CBN and FDI Outflows to China

Published Date: 19 Feb 2018

Introduction and Research Problem

Since its economic opening in 1979, China has become one of the world's largest recipients of foreign direct investment (FDI). In 2007, inflows to China totalled over US$82 billion, bringing China's cumulative FDI to almost US$700 billion for the period 1979 to 2007 (CSB 2007). But what has particularly captured both academic and popular attention is the extent to which China's massive levels of FDI may be attributable to "diasporic" ethnic Chinese capital, what Harvard academic John Kao famously termed the "Chinese commonwealth" (Kao 1993: 24). It has often been asserted that some two-thirds of all the foreign investment that has poured into China originated from ethnic Chinese living outside of China (e.g., Wolf 2002: 134).

This unprecedented level of intra-ethnic investment presents something of a headache to mainstream FDI theories, which, at the level of the firm, tend to explain internationalisation as an incremental process resulting from, variously, the pursuit of market power, an internalising of technological improvements, and the accumulation of foreign market knowledge and experience. Protesting against this type of theorizing as "under-socialised" and "Western-centric," many Asia scholars (who are frequently also Asian) developed an alternative account drawn upon insights from "network theory" and some sociological studies of Chinese firms done in the 1990s. Their account—which in this dissertation is referred to as the "Chinese Capitalism" corpus—spans a variety of disciplinary frameworks including anthropology, economic geography and sociology, development economics, management, and Southeast Asia Regional studies, but has at its heart the premise that ethnic Chinese enterprises dominate the economic activity of East Asia and FDI flows into China in large part because of their ability to draw upon dense, interlinked networks of social/family/political relationships that span national boundaries. These linkages are commonly known as Chinese business networks (CBN). The assertion that ethnic Chinese engage in pervasive networking on an international scale has become so ubiquitous in popular and academic literature that it is usually considered a stylized fact.

But is it true that—despite citizenship in countries with differing social structures, political economies, and histories—the Chinese diaspora is linked by transnational webs of strong personalistic ties? And have these webs actuated and facilitated massive flows of FDI to China? If so, this would suggest that ethnic Chinese business operates in a distinctive manner, that it is proper to speak of a "Chinese Capitalism" in which flexibly linked Chinese enterprises might even form a competitive substitute for formally structured Western and Japanese multinational enterprises (MNEs). Alternatively, it has been suggested that the concept of CBN might simply be a cultural myth which obscures, possibly exaggerates and distorts, the internationalisation of ethnic Chinese enterprises (Mackie 2000). If so—if intra-ethnic networking is ill-defined, over-stated and under-researched—what should we make of the prevalence of the CBN discourse in economics-based disciplines? And, if they are not advantaged by networks, how should mainstream FDI theories be amended to account for the fact that at the turn of the 21st century we find so many Singaporean enterprises in China?

The main purpose of my research was to move this debate forward. I did so by investigating claims of extensive intra-ethnic networking among the ethnic Chinese with an eye toward enhancing mainstream internationalisation theorising. More specifically, I tested whether evidence of CBN could be found in the transnational expansion into China of randomly-selected Chinese-Singaporean small-medium-sized enterprises (SMEs).

This chapter has two main objectives. The first is to present my dissertation's research question and to explain why it is important. The second is to provide an overview of how and why I investigated it as I did. To this end, the following section discusses the general context of my research problem and reviews the conventional theoretical frameworks that address the phenomenon of internationalisation. Section 1.1.2 explains why it is important that claims of extensive intra-ethnic networking be investigated. Next, the focus is narrowed to the specific research question that was tested. The concept of CBN is carefully defined in Section 1.1.3, and it is conceptually operationalised into testable sub-hypotheses in Section 1.1.4.

Background of CBN Claims

With some US$30 billion cumulative FDI invested in China between 1979 and 2006, Singapore ranked as China's seventh largest source of foreign investment, after Hong Kong, Japan, the Virgin Islands, the United States, Taiwan, and South Korea (CSB, 2007). In 2006, about 70% of the Association for East Asian Nations' (ASEAN) FDI originated in Singapore, and between 1990 and 2006, over 15,000 Singaporean projects were set up in China. These figures are all the more remarkable given Singapore's small size.

Furthermore, as significant as Singapore now is as an investor to China, it is likewise true that China has become important to Singapore as an investment market. Since 1997, China—"a vacuum cleaner for foreign direct investment," as Lee Kuan Yew has frequently called it—has each year received the largest share of FDI by Singaporean entities, replacing Malaysia as Singapore's top investment destination (Hamlin 2002). In 2002, FDI to China accounted for over 17% of total Singaporean investment abroad (Department of Statistics 2002). It is clear from these figures that not only are Singaporean transnational enterprises (TNEs) a significant force in the rearticulation of China into the global economy, but that China has become an important factor in the regionalisation of Singaporean firms.

How can we account for this tremendous and unprecedented diasporic transnational investment? Two corpuses of literature that purportedly shed light on this phenomenon are critically examined in this dissertation: the mainstream internationalisation construct and what I refer to as the Chinese Capitalism perspective.

Three strands within the mainstream internationalisation literature are highlighted in this dissertation. The first is "theories of the MNE," which grew out of Stephen Hymer's seminal work on post-war multinational investment in Europe and has its roots in the utilitarian tradition of classical and neo-classical economics. This corpus of literature has expanded over the decades to encompass a range of views, but at its core is some version of the argument that MNEs are enterprises which, in response to market imperfection and a desire to exploit proprietary advantages, have internalised activities by investing abroad. A distinctive sub-group of these theories has arisen in response to the spectacular increase in developing-country MNEs since the 1970s. Within Developing-Country MNE theories, the leading argument is that emerging MNEs from developing countries follow an incremental internationalisation process driven by gradual internal technological accumulation.

Internationalisation Process Models is the second important strand within the mainstream approach. With its roots in behavioural theories of the firm, it offers a more explicitly dynamic approach to understanding the process by which firms engage in FDI. Though there is some variation in the explanation employed in the models—for instance, some stress learning and others focus on technological accumulation—and though the process is variously described as cyclic, stage-based, or evolutionary, a key premise is that internationalisation is incremental by nature, as the firm acquires knowledge necessary for further internationalisation.

