space (ALTROCK 

2012; FUKUI 2000, 13; WAIBEL 2008). 

The prominence of informality in China is 

closely related to the country’s political culture. 

Thus, one rather conventional explanation 

why informal institutions are so pervasive in 

China is suggested by PYE (1985): “In most situations, 

whether in the party, the bureaucracy, 

or in nongovernmental institutions such as 

schools and factories, too many people are 

waiting in line for advancement and too few 

options exist for the formal procedures to do 

the job of selection. Therefore everyone must 

prudently seek guanxi ties […]. Within the 

Chinese bureaucracy the formal regulations 

tend to be overly constrictive, producing cumbersome 

procedures and little effective action. 

[…] hence the informal structures of power 

built through the guanxi networks often serve 

as the most effective way of getting the state’s 

business done.” In such a context, informality 

is mostly attributed to excessive state regulations 

(ROY/ALSAYYAD 2004, 13). Doubtlessly, 

the fact that the PRD has one of the most complex 

administrative systems in the world with 

multiple jurisdictions is conducive to such 

kinds of informality (ENRIGHT et al. 2005, 233). 

A more comprehensive analysis of specific 

Chinese informal institutions made by social 

scientists over the last three decades has revealed 

a multiplicity of factors explaining their 

origin (KIRCHBERGER 2004, 17), including: 

– The particular cultural path of institutions 

based on the Confucian tradition and the political 

culture formed by the socialist revolution. 

One example of the historical continuities 

is the duality between the formal Confucian 

respect for thoughtful, selfless, and 

public-minded manners on the one hand and 

the self-seeking, interest-driven, and exchange-mediated 

behavior in actual life on 

the other. 

– The importance of interpersonal relationships, 

so-called guanxi. Political influence is 

applied through subtle, culturally sanctioned 

behavior by way of exchanges of favors and 

repayment of commitment (FUKUI 2000, 

15 f.). 

– There is a lack of a rule-of-law tradition. 

– The closely interlinked party-state structure, 

which creates structural latitude. It is characterized 

by the parallel party-state structure, 

which allows for and encompasses diverse 

and often opaque linkages between vertical 

and horizontal lines of authorities (HEBERER/ 

SCHUBERT 2004; HEILMANN 2004). 

However, the list might be arbitrarily continued. 

What is distinctive in the way informality 

is used in China is that there is an amalgamation 

of formalities and – importantly – a pragmatic 

use of informal relationships. Informality will 

most likely not disappear altogether. On the 

contrary, it is the way in which informality is 

practiced that changes over time. 

Apparently, the Chinese state and its local representatives 

at various levels engage in an ambiguous 

set of practices concerning the role of 

informality. ALTROCK/SCHOON (2009) coined 

the term “conceded informality” for this phenomenon. 

The term emphasizes the pro-active 

state that tolerates informal practices where 

they are functional (see also WAIBEL 2008; 

2009; WAIBEL/GRAVERT 2009). This cooptation 

of informal structures to serve formal government 

has a long tradition in China. Conceded 

informality seeks to abandon the dichotomy between 

formal and informal. LEAF (2005) speaks 

of cooperative governance between formal and 

informal structures, for example. The extent to 

which informality is tolerated, used, or promoted 

depends on a variety of determinants such as 

the power of the state to formulate regulations 

and policies; the availability of resources in the 

public sector; global, national, and regional 

economic competitiveness; and global influences 

on socio-cultural aspects. Specific patterns 

and attitudes dealing with informality in 

China, and in the PRD in particular, have been 

identified by ALTROCK/WAIBEL (2010) and 

SCHOON (2010): 

– The state “fights” informality, when its major 

political objectives are threatened. 

– The state “tolerates” informality, when it 

serves development. 

– The state “promotes” informality, when it 

produces new strategic knowledge. 

– The state “utilizes” informality, when flexible 

guiding principles serve as political strategy.


Heft 1-2 / 2012 

This listing shows that the state and its local 

representatives take a tactical approach in using 

their position as rule-setters. For example, they 

may accept informal bottom-up initiatives and 

subsequently formalize them, e.g., as an adequate 

response to newly emerging problems or 

niches, or they can forbid them and, as a consequence, 

ban informal institutions. Another more 

simple reason for informality in the PRD can be 

the lack of state power to efficiently filter 

through all spheres of institutions, markets, and 

society from the very beginning of the transitional 

process (ALTROCK/WAIBEL 2010, 12). 

The role of informality in China has wide implications 

for urban governance, hence the way 

economic restructuring and the accompanied 

reproduction of urban areas. Flexible and experimental, 

testing and learning arrangements 

are expected to being applied by local state and 

private (i.e. companies) actors for the implementation 

of economic restructuring policies. 

Changing urban governance in 

the Pearl River Delta 

In China, urban governance is characterized by 

a high degree of state, especially local government, 

control in urban policies (NG/TANG 2004, 

175). Since the implementation of market reforms 

in the late 1970s, the central government 

does no longer exercise an all-embracing topdown 

control over economy and society 

(CHAN/HU 2004, 10; NG/TANG 2004, 175; XU/ 

WANG 2002, 250). In fact, economic, administrative, 

and fiscal decentralization has taken 

place throughout China since the start of the reform 

process, although politically, there has 

been no significant sign of devolution (CHIEN 

2008, 3). The combination of new market elements 

and decentralized state apparatus has offered 

abundant flexibility especially for local 

governments in pursuing extrabudgetary revenues 

to facilitate entrepreneurialism in urban 

development (WU 2002, 1075). Though still 

strong, the predominant role of the central state 

has been softened in many aspects of urban 

change, new players from the private sector appeared 

in shaping the urban landscape. The 

prevalent mono-player arena has changed towards 

a multiplayer arena with multifaceted interactions 

of central and local governments, domestic 

and foreign investors and businesses (HE 

et al. 2006, 432). All in all, the transition from 

planned to market economy, the policy of open- 

ing up and increasing integration into the world 

market, as well as learning processes and capacity 

building within the country have directed 

changes in the control, provision, and coordination 

mechanisms over time (WUTTKE 2009, 

11). In other words, the gradual implementation 

of the reform process in China is causing constant 

change in the “rules of the game”. This 

implies changing governance arrangements, as 

well. 

In particular, local governments, i.e. municipal 

and urban district governments, have become 

key actors of economic and urban regulation 

processes. Increased competition between 

cities vying to attract companies and investments, 

but also environmental degradation and 

social and spatial fragmentation are significant 

challenges for China’s metropolises. This in 

turn requires the constant adaptation of urban 

development strategies. The increased importance 

of local governments and of private companies 

for overall economic welfare has 

strengthened their role in decision-making. The 

autonomy allows them – to a certain degree – 

to undertake independent planning, political 

decisions, as well as legislative and executive 

governmental functions. Moreover, despite its 

function as regulatory instance, the local state 

authorities have gained responsibility in the 

promotion of local economic growth and, for 

the first time, had to apply location policies of 

their own to lure companies and capital. This 

forces them to involve stakeholders, their 

needs and aspirations and thus adapt a demandside 

approach guiding of their locational policies. 

How this rather customer-oriented approach 

is implemented will be shown in the 

subsequent section of this paper. 

The realignment of state, market and society with 

a changing role of local governments has been 

explained by different authors as the local state 

incrementally following the logic of economicentrepreneurial 

action (cf. “autonomous local 

governments”, LAQUIAN 2005; “local state corporatism”, 

OI 1992, 1995; “entrepreneurial city”, 

JESSOP/SUM 2000; WU 2002, 2003; WU et al. 

2007; “local developmental state”, ZHU 2004). 

Case study of Guangzhou Science City 

Methodology 

The integrated framework of urban governance 

developed by DIGAETANO/STROM (2003) has


been applied to the case study of the Guangzhou 

Science City (GSC) development and its 

locational policies. Concretely, how the reproduction 

of this urban area and its locational 

policies are governed in order to enforce economic 

restructuring is analyzed by looking at 

the relationships and interactions between different 

actors and stakeholders in the public and 

private sectors (governing relations, in the terminology 

of DiGaetano/Strom), the way decisions 

are made (governing logic), the impact of 

key decision-makers, and their political objectives. 

The analysis is based on qualitative, semi-structured 

interviews conducted in 2009 and 2010. 

Two main groups of interviewees were selected 

for interviews. The first, stakeholders, consisted 

of individuals with a potential stake in the development 

and locational policies of GSC, such 

as members of governmental bodies, planning 

bureaus, companies located within GSC, and 

residents, among them villagers affected by 

eviction, living in the area of interest; the second, 

experts, was made up of professionals 

such as academic staff and planning experts that 

were not directly involved in locational policies, 

but have in-depth knowledge regarding the 

case study. Interviews with experts proofed to 

be especially valuable for qualifying the wider 

economic, political context. Altogether, 35 interviews 

were conducted; of which eleven with 

experts and 24 with stakeholders. The research 

is complemented by an intensive review of governmental 

documents, newspaper articles and 

scientific literature. 

