Centennial Enterprises as Sources of Innovation in Emerging Economies

(This paper was presented at the Session of XVIII World Economic History Congress in August 2018.)

By Wei YI, Denggao LONG, Pierre van der Eng, Tsinghua University

Many less-developed countries and emerging economies have long-established enterprises. They were often founded at times when countries were colonies or had semi-colonial status. They have grown through the twists and turn caused by political upheaval related to national independence and post-independence experiments with nationalist, inward-looking economic policies. Ownership of companies may have changed, as some were nationalized, while others continued as privately owned ventures. Either way, there are many examples of centennial enterprises that on the basis of growth in domestic markets are now competitive international companies. Many of these enterprises were in the past important conduits for economic exchanges between the Western and less-developed countries. They were also conduits for the absorption, adaptation and further development of technology, and therefore important contributors to economic growth in emerging economies. Two well-known prominent examples of such centennial enterprises are the Ayala and Tata conglomerate enterprises in respectively the Philippines and India.

However, in all countries there were many smaller enterprises that survived the times in the same way and that performed a similar role in economic development. In China, for example, during the late Qing Dynasty and the Republic of China, a generation of modern enterprises was established in the following ways. (a) Introduction and learning of western technology and management, such as the establishments as part of the ‘Westernization Movement’. (b) Sino-Western cooperation. International co-operated modern enterprises involving tie-ups with foreign firms. (c) Foreign direct investment by foreign enterprises in China. (d) Foreign firms engaging intermediary agents in various ways, and subsequently transformed away from intermediary trade of the compradors. Each type of business evolved in China before 1949 and engaged multi-national companies in some way.

For example, the China Merchants Group (Class a) was established in 1874 as a state-owned enterprise, and now a company in the Fortune 500 list. Hai-Ho Conservancy Commission (Class b) was established in 1897. Its board of directors, general commission and the foreign chief engineers were appointed by both sides of Chinese and foreign governments. In 1949, it was reformed from a public welfare corporation to a state-owned enterprise. After many difficult reformations and innovations, it gradually has global business from the east to the west. HSBC, Jardine Matheson, AIG (Class c) are that were built by foreigners in prewar China, experienced a rapid development, and finally became multi-national companies with headquarters in Hong Kong or Shanghai. AIG was a typical case of business localization. They quit the China market after 1949, but gradually returned to China to invest and extend its business after 1992. These enterprises have over 100 year’s history, and in each case, enterprises still survived in some form in China until today, even became competitive international companies.

The experience of those enterprises is fairly common in virtually all less-developed countries. Such types of enterprises also exist in other emerging economies. They may be as large or smaller, and their operations may be more or less international. In broad terms, they often experienced three phases of development. (a) Establishment and learning phase in the early 20th century. (b) Stagnation and transformation phase in the mid-20th century, as many enterprises were nationalized as part of economic nationalist policy agendas pursued in less-developed countries following independence. (c) Privatization in some cases, but particularly change from imitating to independent innovation, and gradually penetrating global markets to become competitive international companies by the late 20th century.

This session intends to discuss the development of such enterprises in the changing business contexts of emerging economies around the world. Participants in the session will discuss and compare, for example, the transformation of individual enterprises during different time periods, the influence of colonization and decolonization on companies, and the historical and institutional background of innovative capabilities of these companies. The ultimate aim of the session is to facilitate generalizations of the evolution of such enterprises, and their role in fostering innovation and therefore economic growth in emerging economies. We welcome both case-specific studies in business history and macro-level studies that link enterprise development to innovation and economic growth throughout the 20th century.

At the beginning of the session, Wei YI and Miao WANG, from Tsinghua University, first presented “The Foreigner Engineer-in-Chief as CEO and the development of Modern China’s Dredging Industry”. In the late Qing Dynasty, Hai-ho Conservancy Commission (1897) and Whangpoo Conservancy Board (1905) were established in Tianjin and Shanghai, becoming the origin of modern dredging industry in China, mainly responsible for dredging projects and maintenance the channel of Hai-ho and Huangpu River. Engineer-in-chief is responsible for overall business operation, adopts internationalized management model and operating mechanism. Its employment mechanism, work authority, and independence reflect the institutional nature and operational characteristics of both organizations, and have made outstanding contributions to the development of China’s dredging. They rely on its international background and making a broad perspective. Through hiring foreign technology and management experts, they have extensively and comprehensively contacted and introduced the world’s most advanced dredging technology and equipment at the time, adapted and transformed them locally, forming a high starting point for the China dredging and nurturing early professional technologies and talents, thus laid the foundation for China’s modern dredging business.