A third major strand within the mainstream approach has explicitly incorporated the concept of "network" into internationalisation theorisations. It is important to note the schism in the network literature between viewing networks as a form of governance structure versus focusing on networks as social relationships. This has caused a number of definitional problems and contributed to a seemingly irreconcilable divergence between mainstream economics/business theories and an approach that has grown out of the sociology discipline. Of the former, perhaps the most important for this thesis is the Late Industrialisation framework, which treats the concept of networks as a distinctive mode of organisation through which learning and the adaptation of borrowed technology were combined to promote economic development in a number of "late industrialising" countries in the 20th century.

These three strands within the mainstream internationalisation construct dominate much of the research on MNEs and FDI but they have their shortcomings. In particularly, many Asia scholars (who were frequently Chinese-speaking Asians) have objected that mainstream internationalisation theories, with their under-socialised and "Western" roots, cannot adequately explain the phenomenon of ethnic Chinese investment in the "motherland" (Yeung 2000: 10). These scholars have instead drawn upon the insights of network theory and several sociological studies of ethnic Chinese enterprises (that were done in the 1990s) to develop an alternative account—the Chinese Capitalism perspective—to elucidate the specific case of ethnic Chinese transnational expansion. As its name suggests, this large corpus of literature is exclusively concerned with ethnic Chinese enterprises because it is argued that they differ in important respects not only from Japanese and Western firms, but from other developing-country enterprises (Kao 1993).

Central to the Chinese Capitalism perspective is the premise that ethnic Chinese firms dominate FDI flows into China, and indeed much of the economic activity of East Asia, because of their ability to form and draw upon dense, interlinked webs of social/family/political relationships that span national boundaries and "rest on trust and reciprocation" (Hamilton 1996a: 17). These relationships—Chinese business networks (CBN)—are variously ascribed to cultural and/or institutional factors and ostensibly give ethnic Chinese TNEs a strong advantage, especially when entering culturally Chinese markets such as China, while non-ethnic Chinese businesses meet with less success (EAAU 1995). As Hamilton-Hart wrote:

Investment and trade flows linking Southeast and Northeast Asia have been promoted by network-like relationships among firms and individuals. These relationships have fostered regionalization by reducing the costs and risks of transnational investment (Hamilton-Hart 2002: 1).

Describing this advantage in an especially enthusiastic manner, Redding wrote that "ethnic Chinese capitalism is essentially an economic culture characterized by a unique capacity to co-operate" (emphasis added: Redding 1990: 79). And Hamilton, concluding that the Chinese diaspora will elbow out non-Chinese entrants in the China market, wrote: "Many Westerners honestly believe that they have a real chance to sell to the one billion plus Chinese consumers, but I do not believe it will work out this way" (Hamilton 1996a: 19). Journalists and management gurus have similarly embraced the concept of Chinese business networks (e.g., Seagrave 1996; Backman 1999; and Drucker 1994).

The concept of CBN has historical roots in the centuries of mass migration that have fostered transnational ethnic Chinese communities which span the world. Many historians have argued that commercial and financial networks based on fictive and agnatic familism, pang or speech-group solidarities, and regionalism, were historically important social channels in some settings, such as for those emigrating to Southeast Asia from southern China. But the Chinese Capitalism literature, taking new life from the treatment of networks within the sociology discipline, extended this historical observation further. It not only asserted that CBN remained important at the turn of the 21st century, but it emphasized CBN as a distinctive characteristic or skill of the ethnic Chinese.

Research Significance

The skill or special ability to combine a firm's resources with the complementary resources of its partners can no doubt be an important organisational capability. Among the benefits, networks lower business transaction costs, provide for better risk assessment, and lead to prompt decision-making. But is there evidence that networking has been a primary factor in ethnic Chinese transnational expansion? Does it explain why Singaporean FDI has flowed so far afield to China?

My research contributes to academic understanding in a number of ways. It adds to the scarce academic research that has been published to date on Southeast Asian SMEs, and it contributes to a more rigorous definition of CBN and some of the terms associated with it, such as guanxi. But its most significant contributions are to the following three areas: 1) theorizing on internationalisation and FDI in general, and ethnic Chinese businesses in particular; 2) assessments of whether Singaporean FDI outflows to China represent actual or faux economic development, and what that implies for evaluations of Singaporean state developmentalism; and 3) the use of CBN as a small state strategy to facilitate economic development and to accommodate an ascendant China.

Chinese Capitalism and Internationalisation Theorising

Further research into CBN is necessary to enhance theorising in both the Chinese Capitalism and mainstream internationalisation corpuses. As discussed in detail in Chapter 3, the Chinese Capitalism literature has to date suffered from a serious lack of empirical evidence. Articles that discuss CBN do often reference prior academic works, but when checked these references typically are revealed to be rather insubstantial. There is also a marked tendency to repeat, mantra-like, the same three or four original works on the subject, but because these studies were largely descriptive and based on a tiny sample size, they do not provide an adequate buttressing for the claim of extensive intra-ethnic business networking. Moreover, there have been virtually no rigorous cross-cultural comparative studies, and little consideration has been given to the drawbacks and costs of operating through networks.

My investigation into CBN also speaks to the appropriateness of the academic niche that has developed for "Chinese Business." A virtual phalanx of "Chinese business experts" has popped up since the late 1990s, and it is common to find universities that have dedicated a Chair—or even a department—to the business practices of this specific ethnic group. In contrast, one is less likely to find similar attention to Russian or Indian business studies. Of course, this is due in part to the staggering market potential represented by China's 1.3 billion population, but it can also be traced to the essentially culturalist assumption that ethnic Chinese have unique business practices such as CBN.

In fact, CBN has become so widely accepted that much of the academic discussion has shifted away from directly considering ethnic Chinese ties towards as "pseudo" cross-comparative approach that is problematic because it contrasts the "fact" of CBN with the "lack of networking" in other cultures. Research into how, for example, Nordic or Indian networks are not as strong as CBN have become common. In short, though some of the details of CBN may be contested, the general premise of the Chinese Capitalism literature has largely been accepted and is influential. This has been especially true in the international business rubric, but references to CBN abound in economics-based disciplines as well. For example, in an Institute for International Economics special report describing the lessons South Korea should learn from CBN, Young argued: "In the 1990s, they [the Chinese diaspora] formulated an international strategy to form a global network of overseas Chinese...The experiences of overseas Chinese networks would be good models for Korea" (Young 2003: 50). And how did Young define CBN? "They are led by the unique Chinese personal network, guanxi, which links individuals, hometown associations, business associations in the same industry, and associations of people with the same family name" (Young 2003: 53).