According to our research experience, in China, 

governance is frequently equated with participation 

in the realm of civil society. Having been 

warned that in China, research in the field of 

governance is often misunderstood as looking 

for incidences of corruption, we frequently used 

the term “urban management” doing interviews, 

particularly when talking to political 

leaders. 

Guangzhou Science City – a symbol of 

economic upgrading 

Guangzhou Science City (GSC) has been selected 

as a showcase project, which represents a 

spatial cluster of the higher value-added sector 

and stands for the attempt to upgrade the local 

economy (HE 2006, 205; WANG/HUANG 2007, 

18). From an analytical governance perspec- 

tive, its development is rather innovative. In 

contrast to earlier developments, it is the result 

of a comprehensive urban development strategy 

and therefore represents much more than a 

mere economic entity with high-tech focus: The 

formerly strict division of industrial and urban 

residential and commercial areas is loosened. 

Besides building a new administrative center as 

well as living area, the entire district, in which 

GSC is located, has been planned as comprehensive 

urban environment to become an integral 

part of the whole metropolis. Moreover, as 

part of the Plan for the reform and development 

of the Pearl River Delta (2008-2020) promoting 

the restructuring of the PRD’s economic 

base, GSC is a very illustrative example for the 

interplay of economic upgrading and comprehensive 

urban development strategies. 

Located in the eastern part of Guangzhou and 

comprising a total planning area of nearly 45 

km 2 , GSC constitutes the linchpin of the 

Guangzhou high-tech industrial development 

zone (GHIDZ). As part of Guangzhou’s Urban 

development concept plan established in 2000, 

the city’s east is intended to serve as a center for 

high-tech development (XU/YEH 2003). The 

area has been strategically important for 

Guangzhou’s economy since the early 1980s, 

encompassing four national-level special economic 

areas (Guangzhou Economic and Technological 

Development District GETDD, 

Guangzhou Hi-Tech Industrial Development 

Zone GHIDZ, Guangzhou Free Trade Zone 

GFTZ, and Guangzhou Export Processing Zone 

GEPZ). These economic areas were merged under 

a single joint administration in 2002 and renamed 

the Guangzhou Development District 

(GDD) (SCHRÖDER/WAIBEL 2010, 70). 

As priority project for economic upgrading 

along the value chain, GSC is supposed to 

develop into a flagship high-tech park with a 

focus on information technology, bioscence, 

pharmaceutical, and environmental industries. 

Besides building a new center and a residential 

area, the area as a whole is planned as a comprehensive 

urban environment, including the 

provision of the social, educational, and administrative 

infrastructure elements required to 

make it an integral part of the overall city (HE 

2006, 205). In this regard, it not only serves as 

a location for the attraction of knowledge-intensive 

companies, but is also designed to attract a 

qualified white-collar workforce to work and 

live in this area. Further, it is anticipated that


Heft 1-2 / 2012 

GSC will relieve the core city and contribute to 

a more polycentric urban development. 

Governance in the development phase of GSC 

The analysis of governing relations, governing 

logic, political objectives, and key stakeholders 

in the development of GSC reveals a mode of 

strongly (local) government-led initiation as 

well as implementation. However, needs and 

interests of companies but also of inhabitants 

have been increasingly considered. This has not 

taken place via direct participation but in panels 

and mostly informal exchange where experts, 

selected elites, and companies take part in. Surveys 

served to give insights on the needs of local 

population, which were included in the 

planning process (TANG et al. 2008; WUTTKE et 

al. 2010). 

Guangzhou municipality and its relevant administrative 

bodies already initiated the project 

of GSC in 1998, led the master planning and selected 

the site. Together with district-level government 

bodies they were responsible for project 

implementation. However, key decisions 

have been finalized by high officials (on municipal 

and district level), whose personal development 

visions apparently influenced the 

planning proposals. A common occurrence in 

China’s urban planning is the involvement of so 

called experts as consultants from outsourced 

or privatized urban management research institutes 

or planning bureaus to aid in shaping the 

economic reforms (LEAF/HOU 2006; TANG et al. 

2008; WONG et al. 2006). Accordingly, Chinese 

research and planning institutes were directly 

approached by governing bodies to participate 

in functional planning and design of the master 

plans for GSC. 

Besides municipal and district planning departments, 

private and international planning bureaus 

were allowed to participate in the development 

process as well. This is a new phenomenon 

as a result of strategic planning, 

established in Guangzhou in the year 2000. 

Strategic planning has emerged as an important 

tool to respond quickly to the development and 

control needs of local governments (LEAF/HOU 

2006, 569; SCHRÖDER/WAIBEL 2010, 74). It has 

been arisen from initiatives by local municipal 

governments supplementing conventional master 

planning which was considered as static and 

inadequate to respond to rapid socio-economic 

and urban spatial change. The Guangzhou Concept 

Plan 2000 was the first strategic tool for 

urban development implemented in China 

(WANG et al. 2001, 5; WU/ZHANG 2007, 719). 

This procedure is a perfect example of experimental 

governance in China. First tested in 

Guangzhou and subsequently Hangzhou (Concept 

Plan of Hangzhou), these two plans are 

now being followed by other cities in China. 

Strategic planning as it is understood and practiced 

in China is undertaken to support localized 

economic targets in line with attracting and 

Fig. 2: Changing involvement of key stakeholders during the development process of 

Guangzhou Science City 

Source: own design


guiding capital investment. It addresses more 

flexible aspects of urbanization such as development 

directions, which are soft, rather vague 

formulated as future targets in urban development 

and land use. These directions are beyond 

what is considered by the physical planning orientation 

of formal statutory planning (LEAF/ 

HOU 2006, 569). 

Moreover, semi-private or special purpose associations 

have been involved to take over 

functions that were formerly the prerogative of 

the administration; most importantly in the development 

of GSC these are investment consultancies. 

They not only served as negotiation 

part in the realm of the district government 

when it came to relocation processes of villages 

located within the planning boundaries. They 

also have close relationships with companies 

located in the area. They share believes and experiences 

with local governments and give suggestions 

due to their in depth knowledge about 

companies’ and their workforces’ needs. Together 

with the governments’ own mostly informal 

exchanges with companies and with overseas 

experiences, these suggestions form the 

basis of decision-making processes in the case 

of developing GSC. Face-to-face communication, 

e.g. during regular meetings within companies 

or symposiums with businesses, is used 

to learn about changing needs and demands of 

companies, workforce and inhabitants (mostly 

white collar). Collected needs and aspirations 

are condensed and presented to the local People’s 

Congress (PC) and the Chinese People’s 

Source: WAIBEL/SCHRÖDEr 2009 

Political Consultative Conference (CPPCC) to 

be discussed and revised. Accordingly, planning 

strategies are constantly revised and adapted. 

In sum, though not formal involved in the development 

process, non-state actors such as experts, 

companies and white-collar workforce 

are apparently indirectly involved building-up 

informal arrangements with governing bodies 

and therefore influencing changing urban development 

strategies (see Fig. 2). However, these 

informal arrangements are open to a small group 

of selected people, only. For example, the ordinary 

population of the villages located within 

Luogang District has not been included: About 

60,000 of them had been relocated in the course 

of the development of GSC since 2004. However, 

participation was limited to a survey on their 

housing conditions undertaken on behalf on the 

management committee as well as to exclusionary 

negotiations with the village heads. 

All in all, it can be said, that the deliberate use 

of informal arrangements in the development of 

GSC served local officials to learn from exogenous 

experiences via interactions with foreign, 

returning overseas Chinese, and domestic investors. 

In this regard, investment, especially 

foreign direct investment can not only be regarded 

as a driver for economic growth but also 

an important channel of knowledge diffusion 

for changing urban governance processes 

(CHIEN/ZHAO 2008). There is a close connection 

between urban development strategies and 

locational policies of GSC since the compre- 

Fig. 3: Residential-, leisure- and work-spaces in Gouangzhou Science City


Heft 1-2 / 2012 

hensive development approach adopted for establishing 

GSC can be viewed as part of an 

overall strategy to enhance the area’s attractiveness 

for investors and white-collar people to 

work and live in GSC. 