Leadership role of Ningbo Merchants in technological advances and practices in modern Shanghai industrialization, presented by Jian Li from Shanghai University, discussed Ningbo businessmen and entrepreneurs possess unique characteristics and social status in the local society. Based on the established business model and entrepreneur system, they played a critically important role in improving technological advances and industrial infrastructure and system and policy, thus stimulating modernization and urbanization of Shanghai. This is just like what was stated by a famous American economist: “to a large extent, the economic development of a country is depending on the entrepreneur’s innovative ideas and activities.” Focused on Ningbo (or Yong) merchants of Shanghai because “Ningbo business group” is the most successful and powerful group among all groups in Shanghai in terms of its overall capabilities. The success of Yong merchants is the result of its own unique characteristics combining with the unique social ecology of modern Shanghai. In addition to analyzing the characteristics of Yong merchants and their impacts on economic and social development of Shanghai, we emphasize on identifying and analyzing the components for modern Shanghai industrial development and innovation mechanism, as well as the impacts of social change, policy factors on enterprise development and transformation.

Tracing the Evolution and Performance of the Market Structure of Match Industry in Modern China: centered on Liu Hongsheng enterprises, 1900-1958, presented by Shusheng Fang from Shanghai Academy of Social Sciences. In the first half of twentieth century, with the increasing number of enterprises and the development of modern Chinese industrial economy, the two different economic organizations of the enterprises and the market are closely related and become the logical basis for measuring the evolution of the system. This paper analyses the evolution of China match industry market structures in the 1900-1958 years, by asking the control, division and substitution of the enterprises to the market, as well as the reaction of the market to the enterprises, not only obtains the complete path map of the abnormal evolution of market structure, but also observes the performance and characteristics of them, it will also help to further explore the transaction costs and performance of the private enterprises and the broad significance of the evolution of the market structure in the early twentieth century in the history of industrial organization development.

Innovation and Monopoly: The Formation and Evolution of the Petroleum Corporation System in Modern China,1946-1949, presented by Lin Xu from Shanghai Academy of Social Sciences. As a developing country, China had made innovations and development in modern enterprises over the past 100 years. These enterprises not only showed the scale of individual enterprises, but also transformed from traditional industries to strategic emerging industries such as oil, steel and electromechanical industries. Petroleum industry was an important strategic emerging industry in China. Then the evolution of its enterprises not only determined the industrialization process of modern China but also the stability of energy and economic security. This paper intends to focus on the “China Petroleum Limited Company “(CPLC) (1946-1949) of the “National Resources Commission” (NRC). And this paper intends to explore the development trajectory of China’s petroleum industry in the past 70 years. Furthermore this paper also attempts to think about the innovation impetus and innovation form of the re-chemical industry enterprise system of less-developed countries after the end of world warⅡ.

Nourishing Shanxi: Indigenous Entrepreneurship, Regional Industry, and the Transformation of a Chinese Hinterland Economy, 1907-2004, presented by Zhaojin Zeng from University of Texas at Austin. His paper is a synthesis of my larger dissertation project that investigates China’s economic transformation in the twentieth century through the lens of indigenous entrepreneurship and regional industry. The case study of the dissertation focuses on the rise and decline of Shanxi merchants and their largest industrial business, the Baojin Coal and Iron Company, from 1907 to 2004. Shanxi province was home to the wealthiest trade and banking merchants in the Qing Empire and also possessed one of the most abundant coal and iron deposits in the world. The unique combination of indigenous business culture and modern industrial potential constituted the distinctive context of Shanxi’s economy, which embodied China’s vast under-studied hinterlands in contrast to the much-explored northeastern or coastal areas. Literally meaning “Nourishing Shanxi,” the Baojin Company was founded by a group of Shanxi merchants in 1907. As the first mechanized mining and iron making corporation in North China, Baojin symbolized the local people’s quest for an industrial economy that merged indigenous culture, fossil energy, and Western technology. Drawing on research in nearly a dozen archives in China, Japan, Taiwan, Sweden, and the United States, including the newly discovered 30,000-page enterprise documents, “Nourishing Shanxi” analyzes the one-hundred-year rise and fall of the Baojin Coal and Iron Company through five successive political regimes and economic systems: Qing, Republican, Japanese, Communist, and Post-Mao. It explores how indigenous businesspeople dealt with the politically and ideologically distinctive states and managed to reconcile local industrial production with their different national economic institutions and development visions. By highlighting continuity in entrepreneurial culture, business institutions, and local industrial development, this dissertation challenges the prevailing interpretation of Chinese economic transformation as merely the result of the successes and failures of state policy. Instead, “Nourishing Shanxi” demonstrates that the state-business interaction fostered the processes of institutional change and state-building and argues for the centrality of indigenous business and regional industry to the making of the modern Chinese economy.