Mainstream internationalisation theories also have significant shortcomings. The economics discipline has a long history of neglecting—often completely omitting—the social, political, and historical context in which firms are embedded. A large gulf between mainstream economics and other social sciences has developed, making each seem increasingly irrelevant to the other. Economics' many insights and strengths are too often viewed as inapplicable to other disciplines, and disciplinary cross-fertilisation has been hampered. Sloppy theorisations arise and thrive in such an environment.

One of the most significant ways that evidence for CBN affects mainstream theorising lies in its suggestion that informally-linked enterprises might serve as functional substitutes for Western and Japanese MNEs. Large firms, especially multinationals, enjoy significant benefits of scale and scope as well as learning and productivity advantages that are unavailable to smaller, isolated firms (Nolan 2001). In contrast, the relatively small size of ethnic Chinese firms, which tend to be family-owned and -controlled, is considered by mainstream theorists to limit their competitiveness in international business. But perhaps the 21st century will indeed be a "network age" in which "the economies of scale that dominated in the previous period seem to have given way to network economies" (Young 2003: 33). If so, then the concept of CBN suggests that ethnic Chinese firms are informally bound together in such a way that they can duplicate, and maybe exceed, the benefits derived from the larger scope of MNEs (Borrus 1997). This intriguing possibility—that the limitations on competitiveness inherent in a family-controlled firm may be overcome by networking—provides a further reason for why my research into claims of extensive CBN is significant. Moreover, as my results demonstrate in Chapter 5, irrespective of whether extensive intra-ethnic networking is taking the place, the effects of the CBN discourse are profound and have affected FDI decision-making. Mainstream economic theory would be improved if economists took a more open-minded and sophisticated approach to appreciating, understanding, and incorporating such social dimensions.

Singaporean Development(alism): Actual or Faux?

My research contributes in another key way. Empirical evidence (or its absence) of CBN should factor into evaluations of Singapore's level of economic development and, hence, assessments of the state's developmental policies.

FDI from Singapore to China has not only been large but it continues to grow. Though this transnational expansion has been actively promoted by the ruling People's Action Party (PAP) through various policies, programmes, and an official discourse on creating an "external economic wing," the state would have us interpret Singaporean investment in China as growing economic maturation, a sign that Singapore is moving away from MNE-led development to a stage in which home-grown capitalists diversify into new areas. Outward direct investments are beneficial to both firms and the home country as they provide access to strategic assets, technology, skills, natural resources, and markets. It is especially important for a small state with limited market size and resources to be able to access international markets and connect with global production/knowledge systems.

The degree to which Singapore has experienced the social and technological progress associated with economic development has been a contentious subject for the PAP-state (e.g., Krugman 1994), and it is perennially anxious to demonstrate its effectiveness. As discussed in Chapter 8, signs of declining popular support for the PAP in election results since 1988, in conjunction with a series of accumulation crises over the past two decades, have the state very worried.

Though recognized as highly intrusive, the state has largely been given credit for developing Singapore from a sleepy entrepôt into a major communications hub with a population that enjoys one of the world's highest per capita incomes. Since the 1990s, the Singaporean state has to a striking degree officially embraced and propagated a (selectively Confucian) culturalist discourse alongside calls for the development of an external sector to help insulate the country from downturns in the world economy. Is this yet another sign of an "enduring comprehensive developmental state" (Pereira 2007) cheerleading the march towards the next stage in Singapore's economic development, this time, in part, by encouraging latent networking capabilities in its ethnic Chinese population? This might imply that after years of neglect, the PAP-developmental state has reached a stage where it is prioritising the engagement of local capitalists in its economic strategies (Haggard and Cheng 1987). For while the developmental state is expected to be the most powerful political and economic player during much of development, at some point state strategies should pay off and produce a vigorous and competitive domestic capitalist class (Periera 2007: 3).

But what should we make of Singaporean FDI to China, and the state's insistence that these flows are rooted in Chinese exceptionalism, if evidence suggests that CBN claims are over-stated? Justifications for Singapore's domineering one-party state have always pointed to the Republic's strong economic performance. If public proclamations about Chinese business networking turn out to be rather more wishful thinking than actual practice, then the government may be judged to have taken a serious mis-step, especially considering its own massive investments in China and the problems associated with some of them (, The New Frontier, Far Eastern Economic Review, December 6, 2001, BY Ben Dolven e.g., the Suzhou Industrial Park). The implication would be that Singaporean investment in China represents, at least in part, something other than the cool, independent economic rationalism upon which PAP political legitimacy rests; concerns might be raised about the optimum use of resources and the degree to which political considerations have lead the state to invest heavily in China itself, push its GLC sector to do so as well, and create a discourse in which local capitalists are encouraged to make the risky move to China.

More importantly, high levels of Singaporean FDI to China might not represent maturation out of the MNE-dependency that is widely recognized to now seriously limit economic growth and make the island-state exceptionally vulnerable to fluctuations in a world economy beyond its control. And it may hint that the hither-to developmental PAP-state is losing some of the political insulation, technocratic skills, and discipline it needs to continue to lead Singapore.

In summary, my research contributes to assessments of the PAP-developmental state. Should Singaporean FDI to China be interpreted as a sign of economic development, with all the benefits this implies for a small state that has to date been extremely exposed to world economic conditions? Or, alternatively, is it at heart a sort of "faux" development that does not bring the social and technological progress that accompanies actual development? This important topic—the role of the PAP-state's CBN discourse in FDI decision-making—is discussed at length in conjunction with the results of my research in Chapter 8.

CBN as a Small State Strategy

My research also contributes to an understanding of how CBN and the discourse surrounding can be used by a small state wishing to "punch above its weight" in its engagement with the international environment, especially an ascendant China. By this I am referring to Singapore's strategic use of "culture" and "ethnicity" to further its economic and national security/foreign policy goals.