Locational policies and the role of informality 

in Guangzhou Science City 

The raison d’être of special economic areas in 

China is to attract investors and therefore to 

gain revenues. In times of economic restructuring, 

it no longer suffices for the management 

bodies to offer a fenced mono-functional industrial 

area, as was the case 20 years ago. Nowadays, 

the message of economic upgrading and 

advancement along the value chain is the most 

important driver in locational policies. As a result, 

clean and liveable urban environments 

with a lot of greenery and flagship architecture 

are introduced to a highly competitive market. 

This is especially true for GSC. Here, locational 

policies can be seen as an interplay of three 

important tools: (1) hard incentive schemes; (2) 

a comprehensive approach in designing the 

physical outline of the area; and (3) soft incentive 

schemes. Hard incentive schemes are 

means from the classical toolbox of economic 

development and investment attraction. In 

GSC, these include the provision of technical 

infrastructure such as roads, gas, electricity, 

etc., economic incentives such as tax reductions 

and tax holidays, low or no land use fees, including 

discounted rentals, low energy costs, 

and physical infrastructure such as an incubator 

center for start-up companies to rent out lab and 

office space or a special funding program for attracting 

start-up companies. 

GSC is planned for development into a comprehensive 

urban area. It is intended that “urban 

liveability” and “quality of life” will be created 

by the integration of various urban functions 

specifically, housing, education, leisure and 

amenities, and generous provision of greenery 

and space in general (Fig. 3). The simple assumption 

behind this new approach in regard to 

the physical outline of GSC is that the more 

qualified (white-collar and presumably creative) 

workforce working in knowledge-intensive 

companies and living in the area is expected 

to have different needs and aspirations concerning 

the urban environment than lowerqualified 

(blue-collar) people working in laborintensive 

industries. 

Eventually, soft incentive schemes are formed 

around different informal, flexible, and trustbuilding 

services provided by the zone management 

and semi-private or special purpose associations 

such as investment consultancies. In 

GSC, these include openness regarding information 

policies towards companies, pragmatism, 

service orientation, and particularly 

network promotion activities. The latter encompasses 

various different layers of communication 

between companies, between companies 

and organizations (e.g., chambers of commerce, 

investment consultancies), and between companies 

and the government that serve to enhance 

relationships and knowledge diffusion. This 

mainly takes place in informal meetings at 

lunch, dinner, during breaks at conferences or 

club events such as a yearly golf tournament organized 

by the Guangzhou Multinational Corporation 

Club (MNCC). The primary aim of the 

network promotion activities is to increase 

communication between companies with the 

aim of fostering some kind of “innovative milieu”. 

Our research found that this multi-layered, 

complex net also serves another important 

purpose: It allows the management body to get 

information on the needs and aspirations of 

companies and their workforce. This information 

gained by interaction-based informality is 

highly appreciated, because it allows development 

strategies and location policies to be frequently 

adjusted in order to remain attractive 

for the companies. In this respect, learning 

processes may be understood here as “learning 

by interacting” (LIEFNER 2008). Such learning 

processes are evidently crucial drivers for the 

flexible adaptation of governance processes towards 

economic restructuring (SCHRÖDER/WAI- 

BEL 2010, 78). 

A soft incentive feature that may be less publicized, 

but was often mentioned during our interviews 

with companies is the zone management’s 

pragmatism and service orientation. In 

this context, pragmatism means a flexible approach 

in dealing with (formal) regularities. A 

striking example for this is the management 

body’s pragmatic dealing with registration policies. 

Apparently, enterprises are not necessarily 

obliged to be physically located within the area 

of GSC itself. Apparently, it is sufficient just to 

be classified as a high-tech company by the 

government to enjoy the zone’s preferential 

policies. Furthermore, the zone management of 

GSC has a high reputation for its service orientation, 

efficiency, and professionalism, and tries 

to resolve any issues arising for companies


within a few days. Further services include 

training courses for start-up companies in the 

fields of business development, tax regulations, 

and acquisition of financial support. Apparently, 

the specific, increasingly institutionalized interaction 

between management body and the 

companies over time in the area of GSC has 

contributed to – in terms of SCHAMP (2003, 151) 

– time- and space-specific institutional arrangements 

that rest on path dependencies but at the 

same time have the potential of establishing 

new structures for action. 

Our research reveals that comprehensive urban 

planning and soft incentive schemes are becoming 

more and more important in the course 

of economic upgrading, and that these factors 

can provide a decisive local advantage in competition 

with other spatial economic entities. 

This has been confirmed by interviews with 

stakeholders and experts. Hard incentive 

schemes have become increasingly ubiquitous 

among special economic areas all over China, 

and have therefore become less significant as a 

location factor. Anyway, the significance of 

these zones decreased after China’s WTO entry 

was followed by the gradual reduction of preferential 

policies and economic incentives. Certainly, 

the fierce competition between special 

economic areas has promoted the deliberate use 

of informal arrangements and therefore higher 

flexibility regarding the governance of economic 

entities in China. 

Conclusion 

It has been illustrated that the shift from laborintensive 

towards higher value-added and capital-intensive 

industries is actively promoted by 

national, provincial, and local governing bodies 

in China’s “factory of the world”, the Pearl River 

Delta. The upgrading process apparently requires 

new urban development strategies and 

locational policies as well as innovative governance 

constellations. In the tradition of the Chinese 

transitional process, which is based on experimental 

approaches, informality is being 

produced and applied in a flexible way. By analyzing 

the development of GSC and its locational 

policies, this paper has argued that interaction-based 

informality is used as a tool of 

flexibility as well as of experimental policies attracting 

knowledge-intensive industries and a 

highly educated workforce. The pursuit of competiveness 

and the importance of learning are 

immanent features of this process. Since hard 

incentives, such as the provision of a reliable 

technical infrastructure, are no longer unique 

selling propositions, new strategies have to be 

identified as means of distinction. The management 

body of GSC is applying a wide range of 

rather informal strategies in its development 

strategies and location policies. This is apparently 

happening despite a very clear and highly 

transparent regulatory framework guiding investments 

and development procedures. 

Thus, the competitiveness of GSC results to a 

large extent from high flexibility and service 

orientation towards incoming companies, mostly 

negotiated in informal interactions. Here, informality 

as a mode of flexibility serves as a 

strategy in locational policies to create a local 

competitive edge. Further, informality is used 

as tool for testing and learning. The selective involvement 

of private actors and stakeholders in 

the development and locational policies of GSC 

has been cited as an example. So far, this informal 

procedure has mostly taken place via particularistic 

and personalized exchanges or, to 

use the terminology of DIGAETANO/STROM 

(2003), through a rather clientelistic governance 

mode. If this approach proves successful 

in the long run, we may safely expect it to be 

formalized, and then maybe even to become 

less selective. This would imply a change of 

governance mode towards non-exclusive 

arrangements. 

Moreover, the use of informality produces new 

strategic knowledge in terms of comprehensive 

urban development as well as in terms of upgrading 

strategies towards a knowledge-based 

economy. In this way, the management body of 

Guangzhou Science City deliberately uses informality 

as a mode of learning. All in all, we 

would like to reiterate the important point that it 

is the hybrid interconnectedness between informal 

and formal practices that makes the location 

policies of special economic entities successful. 

Therefore, simplistic connotations such 

as that of the formal-informal divide, or the implicit 

idea of formality as the norm and informality 

as a deviation from the norm, are obsolete 

when dealing with current urban realities in 

China and elsewhere. 

Looking at the development of governance and 

informality over time in the course of China’s 

reform period, it can be stated that in the early 

stage of the transitional process, status-related


Heft 1-2 / 2012 

informality was widely used as an alternative or 

substitute for an inadequate or lacking legislative 

framework and non-existing local capacity 

(subsumed here under the concept of “institutional 

gaps”). In the further course of the reform 

period, during the advanced transitional 

process, however, informality may be more and 

more regarded as a complement to formal 

arrangements and to formal ways of interaction 

(ALTROCK 2011; WAIBEL 2009). 

Linking governance with the notion of informality 

reveals the importance of institutions 

within the complex and highly dynamic urban 

environment of China’s transitional process. In 

order to add to the picture of urban governance 

and informality in urban China, research on 

other policy fields as well as on further spatial 

and sectoral arenas is no doubt indispensable. 

Grasping informality in China by means of an 

analytical governance framework such as the 

model of DiGaetano/Strom is certainly a challenge. 

First of all, it has to be reflected whether 

such a model, developed in a Western context, 

is appropriate for analyzing informal processes 

in China. Certainly, this framework has to be 

adapted to the situation in China. The field research 

and subsequent application has shown 

advantageous and disadvantageous aspects. Di- 

Gaetano/Strom’s model of urban governance is 

enticing because of its comprehensive scope, 

which integrates three middle-range theories, 

i.e., structuralism, culturalism, and rational 

choice. But this comprehensive approach calls 

for the consideration of a multitude of aspects 

(e.g. structures and processes, culture, institutions, 

actor-relations) in urban affairs. In this 

way, it reveals challenges in research that might 

finally lead to a lack of theoretical and empirical 

depth. Furthermore, the specific case of China 

reveals characteristics such as the political 

system (socialism with Chinese characters), the 

important role of personal networks (guanxi), 

the parallel party-state-system, that require particular 

consideration when analyzing urban 

governance in China. All of these particularities 

are difficult to cover using the DiGaetano/Strom 

model which shows the limits of its 

applicability. 