On the second half session, Takeshi Mine, from the University of Tokyo, presented “The development of the small-scale production technology of nitrogen fertilizers in the day of Mao Ze Dong and the innovation afterwards under the open door policy”. Fertilizers were used in the ancient China. We can find the record that the fertilizer was used in the historical book of the ancient Yin Dynasty. It is Min Dynasty where use of fertilizers became more and more popular. Green maturing such as Chinese milk vetch, alfalfa, the squeezed soybean and the squeezed cotton etc. were used as the fertilizer. Among these the squeezed soybean was most widely used for the cash crops. Chemical fertilizer took over the squeezed soybean in 20th century. In 1909 small amount of ammonium sulphate was imported as the first chemical fertilizer in China and from that time the import of ammonium sulphate increased year by year. There are three major nutrients which are crucial in the growth of crops. Ammonia is the key raw material of nitrogen fertilizers. The purpose of this paper is to analyze why China developed the small scale production technology after World War II in the days of Mao Ze Dong and how it has changed under the reform and open-up policy.

Innovation or rent-seeking: the relationship between institutions and talent allocation in modern China, presented by Sheng Xiaofang and Ouyang Yao from Hunan Normal University. The paper employs the theory about the allocation of talent between productive (such as innovation) and unproductive (such as rent-seeking) activities to analyze how enterprises developed in modern China and why almost died in the end, and concludes that institution determines the talent allocation between innovation and rent-seeking, which further decide the economic growth.

Governing Family Firms for the Long Term in the Philippines, presented by Asa Malmstrom Rognes from Uppsala University. Dynastic family firms fascinate scholars and authors alike for a variety of reasons, but at the core is the question of ownership and control, and how that is maintained or lost through generations. Thomas Mann’s Buddenbrooks captures the difficulties of retaining a firm of a certain size and structure through the generations. 1, A poor manager here and a disastrous marriage there and the family fortune was squandered along with the solid reputation built by the founders and second generation. The view that family firms cannot last beyond three generations is echoed in sayings across the globe. In China it is said that “firms go from rags, to riches, to ruins” in three generations, whereas in Europe it is said that “the first generation creates, the second inherits and the third squanders”, and in North America the saying is that firms go from “building to consolidating to divesting”. 2, Dynastic family firms fascinate scholars and authors alike for a variety of reasons, but at the core is the question of ownership and control, and how that is maintained or lost through generations. Thomas Mann’s Buddenbrooks captures the difficulties of retaining a firm of a certain size and structure through the generations.

Tracing the development of semi-governmental enterprises in Thailand in three sectors: textiles, sugar, and gunny sacks, 1932-1957, presented by Panarat Anamwathana from University of Oxford. The paper traces the development of industries which the state ‘desired to create’ – textiles, sugar, and gunny sacks – through the economic upheavals of the pre-war, World War II, and post-war periods. It also argues that developments under the Japanese occupation in 1942-1945 played an important role in the growth of manufacturing in the late 1940s and 1950s. All three case studies demonstrate not only the complexities (and corruption) involved with running semi-governmental enterprises to supply goods to the public, but also that the Japanese occupation did much to lay the basis for swift post-war change. The state established a framework and foundation to supply the country with much-needed products. Though these efforts did not alleviate acute wartime scarcity, the institutions and procedures created between 1942 and 1945 gave the state a foothold in these sectors.

At last, Jiao Zhang and Denggao Long, from Tsinghua University, presented “The Impact of Chinese Entrepreneurs on the Industrialization of Indonesia”. After the World War II, Liem Sioe Liong and other Chinese entrepreneurs support Indonesia’s national economic development. They actively response to the national  industrial development policy, and established the large-scale capital joint venture, such as cement plants, flour mills, steel plant and a series of enterprises, promoting the process of Indonesia’s industrialization. In previous studies, the view take franchise as “Crony Capitalism” is a kind of bias. The strong political-commercial relationship not only matches the needs of national economic strategy transformation, but also can realize the resource allocation, achieving the economies of scale. In the history, it’s also the normal economic phenomenon to one country in which the power has just been liberalized.

The papers in this session explore the question how long established enterprises have survived the twists and turns of competition, political change and the evolving business context in emerging economies, and ask how their resilience contributed to the development of their home economies and prepared them for internationalization. The papers presented in this session take different perspectives. Some take a long-term perspective, covering a century or more, others focus on crucial episodes in the existence of these firms. Some take comparative perspectives across countries or enterprises, but most papers focus on a single enterprise in a single country. During the session, Se Yan (Peking University), Pui Tak Lee (Hong Kong University), Boyi Chen (Washington University at St. Louis), Pierre van der Eng (Australian National University), and Denggao Long(Tsinghua University) have discussed the above topics and papers.

About the Authors

Wei YI:Secretary-General of Center for Tsinghua Chinese Entrepreneur Studies; Ph.D Candidate, Institute of Economics, School of Social Sciences,Tsinghua University; the main research focus on economic history, business history, overseas Chinese entrepreneur studies.

Denggao LONG:Director of Tsinghua Center for Chinese entrepreneur Studies; Professor and Doctoral supervisor, Institute of Economics, School of Social Sciences, Tsinghua University; the main research focus on economic history, business history, overseas Chinese entrepreneur studies.

Pierre van der Eng:professor of Australian National University; Visiting Professor of Tsinghua University; the main research focus on economic and business.