China's growing economic and military strength is increasingly presenting a dramatic challenge to world, particularly East Asian, power relations. Tapping into (or manufacturing) the "Chinese-ness" of a state's population or subgroup may be an excellent strategy for accommodating a rising China, especially for small states such as Singapore which are looking for ways to compensate for their power deficit. A small state faces an "integration dilemma" when it considers China's growing markets and reach (Goetschel 1998: 28). It can insist on economic and security independence but risk being abandoned or isolated, with the disadvantages this would like cause. Or it can accept a constraint on its freedom to act in ways that are contrary to China's economic and security goals and instead try to accommodate, identify with, even in some sense "integrate" with, China. Stressing as it does not just civilisational fluency but actual networks with China, the CBN discourse functions as a novel way of enabling Singapore to do the latter.

Whether Singapore's strategy might successfully be imitated by other small states remains to be seen. It is interesting to speculate how, for example, Africa's over 7 million ethnic Chinese and Peru's 1.3 million, might factor into their states' strategic possibilities for engaging China (e.g., Mung 2008).

Singapore has tried to modify the international environment through its cultural discourse in another sense. As discussed in Chapter 8, this former British colony has for the two decades heavily marketed itself as the "Gateway to the East." Its stated goal since Singapore's regionalisation drive was announced in 1993 has been to be the regional hub, a place where MNEs locate their headquarters and higher value-added operations (such as research and development), while situating lower value-added parts in China and other areas of East Asia where labour is cheaper. The clear implication of the self-orientalising discourse of CBN is that Western firms are unlikely to be successful if they invest directly in China. They need instead to engage a mediating force, such as Singaporean firms, in order to become part of the transnational networks in which Chinese business is accomplished, or so the story goes. As a Singaporean government minister put it:

Those who have knowledge of the culture and cultural nuances are able to lower business risks [for foreigners]. The Chinese overseas understand Chinese culture because they are ethnically Chinese themselves, but they also understand the world outside...They are like modems. They modulate and demodulate and add value in the process. (George Yeo, quoted in Crovitz 1993: 18).

With its middleman familiarity with both East and West and its purportedly dense transnational networks with China, the CBN discourse therefore places Singapore in the enviable niche position of "knowledge arbitrageur" (Tan, K.B. Eugene 2006). It is a striking example of the claiming of "territoriality over knowledge" (Brown and Menkhoff 2006), in both a conceptual and quite literal sense.

Defining the Concept of CBN

Unfortunately, a clear-cut definition of the concept of Chinese business networking does not currently exist. Much of the Chinese Capitalism literature is largely descriptive rather than theoretically precise, and to the degree that a definition is specified it varies significantly from author to author. Some scholars discussing networks have stressed their origin in qiaoxiang (usually defined as ancestral homeland ties), kinship, religious, and/or school ties (Hamilton 1996; Liu 1998, 1999; Yeung 2000d). Other scholars have used a broader definition that characterises Chinese business networks as "long-term, but extensible, personalized networks, based on trust and upheld by the indispensability of reputation within such a system" (Tracy et al. 2001: 262). These are contrasted with what are characterised as the generally weak, situational, and non-enduring ties of the West (Zahra et al. 1999: 45).

A particular problem with the fuzziness surrounding CBN is that this concept is often—and unhelpfully—confused with guanxi. Like CBN, the latter term suffers from a lack of definitional rigor. Guanxi has commonly been translated as both "connections" and "relationships," but neither of these terms adequately gives a sense of how this multi-faceted concept is commonly understood by Chinese. A more sophisticated definition is, "the concept of drawing on connections in order to secure favors in personal relations" (Luo 2007: 2).

There are obvious similarities between the concepts of CBN and guanxi, but closer scrutiny of the academic literature as well as the results of my fieldwork led me to a conclusion, shared with a few researchers (e.g., Fan 2002), that guanxi is not identical to CBN. For example, it is not generally considered to be something that is exchanged between family members or childhood friends, nor is it usually described as having any sense of qiaoxiang or ancestral homeland sentiment. Also, unlike CBN, guanxi has on occasion been described quite negatively by a few researchers. Fan, for example, argued that guanxi and corruption are inextricably intertwined in 21st century China (2002). This assessment was supported by my fieldwork, as most of the SME owners I interviewed ascribed negative qualities to the practice of guanxi. Some of them described guanxi as a payment—on occasion they used the term "bribe"—that must be paid to local government officials as a cost of doing business in China. Others equated it with an obligation to pay for lavish dinners and parties for customers or suppliers in the (frequently forlorn) hope of receiving enough business in return to justify these outlays. When one of my interviewees was asked to define guanxi, he summed it up as, "If you want to do business in China, you must pay to play" (Interviewee #6).

In summary, though any attempt to definitively delineate these two unwieldy and "messy" terms (Luo 2007) is beyond the scope of this dissertation, the results of my research, combined with a close scrutiny of the academic literature, led me to the conclusion that they are not identical. While creating guanxi with someone may lead to a close networking relationship, it should not be confused with the networking relationship itself.

So, though these concepts overlap, it is important to carefully define and distinguish between them. Yet in many accounts of Chinese business practices these two terms—guanxi and CBN—are used as though they were interchangeable. As discussed further in Chapter 5, the frequent conflation of what are actually two separate concepts adds to the confusion surrounding intra-ethnic networking and has important ramifications for my research conclusions.

In light of the definitional jumble surrounding CBN, it was important in this thesis that the concept be defined in such as way as to convey the general intent of the Chinese Capitalism literature, yet be specific enough to be rigorously tested. To this end, I chose to draw upon the definition of Chinese business networking suggested by Gomez and Hsiao (2001). They argued that the Chinese Capitalism literature is characterised by an emphasis on Chinese exclusivity, a special conception of "trust," and an explicit challenge to existing theories of transnational expansion. Thus, contrary to the very broad definitions typically put forth or assumed, the concept of CBN must necessarily imply a precise, strong connection among businessmen that goes beyond the common, and casual, use in the West of the term "business networking" (Gomez and Hsiao 2001). More specifically, Gomez and Hsiao claimed that the concept should be reserved for:

The establishment of interlocking stock ownership ties, a sharing of resources and information, or collective cooperation through the merger of Chinese enterprises that can emerge as a major economic force in terms of asset base and enterprise (Gomez and Hsiao 2001: 14).