However, we should highlight the fact that the 

model also has its merits. For example, its 

breadth proved to be a distinct advantage, because 

it helps to embrace complexities in urban 

affairs. These complexities are due to the plurality 

and often opaqueness of national, provin- 

cial, municipal, and even district strategies as 

well as the multi-faceted relations between the 

government, the corporate sector, and the 

emerging civil society, to name but a few challenges. 

The model grasps the major and complex 

influences affecting urban affairs. Each approach 

alone would not be sufficient for mapping 

the dynamic interdependencies and 

interrelations between structures (and processes), 

culture, and actors. At the same time, the 

model reduces the fuzziness of concepts such as 

governance and informality, whose ambiguous 

nature is certainly a challenge regarding conceptualization 

and empirical operationalization. 

Also, aspects of temporality are included within 

the framework, particularly in the structural 

context layer. These merits are especially important 

for analyzing urban governance within 

the highly dynamic urban environment of transitional 

China. 

Notes 

1 In comparison, the average GERD (gross domestic expenditure 

on R&D) in the European Union in 2007 

was 1.8 %, in Germany and Japan 2.5 %, 3.5 % respectively. 

2 The division between informal institutions and political 

culture is often misleading. In this respect, we propose 

to follow the understanding of KIRCHBERGER 

(2004, 11). According to her, all observable regular but 

not formally codified behavior patterns that apply to 

interaction between different actors are considered “informal 

institutions”. In contrast, behavior patterns that 

are not directly observable, internalized moral concepts, 

and individual socializations are considered 

“political culture” (ibid.). Following this line of argumentation, 

the widespread guanxi as the traditional 

network of personal relations in China would be related 

to political culture whereas a not formalized negotiation 

process over political affairs would relate to informal 

institutions. 

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Buchbesprechungen 

BATHELT,HARALD/GLÜCKLER, JOHANNES:The 

relational economy. Geographies of knowing 

and learning. Oxford: Oxford University Press 

2011, X+298 p., £ 24,99 (paperback), £ 65,- 

(hardcover). 

Mit der „relationalen Wirtschaftsgeographie“ 

liegt seit fast einem Jahrzehnt ein neuer Entwurf 

für ein grundlegendes Verständnis des 

Wirtschaftens im Raum vor, an dem die beiden 

Autoren dieses Bandes an vorderster Stelle 

mitgewirkt haben. Das Buch folgt der verbreiteten 

Idee der kumulativen Publikation, nämlich 

die zuvor in verschiedenen (anglophonen 

und deutschen) Zeitschriften publizierten 

Gedanken und empirischen Erfahrungen der 

Autoren systematisiert zusammenzufassen. 

Hier hat es seine Berechtigung. Es wird eine 

Kohärenz verfügbar, die man sich davor mühsam 

hätte erarbeiten müssen. Obwohl beide 

Autoren sich auf „German research traditions“ 

berufen (6), erheben sie seit langem international 

ihre Stimme in englischer Sprache. In deutscher 

Sprache sind ihre Positionen aus ihrem 

weit verbreiteten Lehrbuch (BATHELT/GLÜCK- 

LER 2002, 2003) bekannt. 

Der Grundgedanke des Relationalen lautet: Es 

gibt keine (ökonomische) Handlung eines Akteurs 

ohne eine Beziehung zu (einem) anderen 

Akteur(en). Daher ist jede economic action 

auch zugleich eine social action. Dieser Ansatz 

stellt das Individuum mit seinem „praktischen“ 

Handeln in den Mittelpunkt, ist also einer Mikroperspektive 

verbunden. Aus dem sozialen 

Handeln reproduzieren sich Institutionen als 

handlungsleitende Rahmen; wird Raum hergestellt; 

es entstehen Prozesse, die das Lokale mit 

dem Globalen verbinden und zugleich an das 

Vorherige gebunden „pfadabhängig“ sind; und 

es wird eine „proaktive“ Politik erforderlich 

(alles 6 f.). Die Vorstellung, wir lebten in einer 

Wissensgesellschaft, bewegt die Autoren dazu, 

Wissensprozesse als zentralen Gegenstand der 

relationalen Wirtschaftsgeographie zu verstehen. 

Allerdings in ziemlich eklektischer Form: 

Dies ist – anders als der Subtitel vermuten lässt 

– keine umfassende Geographie des Wissens. 

Das Buch ist in vier Teilen aufgebaut. Teil 1 

legt die Grundlagen des relationalen Denkens. 

Akteure handeln nur in Beziehungen zu anderen, 

und dieses Handeln kann man auf eine 

„geographische Perspektive“ (geographical 

lense) herunterbrechen. Unter Bezug auf Giddens 

Strukturationstheorie ist soziales Handeln 

eingebettet in Strukturen, für die Institutionen 

stehen. Deren „context matters“, was zu einer 

eingeschränkten Handlungsfähigkeit des Akteurs 

in „Pfadabhängigkeit“ und Kontingenz 

führt (32). Wer ist der Akteur? Praktisch fühlen 

sich die Autoren der „geography of firms“ verbunden 

(vi) und diskutieren das Handeln von 

Unternehmern oder Unternehmen bzw. deren 

Experten. Welche Handlungen? Solche, die mit 

dem Erwerb, der Nutzung und der Verbreitung 

von unternehmerisch verwendbarem Wissen 

verbunden sind. Mit dieser Einschränkung stehen 

die Autoren nicht allein: Auch im Fach 

fehlt es an einer Empirie über das Wissen von 

„Nicht-Experten“ – beispielsweise von Bauern, 

Arbeitern, Hausfrauen, Politikern. Leider 

legen die Autoren eine vergleichbare Konkretisierung 

für den Kontext, in dem die Akteure 

handeln, nicht offen. Doch die empirischen 

Aussagen machen eine Eurozentrierung sowie 

den Bezug zur gegenwärtigen neoliberal geprägten 

„flexiblen“ Wirtschaftsweise offenkundig. 

Die beiden folgenden Teile des Buches vertiefen 

in sechs Kapiteln wichtige geographische 

Konstrukte sowohl konzeptionell als auch empirisch 

in ausführlichen Fallstudien. Teil 2 diskutiert 

Cluster als eine spezifisch geographische 

Konfiguration von Akteuren und fragt 

nach den Wissensprozessen in Clustern, zwischen 

Clustern und zu anderen (“globalen“) 

Orten. Teil 3 betrachtet explizit den Aufbau 

globaler Vernetzungen in Wissensprozessen; 

zuerst bei der Internationalisierung des Unternehmens 

sowie der Organisation globaler unternehmensinterner 

Wissensflüsse, dann durch 

Analyse der Rolle internationaler Messen als 

ereignisschaffende Orte, an denen Aufbau und 

Pflege von Beziehungen zwischen Akteuren 

möglich werden. In diesen Kapiteln stellen die 

Autoren – gewissermaßen (pfad-)abhängig von 

ihren eigenen empirischen Erfahrungen – Fallstudien 

über Unternehmen aus Beratung und 

TV sowie der Chemieindustrie vor. Das sind 

sehr spezifische Branchenkontexte, über die


Heft 1-2 / 2012 

die Autoren allerdings gelegentlich mit ihren 

Schlussfolgerungen weit hinausgehen. 

Das Buch schließt mit dem vierten Teil zur „relationalen 

Wirtschafts-Politik“. Das meint die 

Umsetzung des analytisch gewonnenen Wissens 

einerseits in Regionalpolitik und andererseits 

in Fachpolitik. Dieser Teil des Buches ist 

der kürzeste; er lässt den Leser einigermaßen 

ratlos zurück. Für die Regionalpolitik lässt sich 

eigentlich aus einem so strikten Konzept des 

individuellen Akteurs und seines „eingebetteten“ 

Handelns wenig ableiten, was nicht längst 

vertieft in der Governance-Debatte zur Regionalpolitik 

diskutiert worden wäre. Zudem geben 

weder das Konzept des ex post analysierten 

„situativen“ Handelns noch die Fallstudien 

Ziele, Normen oder Ähnliches her, auf das man 

Handlungsempfehlungen aufbauen könnte. 

Der disziplinäre Ausblick bezieht sich vor allem 

auf Gegenstände und aktuelle Themen, die 

in Gesellschaften der hoch entwickelten Länder 

diskutiert werden – explizit Klimawandel 

und erwartete Ressourcenknappheit. Die argumentative 

Weiterführung der relationalen Wirtschaftsgeographie 

kommt hier zu kurz und 

scheint in einem lock-in gefangen. Vielleicht 

liegt die größte Schwäche des Buches darin, 

sich immer und überall gegenüber der (neo-) 

klassischen deutschen Raumwirtschaftslehre 

abgrenzen zu müssen. Für den deutschen Leser 

ist es hier leicht zu folgen, denn die Autoren 

diskutieren oft auf der Grundlage deutscher 

wirtschaftsgeographischer Literatur der vergangenen 

beiden Jahrzehnte. Dennoch erscheint 

diese Sicht dem Rezensenten als unterkomplex. 

Es ist eine dualistische Sicht auf die 

Fachwelt – ihr da draußen, wir da drinnen –, 

die eine vertiefende Auseinandersetzung mit 

der inzwischen vielfach vorliegenden Kritik 

am Konzept der relationalen Wirtschaftsgeographie 

verhindert (z.B. durch Autoren wie Peter 

Sunley oder Henry Yeung; in deutscher 

Sprache z. B. VON FRIELING 2005). Davon gibt 

es genug, und sie bezieht sich vor allem auf 

eine als unzureichend empfundene Durchdringung 

des Kontextes, in dem die Akteure „situativ“ 

und „kontingent“ handeln; wobei der 

Kontext sowohl gesellschaftstheoretisch als 

auch sozialpsychologisch und kulturell gemeint 

sein kann – Letzteres etwa die noch in 

der Einleitung genannten „values, interpretive 

frameworks“ (vi) oder soziale Deutungsmuster 

bezeichnend. 

Die relationale Wirtschaftsgeographie zeigt ihre 

Stärke gerade dann, wenn sie die Interaktivität 

der Handelnden selbst thematisiert. Angesichts 

der Vorliebe für qualitative Forschungsmethoden, 

die die Autoren anfangs äußern, ist 

es schon etwas paradox, dass die überzeugendsten 

empirischen Teile des Buches aus den 

quantitativen Netzwerkstudien im Beratungsmilieu 

bestehen (Kap. 6, 8, 10). Hier wird die 

Leistungsfähigkeit des Ansatzes – soziales 

Handeln über Vertrauen und Reputation und 

„seiner“ Methode der quantitativen sozialen 

Netzwerkanalyse – genau und modern demonstriert. 

Auch die Beispiele fehlenden interaktiven 

Handelns, mangelnder Möglichkeiten 

für „buzz“ und „pipelines“, verweisen auf die 

Berechtigung der relationalen Perspektive 

(Kap. 7). Die Kap. 5 und 9 befassen sich dagegen 

mehr mit gegebenen Kontexten des Handelns; 

zum einen mit dem (hier nicht begründeten) 

Regierungshandeln beim Aufbau chinesischer 

Chemiekomplexe, zum anderen mit der 

Messe als ermöglichender Ort von sozialer Interaktion. 

Die „schwarze“ Seite der Vernetzung 

wird nicht einmal randlich angesprochen: Exklusion 

(von Wettbewerbern, Bevölkerungsgruppen), 

ungleiche Aneignung (von Einkommen) 

und Teilhabe (an Entscheidungen), blockierende 

Netze (lock-in) und ihre Wirkung 

auf Stagnation und Niedergang; letztlich also – 

entgegen der Forderung der Autoren – eine 

Diskussion um die situative Analyse der Nutzung 

von Macht. 

Folglich gilt es, noch viel konzeptionell nachzudenken 

und empirisch zu tun, wenn man die 

relationale Wirtschaftsgeographie als ein aktuelles 

Projekt der scientific community verstehen 

will. Das Buch ist dazu eine – in sympathisierender 

Kritik – anregende Pflichtlektüre 

für alle Fachwissenschaftler. Der klare didaktische 

Aufbau der Teile und die Zusammenfassungen 

am Ende jeden Kapitels machen es 

auch für Masterkurse einsetzbar – wenn man 

um kritische Literatur ergänzt. Die sozialen 

Netzwerkanalysen mögen junge Wissenschaftler 

zu entsprechenden Arbeiten anregen. Die 

Autoren hegen schließlich berechtigt die Hoffnung, 

international weitere Aufmerksamkeit 

unter den Sozialwissenschaften zu gewinnen. 

Jedenfalls gibt das Buch als erste internationale 

Zusammenfassung des Konzepts der relationalen 

Wirtschaftsgeographie wichtige Anstöße 

zur wissenschaftlichen Debatte.

Literatur 

BATHELT, H./GLÜCKLER, J. (2002., 2003): Wirtschaftsgeographie. 

Ökonomische Beziehungen in räumlicher 

Perspektive. Stuttgart. (2. korr. Aufl.) 

VON FRIELING, H.D. (2005): Die gesellschaftstheoretischen 

Grundlagen der relationalen Wirtschaftsgeographie 

– soziale Kosmologie und naturalistische Metaphern. 

In: Geographische Zeitschrift, (93)2, 82-99. 

Eike W. Schamp, Frankfurt am Main 

STEINECKE, ALBRECHT: Themenwelten im 

Tourismus. München: Oldenbourg Verlag 

2009, 362 S., € 39,80. 

Nach wie vor zählt der Tourismus zu den globalen 

Wachstumsbranchen. So geht die World 

Tourism Organization (WTO) der UN für das 

Jahr 2025 von weltweit 1,6 Mrd. Ankünften, 

inklusive der Geschäftsreisen (aber ohne den 

Binnentourismus mitzurechnen) im internationalen 

Reiseverkehr aus, was im Vergleich zu 

heute in etwa einer Verdoppelung gleichkäme. 

Lag 1971 der Anteil der fünf Top-Destinationen 

noch bei ca. 70 %, entfielen allerdings im 

Jahr 2008 nur mehr 31 % der grenzüberschreitenden 

Reisebewegungen auf die führenden 

fünf Staaten. Der Wettbewerb wächst und reife 

Destinationen verlieren zusehends an Boden. 

Als eine Reaktion darauf kann gerade für 

Tourismusregionen, welche am Ende ihres 

Destinationslebenszyklus stehen, die Etablierung 

kommerzieller Themenwelten im Speziellen 

betrachtet werden. Auch allgemein ist 

die Thematisierung des Raumes durch Nutzung 

endogener Potenziale und in der Regel 

begleitet von darauf abgestellten Events (vgl. 

z.B. die ostschweizerische Ferienregion „Heidiland“, 

die die große Popularität der Heidi- 

Romane von Johanna Spyri zur Etablierung 

ihrer Dachmarke nutzt) ein Fakt, der damit in 

Zusammenhang steht. Freilich ist neben einer 

gerade in unseren Breiten unzweifelhaften 

Marktsättigung die generelle Emotionalisierung 

des Konsums und die Erlebnisorientierung 

der Freizeitgesellschaft ebenfalls mit verantwortlich 

dafür zu machen. Denn Tourismus 

ist ein von der Nachfrage getriebenes Geschäft. 

Nun sind die teilweise als Kommerztempel 

scharf kritisierten künstlichen Themenwelten 

gar nicht so neu. Denn illusionär gestaltete Gebäudlichkeiten 

finden sich nicht nur, und dort 

besonders konzentriert, entlang des Strip im 

jungen Las Vegas. Seit mehr als 200 Jahren 


115 

gehören sie zum architektonischen Fundus der 

europäischen Kulturgeschichte. Beredtes Beispiel 

hierfür ist etwa die im Münchner Schlosspark 

zu Nymphenburg anzutreffende Magdalenenklause, 

welche im Jahr 1725 als bewohnbare 

Ruine errichtet wurde. Trotzdem ist sowohl 

die Dimension und Marktstellung als auch die 

räumliche Verbreitung touristischer Themenwelten 

und den darin anzutreffenden Inszenierungstechniken 

heutzutage so prominent, dass 

es höchste Zeit für eine Monographie wie die 

vorliegende auch in deutscher Sprache und mit 

bevorzugt mitteleuropäischen Fallbeispielen 

bedurfte. Dabei bezieht der Autor durchaus die 

internationale Literatur zum Thema kenntnisreich 

mit ein. 