I drew upon Gomez and Hsiao's definition in my research as the lens through which to examine CBN. After reviewing the Chinese Capitalism literature, I agreed with them that to do otherwise would reduce Chinese business practices to little more than the banal idea that Chinese capitalists tend to exploit social and other ties with other Chinese capitalists. CBN must be more than simply a Chinese version of business contacts or connections because otherwise it would not suggest Chinese exclusivity and it would not derive from a special conception of trust. Equally importantly, it would not challenge mainstream theories of transnational expansion nor suggest the intriguing notion that Chinese networks might serve as functional substitutes for Western-style MNEs. In short, a definition of CBN that did not explicitly go beyond what in the West is commonly referred to as "wining and dining" would simply not support the enthusiasm of the Chinese Capitalism literature.

Therefore, following Gomez and Hsiao's definition of CBN, it was clear that for the Chinese Capitalism literature to have theoretical weight, transnational expansion should be marked by a tendency toward the following. First, there should be evidence of interlocking stock ownership, merger, and/or other formal or informal equity-sharing agreements. Second, there should be a significant sharing of resources, technology, and information between ethnic Chinese business leaders and enterprises. Third, it would be reasonable to expect the firm's choice of location to be influenced by the networks in which it is embedded. And, finally, the firm's staffing strategy should be designed to take advantage of any durable "personalized networks based on trust" the SME can draw upon.

In welcome contrast to some of the fuzzier conceptions of CBN often found in the literature, each of these four aspects of a firm's cross-border expansion is reasonably testable. If little or no tangible evidence of CBN is seen in these four strategic dimensions during an enterprise's cross-border expansion—which is after all one of the more inherently risky and expensive actions an SME can undertake—then how can CBN be described as an "ownership advantage"? And if tangible evidence of intra-ethnic networking cannot be found in some or all of these dimensions, it follows that one must also seriously question the notion that such networking enables Chinese businesses to reap the benefits of scale and scope enjoyed by MNEs. In fact, if little explicit evidence of networking can be found in these areas, one might be forgiven for questioning how "Chinese business networking" is any different than business networking the world over.

Research Hypotheses

The hypothesis of my thesis was: the transnational expansion of Singaporean SMEs into China were actuated and/or facilitated by Chinese business networks. Drawing upon the specific definition of CBN proposed by Gomez and Hsiao (2001: 14) and my review of the Chinese Capitalism literature, the validity of this hypothesis was considered to primarily lie in four dimensions: choice of location, sharing of resources/cooperation between firms, staffing strategy, and investment structure. To empirically test for evidence of CBN, therefore, these dimensions were operationalised into the following four related sub-hypotheses:

• Sub-hypothesis 1: Singaporean SMEs located their transborder investments in areas of China where their owners had ancestral ties and/or close family and personal relationships.
• Sub-hypothesis 2: To facilitate their transborder investments into China, Singaporean SMEs shared resources (such as computers, machinery, and/or facilities) or technology with other ethnic Chinese enterprises (from Singapore, China, or elsewhere).
• Sub-hypothesis 3: When Singaporean SMEs expanded into China they drew on family and/or personal relationships for recruiting/hiring employees, especially key employees, rather than use impersonal methods.
• Sub-hypothesis 4: Singaporean SMEs that expanded into China did so by entering into some form of equity-sharing agreement—whether formal, as in equity or contractual joint ventures, or informal—with other ethnic Chinese enterprises rather than undertaking the risky and expensive process of establishing wholly-owned subsidiaries.

I tested these hypotheses by studying 19 Chinese-Singaporean SMEs that had made cross-border investments into China. My research design and methodology are the subjects of the following section. The reasons behind the situating of my research in Singapore are given in Section 1.2.1, and Section 1.2.2 provides a detailed consideration of the Singaporean SME sector—defining and detailing it and looking at its historical development—to clarify why SMEs were the most appropriate subjects for my investigation into Chinese business networking. Section 1.2.3 explains my decision to use both quantitative and qualitative research methods, summarizes the criteria I used to select firms, and touches on my interview strategies.

Research Design

Why Singapore?

Singapore was an ideal country in which to situate my research for several reasons. First, in order to keep the focus on intra-ethnic networking, it was important to limit my search to a country with a significant ethnic Chinese population. Second, it was necessary to try to avoid potential border/geographic proximity effects on FDI location decisions, which may be especially great for SMEs (Ferrazzi and Revoltella 2008). This consideration implied that Hong Kong and Taiwanese firms would not make ideal research subjects. Choosing a country in Southeast Asia seemed to recommend itself because ties between the Southeast Asian diaspora and China were frequently emphasised in the Chinese Capitalism literature. For instance Dirlik, discussing the intra-ethnic influx of FDI to China, wrote:

It seems reasonable that Chinese, who have been prominent all along in small business in Southeast Asia, and who have retained network-relations of one kind or another over the years, should be particularly well-placed to take advantage of the new division of labour in production (Dirlik 1997: 310).

As the only Southeast Asian state with a majority ethnic Chinese population, Singapore was therefore an especially well-suited place to investigate claims of extensive intra-ethnic networking.

For the past four decades, Singapore society has contained a fairly stable ethnic mix of about 75% Chinese, 15% Malays, and 7% Indians. Though represented officially as a harmonious multi-ethnic state with a Chinese majority and successfully integrated minority groups, it is important to note that because of the state's policy of multiracialism, an ethnic (or "racial") identity must be carried in tandem with Singaporean citizenship: one cannot simply be a "Singaporean," but must be a "Singaporean-Chinese," or "Singaporean-Malay," etc. This hints at the fact that the historical ethnic divisions that have been such a part of Singapore's (and Southeast Asia's) past still add complexity to the present. Singapore was originally a multi-racial, multi-lingual, and multi-religious immigrant society governed by a British elite. Founded in 1819 as a British trading port on an island populated by a small number of Malays, the original inhabitants were quickly dwarfed by large streams of immigrants from China, India (who were often convict labourers), and elsewhere. Even by the 1930s, only about a third of Singapore's residents were born in the Straits Settlements. Identity and ethnicity have been key issues in Singaporean, and more generally Southeast Asian, history ever since.

By far the largest migration flow was of ethnic Chinese. Primarily originating in the southern coastal regions of China and accelerated by the forced opening of the Treaty Ports and Britain's annexation of Hong Kong in 1842, migration was organised and primarily exploitative, consisting mainly of males signed on as indentured labourers. These immigrants tended initially to see themselves as transient visitors, "for whom a chief objective was to remit their earnings home" (Lee et al. 2002: 378). In this sense, most were indeed "overseas Chinese" (huaqiao) in that they intended to one day themselves return home, to marry, buy land, and live as prosperous farmers in China. But despite this goal the majority ended up living and dying in Singapore as coolie labourers, unmarried (because Chinese women were scarce in the colony and elsewhere in the region until about the 1930s), and dependent on Secret Societies, clan associations, and gambling parlours for their employment and social affairs.

A minority were able to set themselves up as merchants and middlemen in the entrepôt trade of the region, and a minority of that minority started enterprises that went on to thrive. A prominent characteristic of these early entrepreneurs, as indeed present-day ones, was the tendency to establish businesses that were family-owned and controlled (Lee et al. 2002). Contrary to the homogeneity implied by much of the Chinese Capitalism literature, it is important to note that for Chinese who immigrated to Singapore in the last century, "Chinese-ness" in practice was less relevant than their identification with a particular clan or dialect group. Their clan/dialect group identity often restricted the industry in which they worked or established businesses and the people with whom they socialised.

Rigid group identification with particular occupations has long since died away in Singapore, but dialect group identity remains relevant today. The continued prevalence of Chinese dialect (i.e., Hokkien or Teochew, as opposed to Mandarin Chinese, which is the only dialect officially considered by Singapore to be "proper Chinese") has been a source of concern to the People's Action Party (PAP), which has been Singapore's ruling party since independence. For economic and nation-building reasons, it would prefer Chinese-Singaporeans to be fully bilingual in English and Mandarin, rather than dividing their studies, attention, and potentially their politics with one of the Chinese dialects. In recent decades the PAP-state, among its many other social policies, launched a "Speak Mandarin" policy in order to reduce what it sees as societal cleavages. Measures include the banning of dialect-subtitled movies and requiring school children to reach a certain competency level in Mandarin as well as English. However, as even the casual visitor to Singapore quickly realizes, language divisions are still quite apparent.

In addition to language divisions, another societal cleavage which has concerned the state as far back as the 1960s was the divergence in perceived "degree of 'Chinese-ness' among those Singaporean Chinese of different generations and socioeconomic classes. 'The older the generation, the higher the degree of 'Chineseness'" (Chan et al. 2001: 46). This difference persists, at least to a degree (e.g., Chan and Ng 1999 and Kopnina 2004). Many factors create and maintain this difference, including how recently the family immigrated from China, their socio-economic class, and whether they have gone overseas for their education. It is important not to over-privilege this as a source of differences in Singaporean society, yet it is fair to say that at the turn of the 21st century one can still distinguish between two groups of ethnic Chinese businessmen. One, which tends to identify itself as "Chinese-educated," is more culturally Chinese and traditional than the other. The term "Chinese-educated" originally referred to those Singaporeans who went through a Chinese-language education stream. The state started to phase out separate "Chinese education" schools in the 1980s; however, this term is still commonly used to refer to some Singaporeans, especially those who are older and considered to be more culturally Chinese and not as highly-skilled in the English language. It follows that these Chinese-Singaporeans are more likely to use Mandarin or another Chinese dialect as their predominate language.

In contrast, the second group of Singaporean-Chinese businessmen, which is still relatively small in number, is more "Westernized" in outlook. Members of this group are generally younger and have typically received advanced education abroad. They most often work, or have worked, in MNEs. They are likely to use English in the workplace, and indeed many are not at all at home in Mandarin or another Chinese dialect.

In short, contrary to the official claims of a generalised and fluid Singaporean culture and identity, there is evidence that Singaporeans tended to present their identities as rather fixed (Kopnina 2004; Yao 2003; 2007). These continuing social divisions are important to this dissertation in two key ways. First, given that anthropologists and others still find extensive identification with China and Chinese-ness by Singaporean SME owners, this adds salience to the choice of Singapore as my research location to investigate CBN. Second, ongoing Singaporean identity/ethnic tensions point to the necessity of looking at the substance and importance of cultural discourses propagated by the Singapore state. As Douw pointed out, "assertions of cultural affinity are more important as an object of study than cultural affinity itself in explaining economic development..." (1999b: 29). This reminder would seem particularly apt in the case of Singapore since, beginning in the 1990s, the PAP-state has propagated a vigorous culturalist discourse—for example, in its Asian Values rhetoric and various Sinicisation programmes. How is the state tapping into, or manufacturing, this sense of primordial Chinese-ness? Official state discourse focuses on building an integrated, common Singaporean culture. But it is important to the argument of this dissertation that it be understood that the state has simultaneously been pursuing a parallel narrative of Chinese exceptionalism, wrapped up in its ongoing larger discourse of Asian Values (Yao 2007). Attention clearly needs to be given to the impact of political power on the economic order—to the political economy of ethnic business activity (Dahles 2004). The origins and motives of the PAP-state's cultural discourse are discussed in greater detail in Chapter 7, when this unusually intrusive "Nanny State" is examined.

A few other reasons for why Singapore was an ideal location for my research into CBN included the fact that since the Republic formally opened economic relations with China in 1990, it has become China's seventh largest source of FDI despite its tiny size. Singapore also offered me the chance to draw on networking ties of my own formed when I lived there for over a year in the late 1990s while I pursued a master's degree at National University of Singapore. Moreover, as discussed in Section 1.2.2, there remains in Singapore a sector of small-medium sized enterprises that has been marginalized over the years and which purportedly retains many traditional Chinese characteristics.

Why SMEs?