Der Verfasser folgt einer vornehmlich auf Fallstudien 

bezogenen Betrachtung und legt die jeweiligen 

spezifischen Charakteristiken ausgewählter 

Themenwelttypen zu folgenden Sachverhalten 

kompetent dar: 

– Freizeit- und Themenparks (wie z.B. das Disney 

Resort Paris oder der Europa-Park Rust 

als mit Abstand meistbesuchter Themenpark 

Deutschlands); 

– Themenhotels und -restaurants (wie z.B. die 

„Irish Pubs“ eines irischen Brauereikonzerns 

oder die „Hard Rock Cafés“); 

– Urban Entertainment Center (wie z.B. das 

Centro Oberhausen als größtes innerhalb 

Deutschlands); 

– Markenerlebniswelten oder „brand parks“ 

(wie z.B. die Autowelt Wolfsburg oder das 

Legoland im bayerisch-schwäbischen Günzburg); 

– Zoologische Gärten/Aquarien (wie z.B. der 

Erlebniszoo Hannover). 

Dabei dekliniert der Autor die betreffenden 

Kapitel seines Werks jeweils mit einer einleitenden 

Definition, der historischen Entwicklung, 

den Merkmalen und international festzustellenden 

aktuellen Trends durch. Das Werk 

benennt nicht nur gelungene Vorhaben, sondern 

bezieht auch gescheiterte Projekte und 

Gründe für deren Misserfolg mit ein (41). Hierbei 

ist eine wesentliche Vorbedingung für den 

Erfolg von Themenwelten eine hohe Bevölkerungsdichte 

im Umfeld (Erreichbarkeitsradius 

von 1,5 – 2 Stunden Fahrzeit) und Nachfragepotenzial. 

Auch andere für Raumwissenschaftler 

zentrale Standortbedingungen werden angeführt 

(74, 151). Gut gefällt dem Rezensenten, 

dass nach jedem Abschnitt Zwischenfazits als


Heft 1-2 / 2012 

Kastentexte die zentralen Botschaften zusammenfassen. 

Hierbei sind die vielschichtig präsentierten 

Inhalte nicht allein für Freizeit- und 

Tourismusforscher lesenswert, sondern auch 

für Stadt- und teilweise auch Handelsgeographen 

interessant (252 ff.). Das Buch erscheint 

insofern in jeder Hinsicht lesenswert, auch 

wenn man die am Schluss stehende gewagte 

Hypothese des Verfassers „Mit dieser Entwicklung 

werden die Grenzen zwischen (angeblich) 

künstlichen Themenwelten und den (angeblich) 

authentischen Realwelten hinfällig.“ 

(282) nicht unbedingt teilen muss. 

Hubert Job, Würzburg 

SCHERRER, CHRISTOPH (Ed.): China’s labor 

question. München: Rainer Hampp Verlag, 

2011, vii+221 pp., € 27,80. (e-book available: 

http://www.global-labour-university.org/ 

fileadmin/books/CLQ_full_book.pdf). 

“China’s labor question” is a collection of papers 

based on presentations at a panel of alumni 

from a Master’s-level programme at a conference 

in Berlin in 2010 and has been replenished 

with additional invited contributions. Addressing 

a rapidly evolving issue of clear topical 

interest, the initiators of the volume have 

been keen to expedite publication, responding 

to “great interest among trade unionists and 

academics in learning more about workers’ 

struggles in China” (vi). The initiative to publish 

junior researchers’ work speedily is laudable, 

for it is in my view an excellent element 

of training that allows budding researchers to 

gain valuable experience of publishing; for a 

group of young scholars, all non-native speakers 

of English, to cut their teeth on an English 

publication is the best possible preparation for 

the struggles of the academic world. 

Considering the importance of Chinese workers 

for the world economy, who manufacture a 

large proportion of the consumer goods for the 

European and North American markets, the 

reader approaches the book with considerable 

expectation. Systematic syntheses, fresh views 

and the application of new, critical approaches 

to dynamically changing data on economy, 

work and society are certainly needed, since 

the scholarly field has had a hard time catching 

up with developments. The book, although 

bold and refreshing in some respects, unfortunately 

does not meet these expectations. The 

kaleidoscopic character of the book is a defi- 

nite draw-back as it merely raises a large number 

of “challenges” without reaching a central 

idea of the processes of change in “labour relations.” 

I shall make this point with reference to 

two of the contributions. 

The book starts out with Hansjörg Herr’s 

analysis of high economic growth and its consequences 

for employment in China. The intention 

is excellent, but it starts out with eerily 

irrelevant approaches to economic growth, like 

the “neoclassical model” and “new growth theory,” 

which are rejected for a number of reasons, 

partly because the theories are flawed in 

themselves, partly because they are not measuring 

the phenomena presenting themselves in 

China other than in very abstract terms, and 

partly, I would add, because economic policy 

making in China defeated the presumptions of 

conventional economic theory. The attempt to 

explain growth with inequality, harking back to 

Simon Kuznets and his famous curve, is also rejected; 

interestingly, Hansjörg Herr understands 

that “Chinese leaders even seemed to 

follow the idea that increasing inequality is a 

good thing,” but he fails to follow up on this 

and concludes that the Kuznets curve “does not 

bear up,” mainly due to points of no relevance 

to the Chinese case. Instead he marries Joseph 

Schumpeter’s and Milton Keynes’ ideas in a 

“monetary development model” hoping to explain 

high economic growth rates in China. 

The model involves a cycle of credit-investment-income-savings 

and dictates that the productive 

(rather than speculative) nature of investments 

(as guided through the central bank) 

is crucial for economic growth. In the case of 

China, the risky reliance on international export 

processing incomes and the low domestic 

consumption rates have long been identified as 

potential obstacles to growth. The fact that 

high rates of social inequality stymy domestic 

consumption brings the author back to the conclusion 

that “the Chinese government has neglected 

the distribution question for too long.” 

The reader is left with very little understanding 

of China and a lot of chaff about debunked theories. 

And yet Herr does have a point that he 

could have pursued and measured: Exactly 

how the Chinese authorities systematically 

used the transition from one mode of planning 

to another and the manipulation of institutions 

like ownership (including the privatisation of 

state assets), household registration, land 

rights, enterprise reform and regulation and so 

on to achieve growth. That the policy since

2003 has been more focused on fairness does 

not indicate that the authorities are pursuing 

social equality, but rather that some of the inequalities 

arising from earlier policies have lost 

their usefulness and that the authorities promote 

other goals to consolidate economic 

growth, in that process not shying away from 

utilising other types of inequality. His bland 

conclusion that the Chinese success story can 

be ascribed to a “productive combination of 

government interaction and market forces” 

could have been the starting point and he could 

have used much more space on systematically 

discussing how the strong Chinese state managed 

to do what economics text books of any 

persuasion, even the works by Joseph Stiglitz, 

tell us is impossible. In stead of telling us that 

China’s “capitalist model is a specific and 

unique one,” he could have told us in what 

sense it is specific and what is so unique about 

it. Alas, he did not. 

Frido Wenten’s contribution on “restructured 

class relations” since 1978 seeks to use a historical-materialist 

approach to bring out an understanding 

of social change. He homes in on 

the most important aspects that could provide 

answers, but fails to grasp them (and fundamentally 

misunderstands crucial aspects). He 

points at the rural reforms, i.e. the introduction 

of the household responsibility system which 

between 1978 and 1983 transferred agricultural 

production back to rural households, he mentions 

the boost in rural incomes due to increase 

in state procurement prices and understands the 

rapid growth of the rural non-agricultural enterprise 

sector, as well as the huge rural-urban migration 

flows as “supply of cheap labour” to urban 

industry. He also understands the general 

issues of state-owned enterprise reform. However, 

he wrongly believes that the processes 

were “privatisation.” To the contrary, the state 

actively promoted the rural enterprise sector 

mainly as a collective sector, condoning new 

private enterprises as “red-cap companies,” 

changing the names of the “commune and 

brigade enterprises” into “township and village 

enterprises,” leading to township and town government 

control over the sector (the “local state 

coropratism,” as this has been termed by observers, 

dominated from the mid-1980s until 

sometime between 2005 and 2007, when townships 

and towns lost most of their economic 

functions). The efficiency gains the government 

sought to achieve in state owned enterprises 

had nothing to do with privatisation or capital- 


117 

ism, and the “Democracy Wall Movement” had 

no working class agenda; Wei Jingsheng’s claim 

for a “fifth modernisation” was for “democracy” 

in an ideal and broad sense and certainly 

not for “democracy in enterprises”; the movement 

learnt from not only Lech Wałęsa’s Solidarność, 

but also studied texts by Rudolf Bahro, 

Milovan Djilas and many others in translations 

produced for exclusive use within the top ranks 

of the Chinese Communist Party – they did not 

seek worker solidarity against encroaching capitalism, 

but a critical understanding of power in 

socialist states. The idea that the late 1980s 

were characterised by worker activism (sparked 

by high inflation and also by the localised experiments 

with state-owned-enterprise reform 

in Liaoning), linking up students and workers, 

and ending in the “Tiananmen-massacre” compresses 

very diverse issues into an overly simplistic 

narrative of a working-class struggle that 

never took place. In the analysis of the state 

owned enterprise reform, Wenten fails to grasp 

the process of transition, seeing it more as a 

struggle than as a systemic change. Discussing 

the rural-urban labour migration as a major 

source of “primitive accumulation,” Wenten inadvertently 

strikes the central point, but sadly 

fails to make it the crux of what could have 

been an exciting analysis, thinking of it merely 

as the “subjective agency of migrant workers,” 

missing the point that their agency is bounded 

by the deliberate and careful calibration of administrative 

and other institutions by China’s 

central and local “developmental state” administrations 

within the parameters of their regulation 

of core market players. As for the Hu Jintao-era 

that began in 2003 and is nearing its end 

in 2012, Wenten believes that it mainly sought 

to address instability (partly due to worker activism 

and public protests) by backtracking and 

creating more social justice to make amends for 

the capitalist overdrive perpetrated by the Jiang 

Zemin leadership 1989-2002. Wenten does not 

systematically identify how proactive government 

policy making since the late 1990s and in 

particular during the Hu Jintao-era have gradually 

changed modes of capital accumulation, 

upgrading of technology and skills, location of 

industry, relations between agriculture and other 

sectors, and administrative and market structures 

of resource allocation and investment. By 

abandoning the basic political-economy principles 

of an historical-materialism approach and 

focusing on the affective aspects of worker activism, 

protest and social injustice, Wenten’s account 

does not reveal the direction of China’s


Heft 1-2 / 2012 

political-economy system, but only concludes 

that “social conflict” will continue into the future. 

I shall not discuss all the contributions in the 

book, although several are better focused and 

demonstrate a better empirical balance. In any 

case, what can be learned from this master 

class? 

– First, the authors should have let the manuscript 

be read by people with experience in 

the field of scholarship, willing to be genuinely 

critical, and they should have taken 

their advice and criticism seriously; the main 

lesson is that critique that allows one to 

change the manuscript before publication is 

something one learns from, while post-publication 

critique by reviewers only leads to 

grief. 

– Second, the authors should get to the core 

point and avoid empty theoretical deliberations. 

They should avoid using loose concepts 

or irrelevant theories. 

– Third, the authors should put away their personal 

sym- and antipathies, for nothing is 

more disturbing than misplaced solidarity 

and dissonant claims of unity, even if they 

are only hidden away in the subtext: Chinese 

working people can do without clammy embraces. 

– Fourth, the authors should avoid poaching 

other people’s interview quotes, taking them 

out of context. In particular Wenten sins 

against this principle. 

– Fifth, the authors should be meticulous when 

referring to other people’s work, avoiding to 

impute or infer meanings not expressed. 

Again, Wenten’s is prone to draw wrong conclusions 

from the works he refers to. 

– Sixth, the authors should be dispassionate, 

try to see the big picture and at the same time 

understand the actual dynamics at play. For 

example: Private ownership or the household 

registration system are not good or bad, they 

are facts the significance of which changes 

over time and varies across situations. Collective 

bargaining has no intrinsic merit, for 

its value is entirely determined by its context. 

Judging phenomena in China as everywhere 

else, one needs to see them in context, not 

isolated. 

– Seventh, the authors should get their work 

properly language edited in several iterations 

by people who are used to their field of 

scholarship. When English is the language of 

publication, the citation styles and all other 

detail must follow English conventions, even 

if the publisher is in Germany. 

The point I want to make is that a lot of enthusiasm 

and hard work has gone into this book, 

and that most of the fundamental flaws could 

have been avoided by more careful processes 

of pre-publication peer review, editing, and 

better scholarly practices. For example, some 

of the mistakes in Wenten’s work are not uncommon 

among young scholars, and better advising 

and mentoring should have smoothed 

them out. I found the book hard to read and 

hard to review, and I considered declining to 

review it at all. The fact that I do review it and 

choose to be emphatic and blunt about its flaws 

is that I hope that my comments at least can be 

of use, for I do believe that this type of publication 

is important, and that in the future we 

can make sure that young researchers are guided 

and supported by critical peer reviewers, 

their advisors, as well as commissioning editors, 

language editors and copy editors to better 

learn the skills of publishing internationally. 

We need new cohorts of highly skilled researchers, 

and the only way to achieve that is 

by providing both support and criticism. Even 

if the publication would be delayed by a year in 

order for it to become academically stronger 

and more credible, that year would be well 

spent. 

Flemming Christiansen, Duisburg-Essen 

ZIMMERMANN, GERD R.: Die Besiedlung Madagaskars 

durch „Indonesier“. Nackenheim/ 

Rhein: Edition Matahari 2010, 6 Abb., 119 S., 

€ 31,40. 

In seiner inzwischen schon klassischen Definition 

hat Anthony Giddens Globalisierung als 

Intensivierung weltweiter sozialer Beziehungen 

bezeichnet, durch die entfernte Orte so 

miteinander verbunden werden, dass Ereignisse 

an einem Ort durch Vorgänge geprägt werden, 

die sich an einem viele Kilometer entfernten 

Ort abspielen – und umgekehrt. Der aktuellen 

Globalisierung, die durch Prozesse räumlicher 

Verdichtung und zeitlicher Beschleunigung 

gekennzeichnet ist, kommt sicher gegenüber 

historisch weiter zurückliegenden Vorgängen 

eine neue Qualität zu. Aber Migrationen 

und Verflechtungen über große Distanzen hinweg 

finden sich auch bereits lange vor Beginn 

der europäischen Kolonialisierung der Welt.

Ein solches Beispiel ist zweifellos die Besiedlung 

Madagaskars durch Auswanderer aus der 

Inselwelt des heutigen Indonesien. Sie haben 

dabei seit Begin der Zeitrechnung, wahrscheinlich 

in mehreren Schüben, nicht nur Distanzen 

von über 6.000 km überwunden, sondern vermutlich 

auch bis zum 10. Jahrhundert, vielleicht 

sogar bis zum 14. Jahrhundert, Beziehungen zu 

ihren südostasiatischen Herkunftsräumen unterhalten. 

Auch wenn vieles mangels schriftlicher 

Quellen hypothetisch bleibt, etwa ob der Indische 

Ozean direkt überquert, oder ob küstennahe 

Routen gewählt wurden, es besteht kein 

Zweifel daran, dass die „Indonesier“ die Kultur 

Madagaskars nachhaltig geprägt haben. Der 

Autor demonstriert in seiner verdienstvollen 

Studie eindrucksvoll, wie ein explizit geographischer 

Zugang die bisher dominierende linguistische 

und ethnologische Forschung zum 

Thema erkenntnisfördernd, gerade auch im 

Sinn der Generierung fruchtbarer Forschungshypothesen, 

bereichern kann. Dies betrifft unter 

anderem Fragen nach den Herkunftsräumen der 

Migranten im heutigen Indonesien, in Madagaskar 

nach den Beziehungen zwischen verschiedenen 

Einwanderergruppen und zwischen 

Küste und Hochland sowie nach der Ausbreitung 

von Kulturelementen wie etwa dem Nassreisanbau. 

Die Studie zeigt exemplarisch, dass 

es bereits lange vor der europäischen „Entdeckung“ 

der Welt Verflechtungen über große 

Distanzen und über lange Zeiträume gegeben 

hat, die zu bis heute nachwirkenden, sozial und 

auch politisch bedeutsamen kulturellen Hybridisierungen 

geführt haben. Es ist zu wünschen, 

dass die beigefügten Übersetzungen der Zusammenfassung 

ins Englische, Französische, 

Indonesische und Madagassische der internationalen 

Rezeption der ausgesprochen lesenswerten 

Studie förderlich sind. 

Helmut Schneider, Duisburg-Essen 

JOB, HUBERT/ WOLTERING, MANUEL/ HAR- 

RER, BERNHARD: Regionalökonomische Effekte 

des Tourismus in deutschen Nationalparken. 

Bonn-Bad Godesberg: Bundesamt für 

Naturschutz 2009, 186 S. € 18,-. (Naturschutz 

und Biologische Vielfalt, Band 76). 