My choice to focus on SMEs was prompted by both strategic and practical considerations. First, the scarcity of research centred on Southeast Asian SMEs has frequently been lamented in the literature. Typically only the region's largest or capitalists—such as Charoen Pokphand, Robert Kuok, and the Salim Group—are the focus of papers and research. Though my research sample was not large, it does augment the limited data published to date on Southeast Asian SMEs. Second, the decision-making at small enterprises tends to be centralized, which implied it may be easier for me to arrange to speak directly to the person (or at least one of the key people) who led the firm's transnational expansion into China. This characteristic of SMEs was attractive as it promised a potentially fuller understanding of the "why, where, who and how" of ethnic Chinese enterprises.

Most important, however, was the argument that in contrast to government-linked and foreign-owned large enterprises, Singaporean SMEs may better represent "traditional" ethnic Chinese values, culture, and practices. CBN has been represented in the Chinese Capitalism literature as a (perhaps the definitive) traditional Chinese business practice; it therefore was best to choose a research setting that focused on those enterprises which are arguably most likely to retain traditional Chinese characteristics. As Gomez wrote, "It is quite probable that co-ethnic business cooperation tends to occur more among the SMEs, as Chinese businessmen who lead large enterprises have been able to accommodate the state more in order to continue to ascend" (Gomez 1999: 12). Similarly, Chan et al. (2001) argued:

Generally, the smaller the size of the business, the more Chinese and traditional the outlook of its owners. In contrast, the larger the size of the company, the more westernized is its management style and corporate culture. The more culturally Chinese group tends to operate family-owned companies and is typically involved in banking, retail trade, hotel and restaurants, light manufacturing and property and real estate. The members of this group tend to be actively involved in the Singapore Chinese Chamber of Commerce and Industry (SCCCI). They also participate actively in clan associations and alumni bodies of local Chinese schools (Chan et al. 2001: 46)

Since my research tested claims of CBN, it was important to limit my interviews to those Singaporeans most likely engaged in intra-ethnic networking, or who had more potential to draw upon traditional Chinese practices such as networking. I therefore restricted my interviews to SME owners and key managers who, when asked, identified themselves as "Chinese-educated." As discussed in Chapter 4, this was a fairly straightforward process since the vast majority of the SMEs owners/key managers contacted were old enough to have been in school prior to the time the state phased out separate educational tracks what constitutes a "small" or "medium" enterprise continues to be a matter of debate. The term SME is a relative concept usually defined in contradistinction to that of a large enterprise, and what may be an SME in a developed country in a particular line of business might be considered a large enterprise in a developing country or in a different line of business. Countries vary, sometimes significantly, in how they define SMEs, though a commonly used index is the number of employees.

For my research I used the Singapore state's official and widely-accepted definition, which classifies enterprises as SMEs if they have at least 30% local equity, fixed productive assets (defined as net book value of factory building, machinery and equipment) not exceeding $S15 million for manufacturing firms, and employment size not exceeding 200 for services companies. Companies in the private sector with assets/employment sizes above this were regarded as Large Enterprises (LE).

In practice it is generally easy to separate SMEs from LEs in Singapore. Firm size is rather polarized; they tend to be either quite large or quite small. Out of the total number of private-sector enterprises employing 25 persons or more in 2002, the majority (75.5%) were enterprises with fewer than 100 employees. Only 8% of workers were employed in establishments with 250 employees or more. The "missing middle" stratum of firms in Singapore (and, indeed, many Asian countries) is a sign of the difficulties inherent in growing an SME (Hall 1998). In the case of Singapore, it is also a sign of the state's historical and ongoing failure to cultivate local capitalists (Haggard and Cheng 1987). The city-state is instead dominated by vast numbers of MNEs and government-linked companies (GLCs). Local enterprises generally remain small and engage in lower value-added activities such as relatively labour-intensive manufacturing or primary commodity trade. In 1999, the value-added per worker in SMEs in general was less than half that of workers in non-SMEs ($48,000 compared with $118,000). The disparity was especially large in manufacturing, where SME value-added per worker was $38,700 to $111,200. Following many years of explicit SME assistance from government agencies, figures for 2005 show that the value-added per SME worker was still only about half that of non-SME workers (SPRING Singapore, Enterprise Competitiveness 2005/2006).

There is also a clear difference in the level of SME intensity across countries, with Singapore lagging behind the US, Japan, and Taiwan. In 1995 the US had more than double the SME intensity (56.9 SMEs for 1,000 people) of that of Singapore (23.0 SMEs per 1,000 people). SME intensity in Singapore was much lower than that of Taiwan, though higher than in Thailand or Indonesia. It should be pointed out that this lower SME intensity occurs in spite of the fact that Singapore is a high-density city-state (and consequently does not have a large agricultural sector to depress its SME numbers).

Though it is difficult to find figures that allow easy comparison between countries, there is evidence that the gap in efficiency between SMEs and non-SMEs is wider in Singapore than in countries like the US, Taiwan, Korea, Germany, and others, where SMEs are often internationally competitive and a dynamic source of growth. For example, in the late 1990s, small enterprises in the US employed about 70% of the workers, contributed about half of the economy's GDP (compared to 34.7% in Singapore), and were widely credited for more than half the innovations and approximately three-quarters of fresh job creation.

The relative lack of domestic entrepreneurship is especially obvious when Singapore is compared to other developing countries, such as to the thriving local enterprises in Hong Kong and Taiwan. In the late 1990s, the percentage of SME exports in total exports of Taiwanese and Korean SMEs (56% and 43%, respectively) were at about three times the level they were in Singapore (16%). And the relatively poor performance of Singaporean SMEs persisted despite a large number of government schemes to promote entrepreneurship and internationalisation.

Clearly, in one sense Singaporean SMEs play an important role in the domestic economy. They comprise over 90% of all business establishments, employ more than half of all workers in the country, and, in 2005, SMEs contributed about 40% to the Singaporean economy (SPRING Singapore 2006). They also serve to "augment the economic activities of the larger manufacturing concerns, the multinational enterprises and the larger listed companies. And they provide important services in the areas of logistics, services and trading" (Lee et al. 2002: 376). But it is generally more accurate to describe the Singaporean SME sector as weak. This is reflected not only in the large gap in efficiency between SMEs and MNEs and the relatively low rate of SME intensity, but also in the wide-spread public angst (frequently expressed in the Singaporean media, by the government, etc.) that Singaporean SMEs lack innovation, branding, and vigour. A Singaporean government minister contrasted Singaporeans and Taiwanese rather starkly, as follows:

People say that if you are a chap working for a multinational company in Singapore and you leave to start up your own company, your friends will ask you, 'What went wrong? Why are you doing this?' In Taiwan if you start a career in an MNC and after a certain time you are still there, your friends ask you, 'What's wrong? Why are you still there?'

(PAP Minister Raymond Lim, quoted in Hamlin 2002).

The ongoing feebleness of local capital may be due in part to the tendency of Singapore's top students and most promising young people to seek political careers because of the unusually high, secure remuneration offered in that sector. It may also be a consequence of the absence of positive associations with creativity and risk-taking, a bias fostered by schools and more generally in society (though since the late 1990s the PAP has repeatedly stated its goal of changing this orientation). A fuller, generally accepted explanation for the relative weakness of the Singapore SME sector was given by Low and Lee (1990). They argued that the persistent lack of successful entrepreneurship indicated that Singaporeans tended to be ready to go into business but not into the manufacturing sector, where most exports originate. They hypothesized that "crowding out" by the extensive network of GLCs—especially in the labour market—and a lack of scientists and engineers educated abroad are key reasons for this problem.

In summary, Singaporean SMEs have historically been peripheral to the many MNEs that have set up in Singapore and to the large GLC sector. They arguably have been capable only of serving "the needs of multinational firms, rather than to directly export their products" (Wan, 2002: 50). The marginalisation and limited capabilities of Singaporean SMEs are important to my thesis for two reasons: 1) they suggest that internationalisation might be difficult; and 2) they, perhaps paradoxically, also provide the means for understanding this very internationalisation, as discussed further in Chapter 7.

Returning to the claims of the Chinese Capitalism literature, what are we to make of the droves of SMEs that have now, at the turn of the 21st century, successfully undertaken transnational expansion into China? After all, internationalization is a move that entails significant risk and requires funding and numerous skills. Have Chinese business networking skills, latent all these years before Singapore opened trade with China in 1990, bloomed into an ownership advantage for these SMEs, enabling them to set up operations far from home and in competition with enterprises from around the world? If so, then clearly it will soon be improper to speak of a weak Singaporean SME sector. But if the claims of extensive CBN are exaggerated? How else can we explain the fact that large numbers of Singaporean SMEs can be found in China? These three related questions—the strength or weakness of the Singaporean SME sector, its relationship MNEs and GLCs, and the political economic reasons which underlie this situation—are discussed in greater detail in Chapter 8 as they go to the heart of this dissertation's research problem.

Methodological Overview

My research fieldwork was carried out in 2003 and consisted of 19 in-depth semi-structured interviews with SMEs owners (or occasionally other key decision-makers). These interviews took place in Singapore, were face-to-face, and each lasted about 90 minutes on average. While it initially appeared that my sub-hypotheses could be tested primarily with quantitative methods, it became evident to me after closer scrutiny of the Chinese Capitalism literature that adding qualitative inquiry would enhance the theoretical relevance of the results obtained. It would do so not only by adding rich detail and a degree of methods triangulation but also by helping my research to overcome the confusions caused by what has been to date a rather poorly defined and fuzzy conception of CBN. The inclusion of qualitative methodology was also suggested by the fact that my investigation aims to contribute to a greater understanding of ethnic Chinese internationalisation at the level of individual firms, rather than an industry or economy.

Firms were randomly selected from a list of some 4,600 Singaporean SMEs, published by ... in Winter, 2002/2003. Selected firms were first contacted by telephone. Following a short explanation that a doctoral candidate from the University of London was researching Singaporean investment into China, the potential interviewees were questioned to determine whether they met four criteria:

1. they had made a direct investment to China;
2. the owner (or owners) was a Singapore citizen;
3. the enterprise met the definition of an SME, as detailed in Section 1.2.2; and
4. the owner (or the senior manager in charge of the China operation) considered himself to be "Chinese-educated" (as discussed in Section 1.2.1).

If all four criteria were met, then an attempt to set up an interview was made. Ultimately the owners/managers in 20 firms (out of the over 200 contacted) met each of these criteria and agreed to a face-to-face interview. Nineteen interviews actually took place.

The SME owners/managers contacted were informed that I was interested in understanding how and why small- and medium-sized Singaporean enterprises were making cross-border investments into China. The first part of each interview consisted of a questionnaire that I orally administered to each SME owner and filled out as each question was answered. It focused on quantitatively testing my sub-hypotheses by posing questions in each of the four strategic areas in which I might expect to find evidence of CBN: 1) location choice; 2) cooperation/resource sharing among firms; 3) staffing strategy; and 4) investment structure. Chapter 4 discusses my quantitative research method in more detail and reports my research results from this portion of my interviews.

As detailed in Chapter 5, the second portion of my interviews explored qualitative aspects of each firm's transnational expansion. I asked the interviewees, for instance, whether they believed their Chinese ethnicity helped them in China, and how it helped them. If they mentioned anything related to networking, I asked them for definitions and more details. If they did not mention CBN, I mentioned the term to them and noted their comments. I also asked them what they considered their firm's ownership advantages to be and to describe any important relationships they had with other firms in Singapore and China. I generally ended my interviews by asking them to tell me in their own words why they decided to invest in China and what experiences they have had there.

Thesis Structure and Key Concepts

To help guide the reader through the argument of my dissertation, Section 1.3.1 gives an overview of how the subsequent chapters are laid out. Section 1.3.2 then provides nuanced definitions of some of the key concepts and terms that are used since several of them vary according to academic discipline. The chapter concludes in Section 1.4 with a summary of my research question and method.

Thesis Structure

This investigation of Singaporean SME internationalisation into China is comprised of eight chapters. Following this introductory Chapter 1 are two chapters which lay out competing theoretical frameworks that address the subject of ethnic Chinese internationalisation. Chapter 2 examines mainstream internationalisation theories, which for the purposes of this dissertation are organized into three major strands. Chapter 3 presents the Chinese Capitalism perspective on transnational expansion. The chapter begins with a review of the networks-as-relationships approach associated with Granovetter and others, as well as an overview of the literature on Asian business systems. The chap