Die Diskussion um die erwarteten und tatsächlichen 

Beiträge von Großschutzgebieten, namentlich 

Nationalparken, zur Regionalentwicklung 

ist keineswegs neu. Im Gegenteil wird 

darüber seit längerem kontrovers debattiert, 


119 

um so mehr als mit dem gegenwärtigen paradigmatischen 

Wandel des Gebietsschutzes das 

Verhältnis von Naturschutz und Regionalentwicklung 

immer stärker in den Fokus rückt. Im 

Zentrum steht dabei die Vorstellung, großräumige 

Schutzgebiete könnten im Sinne eines integrative 

Ansatzes insbesondere in Mitteleuropa 

wertvolle Beiträge zur Regionalentwicklung 

beisteuern. Dem Tourismus galt und gilt dabei 

besondere Aufmerksamkeit, vor allem weil 

Nationalparke bereits per Gesetz auch als Vorranggebiete 

für die Erholung fungieren. Die 

diesbezüglichen Erwartungen sind gemeinhin 

hoch, ohne dass allerdings lange Zeit hinlänglich 

gesichert schien, welche ökonomischen 

Wirkungen vom Tourismus, insbesondere in 

monetärer Hinsicht tatsächlich auszugehen 

vermögen. 

Schon 2009 hat eine Arbeitsgruppe um Hubert 

Job von der Universität Würzburg eine Studie 

zu den regionalökonomischen Effekten des 

Tourismus in deutschen Nationalparken vorgelegt, 

die inzwischen vielfach zitiert wird. Aus 

guten Gründen soll an dieser Stelle ein weiteres 

Mal eine Empfehlung zur Lektüre des Bandes 

ausgesprochen werden, dessen Rezeption 

eine Versachlichung verspricht, vor allem aber 

eine große Zahl belastbarer Daten zur weiteren 

Diskussion um den Nationalparktourismus in 

Deutschland bereitstellt. 

Auf der Basis einer touristischen Wertschöpfungsanalyse, 

der aufgrund ihrer offenkundigen 

Vorteile der Vorrang gegenüber anderen, 

konkurrierenden Konzepten der Wirkungsforschung 

im Tourismus gegeben wurde, präsentieren 

Job und seine Kollegen eine Fallstudienuntersuchung 

sechs ausgewählter „typischer“ 

Nationalparke in Deutschland. Im Zuge diverser 

empirischer Erhebungen in den jeweiligen 

Schutzgebieten, die methodisch konsistent, 

aber gleichermaßen aufwendig und mühevoll 

erscheinen, konnten Daten gewonnen werden, 

deren Interpretation nunmehr für die ausgewählten 

Parke, namentlich Bayerischer Wald, 

Eifel, Hainich, Kellerwald-Edersee und Niedersächsisches 

Wattenmeer, sowie als Schätzung 

auch für alle deutschen Nationalparke 

Aussagen zum Umfang der regionalökonomischen 

Wertschöpfung des Tourismus erlauben. 

Die Konzeption der vom Bundesamt für den 

Naturschutz in Auftrag gegebenen Studie ist 

dabei nicht ganz neu, da Job und andere bereits 

2005 und zuvor 2003 ähnliche Pilotstudien 

durchgeführt hatten. Ursprünglich geht das


Heft 1-2 / 2012 

Untersuchungskonzept auf die Schweizerin 

Irene Küpfer zurück, die schon 2000 eine entsprechende 

Studie zum Schweizerischen 

Nationalpark vorlegen konnte. Die Novität der 

Gesamtschau aller Nationalparke als „Flaggschiffe“ 

des Gebietsschutzes in Deutschland ist 

deswegen gleichwohl kaum zu übersehen! 

Die Ergebnisse geben den vielfachen Vermutungen 

Recht, dass der Nationalparktourismus 

sehr wohl beträchtliche Beiträge zur ökonomischen 

Wertschöpfung auf regionaler Ebene beizusteuern 

vermag, die gleichermaßen Einkommens- 

und Beschäftigungseffekte umfassen. 

Diese variieren, wenig überraschend, von Nationalpark 

zu Nationalpark, wobei für den vergleichsweise 

jungen Nationalpark Eifel die 

größten Wirkungen konstatiert werden. Entscheidend 

ist hierbei die Definition der Nationalparkbesucher 

im engeren Sinne, also der 

Gäste, die das Schutzgebiet ausdrücklich wegen 

des Prädikats Nationalpark besuchen. In einem 

Schutzgebiet wie dem Nationalpark Niedersächsisches 

Wattenmeer, das lange vor seiner 

Erklärung zum Nationalpark eine klassische 

Urlaubsdestination war, müssen diese Wirkungen 

notwendigerweise geringer ausfallen. 

Die Präsidentin des Bundesamtes für Naturschutz, 

Beate Jessel, hat in ihrem Vorwort die 

Bedeutung der vorliegenden Studie für die 

weitere Debatte um die Bedeutung von Nationalparken 

in ihrer Funktion als Tourismusdestinationen 

für die regionale Wirtschaft vorrangig 

peripherer ländlicher Räume herausgestellt. 

Dass zudem mit der Studie auch detailliertere 

Kenntnisse zur Besucherstruktur und 

Motivation von Gästen gewonnen werden 

konnten, ist ein beachtlicher „Nebeneffekt“ der 

Untersuchung, der vor allem für die weiteren 

Bemühungen im Rahmen eines professionellen 

Destinationsmanagements für die Nationalparke, 

aber auch andere Großschutzgebiete von 

erheblichem Wert sein dürfte. Die Gründung 

der Dachmarke „Nationale Naturlandschaften“ 

kann beispielhaft für die Richtung stehen, in 

welche sich das Marketing der Großschutzgebiete 

bei der Herausstellung ihrer unverwechselbaren 

Alleinstellungsmerkmale in Zukunft 

weiter entwickeln sollten. 

Indes sei abschließend vor möglicher Euphorie 

angesichts der vorgelegten Ergebnisse gewarnt. 

Mögen diese gerade für periphere ländliche 

Räume auch vielversprechend erscheinen, 

so sollte doch keineswegs von einem Au- 

tomatismus regionalökonomischer Wirkungen 

des Tourismus ausgegangen werden. Wie unter 

anderen Luisa Vogt (2008) eindrucksvoll nachweisen 

konnte, sind dem Tourismus als vermeintlichem 

Motor der Regionalentwicklung 

in der ländlichen Peripherie häufig enge Grenzen 

gesetzt. Von entscheidender Bedeutung 

sind vor allem das zur Verfügung stehende 

Humankapital, Kooperationsbereitschaft, aber 

auch infrastrukturelle Voraussetzungen sowie 

ein professionelles Destinationsmanagement, 

um auch in der Peripherie entsprechende Entwicklungseffekte 

erzielen zu können. Nationalparke 

bieten in dieser Hinsicht sicherlich Vorteile 

gegenüber anderen Konstellationen, inwieweit 

die Ergebnisse der vorliegenden Studie 

allerdings verallgemeinerbar sind, insbesondere 

im europäischen Kontext, bedarf 

zweifellos noch der weiteren Forschung. In 

diesem Sinne wäre ein Blick auf vergleichbare 

Studien in anderen Ländern und deren Ergebnisse 

wünschenswert gewesen; hierauf gehen 

Job und Kollegen allerdings nicht weiter ein. 

Ohnehin sollten im Blick auf die ökonomischen 

Effekte des Tourismus, die zweifellos im Fokus 

der hier rezensierten Untersuchung standen, die 

weiteren Anliegen des Naturschutzes nicht aus 

dem Blick geraten. Dies ist auch und gerade aus 

der Perspektive eines integrativen Gebietsschutzes 

essentiell. Erholung und Freizeit in der Natur, 

Förderung der Gesundheit, persönliche Erbauung 

und Weckung von Kreativität, sowie die 

Beiträge zur Umweltbildung sind wesentliche 

gesellschaftliche Leistungen von Nationalparken, 

deren Stellenwert es für die Zukunft zu 

wahren und zu stärken gilt. Hiermit ist letztlich 

eine ideelle Grundsatzfrage angesprochen. So 

bedarf es angesichts der konkurrierenden Interessen, 

denen sich Schutzgebiete nach wie vor 

ausgesetzt sehen, so hat Reinhard Piechockie 

kürzlich in seinem ebenso lesenswerten Buch 

zur Ideengeschichte des Naturschutzes „Landschaft 

– Heimat – Wildnis“ unterstrichen, einer 

Doppelstrategie des Naturschutzes: Dieser muss 

wertvolle Naturlandschaften weiterhin bewahren 

und zugleich dem Menschen als Erfahrungsräume 

mit touristischer Qualität öffnen. Nur so 

wird auch die Akzeptanz für mehr und bessere 

Schutzgebiete, namentlich Nationalparke weiter 

wachsen können. Genau hierin könnte der eigentliche 

Gewinn liegen, der mit den regionalökonomischen 

Effekten von Nationalparken, 

nicht nur in Deutschland, zu erzielen ist. 

Ingo Mose, Oldenburg

Wirtschaftsgeographie - Institut für Wirtschafts- und ...

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