The Business of Lobbying in China
Scott Kennedy discusses the growing influence of domestic & foreign businesses on China's national economic policy
On April 18, Scott Kennedy, assistant professor in the Department of East Asian Languages and Cultures and an adjunct assistant professor in the Department of Political Science at Indiana University, discussed the growing influence of domestic & foreign businesses on China's national economic policy.
In the late 1990s, Professor Kennedy began, China experienced widespread deflation. As prices fell, many firms that had enjoyed high profits during the inflationary period of the early 1990s suffered. The solution that occurred to some of them was to form cartels, which would set -- and enforce -- a floor on prices. Since this required the approval of the State Economic and Trade Commission (SETC), the top executives in many firms lobbied the SETC, which in the end approved over twenty cartels.
However, "the vast majority of the cartels failed." This was the because more efficient firms resisted, realizing that if prices were set by the market, their inefficient competitors would -- if the government permitted it -- be driven out of business. These more efficient firms effectively lobbied other government agencies to get the SETC’s decision watered down, and also found various ways to get around the price controls. As Kennedy explained, "because of the low concentration of industry in China -- most industries in China have lots of companies -- it is hard to keep everyone playing along. It's easy to cheat in China because of the collective action problem: the difficulty of monitoring."
This result, and how it came about, Kennedy argued, runs counter to common views of how policy is made in China.
Views of Policy Making in China: The State
Professor Kennedy pointed out that in the field of China studies "most of the research emphasizes that policy agenda and outcomes are the result of bargaining between elite politicians and the various bureaucracies. . . The most common model to describe Chinese politics is still 'fragmented authoritarianism.'"
In addition, some recent research has highlighted the important role played by intellectuals -- consisting mostly of researchers in government-sponsored research institutes, but also economists and lawyers and others -- in policy making. Intellectuals "provide expertise and advice as inputs into the policy-making process."
There has also been increased scholarly attention to the role of the National People’s Congress (NPC; China's parliament) in the policy-making process through, most notably, initiating legislation.
All these three -- elite-bureaucrat bargaining, input from experts, and NPC legislation -- "basically occur within the confines of the state broadly defined."
Views of Government-Business Relations in China
"Most of the work on state-society relations in China," Professor Kennedy noted, "has come to three basic conclusions."
First, in the opinion of some researchers -- especially before the Tiananmen incident of 1989 -- "market reforms would lead to great firm political activism and the development of independent associations" such as chambers of commerce. "That stream of research basically died out. No one has written that these associations have grown as the result of market reform and have become important in the policy-making process."
Second, most recent research emphasizes that Chinese "firms are enmeshed in, and controlled by, involuntary, government-sponsored trade associations, which act as conducts of government policy to firms." This sort of top-down arrangement gives firms little chance to influence government policy.
Third, other research has argued that, in order to influence policy, firms develop networks of bureaucratic patrons, and use these networks "either to get privileged access to resources or avoid punishment and onerous regulations."
Lobbying in China
Since neither the view of policy making as happening entirely within the state apparatus nor the common view of government-business relations seems to fully explain policy outcomes (as in the case of cartels), Professor Kennedy embarked on a search project, stretching from 1998 to 2003, that examined (1) firms' general interaction with government, "both direct interaction, and indirect interaction" through, for example, trade associations, and (2) specific policies about which firms lobbied government agencies. This project involved more than 320 interviews, involving (1) top executives in about forty-five firms in three sectors (steel, consumer electronics, and software), in state-owned firms, collectively owned firms, and private (including foreign-owned) firms, and small firms as well as large firms; (2) representatives of trade associations and chambers of commerce; and (3) government officials that are responsible for regulating these companies.
Based on this study, Professor Kennedy reached two main conclusion: first, business lobbying in China is widespread and regularly influences economic policy; and second, the economic contexts of firms and their industries affect how lobbying is carried out and consequently affects firms’ relative policy influence.
Standard Lobbying in China
In describing the results of his study, Professor Kennedy began with typical or common features of lobbying in China, across all industries and firms. First, active lobbying is found in every industry, and by firms of all ownership types and nationalities. "During the Mao era, and even into the reform era, the most important thing for companies was the plan, and where they fit into the plan. And thus they would negotiate with the state about the cost of inputs and the price of outputs, and so on. But now, with the move to a market economy, and the move to create a regulatory structure to rule over this economy, there have been hundreds of thousands of laws and regulations passed. . . . These regulations have become a focal point for lobbying, because they matter and affect the life chances of companies."
Second, China’s business and trade associations (of which there are over 400 nationally, and tens of thousands at the local level) and chambers of commerce, do not have much autonomy. Although they do not have the sort of influence that associations have in the United States, they "are not totally without power. There is an inverted relationship between autonomy and influence. Those that have no autonomy, have no influence. Those that have complete autonomy, have a very difficult time getting access. So it is those in the middle, which have sacrificed some autonomy in order to gain some access, can sometimes act as advocates for their corporate members."
Third, since associations are not very powerful, "direct lobbying predominates. Companies lobby bureaucrats throughout the government directly." Companies contact, via telephone, e-mail, and personal visits, bureaucrats on a daily basis. "This is whether the company is a state-owned company, a private company, or a foreign-owned company."
Fourth, for the most part firms lobby the bureaucracy, that is "the various parts of the ministries and commissions that are responsible for day-to-day management and regulation of industrial policy." There is not much lobbying of the People's Congresses (local-level legislative organs) or of the Communist Party. This is because quotidian regulation occurs with the state (executive) apparatus, not in the legislative organs or in the party. "Even though the Communist Party is obviously extremely important, lobbying occurs as if it were not important."
Fifth, and finally, most public policy lobbying does not involve clientelist relationships whereby "companies cultivate a patron and engage in an exchange relationship where the basically buy influence through that bureaucrat." In part, this is because clientelist relations mostly arise around issues involving local government: "where the company needs a business license, a permit, and the like." Such issues involve local government, where one individual bureaucrat has a great deal of authority and discretion. "Public policy issues," however, "tend to be at the national level, where you have many gates to go through to get something accomplished, and because of that buying influence is less useful."
Variation in Lobbying Across China
"Associations are better developed in some industries than in others," Professor Kennedy continued. For instance, in the steel industry, which is characterized by large, state-owned enterprises, which have regular access to the government, "trade associations have been extremely weak, and on the whole mostly irrelevant to lobbying. In industries like software, there are many individual companies that are relatively small, and lots of interfirm cooperation in business and technical issues, trade associations at both the national and local level are much more developed and active."
In addition, the depth of direct contact that firms have with government varies significantly. "Some firms can call the minister or vice minister, and meet with them quite regularly. Some companies only get to see the section head, and only occasionally, when they are invited to a meeting where there is to be a announcement. . . . The largest, most economically significant firms have the most direct access to officialdom. That is true of state-owned companies, private companies, and foreign-owned companies."
There is also variation in firms' aggressiveness. Much of this is based on a firm's size, "but even some smaller companies in the software industry that are technically extremely important, are willing to speak up and disagree with the government."
Transparency also varies from industry to industry. "In some industries the policy-making process is relatively transparent; for insiders, it is relatively easy to get information."
Finally, lobbying coalitions vary. In some industries, such as steel, the coalitions are "state-owned enterprises on one side, and private and foreign companies on the other. But Chinese consumer electronics companies and software companies are so integrated into global production networks that sometimes Chinese and foreign companies share policy preferences, and find themselves on the same side when it comes to policy."
Foreign Lobbying in China
"Foreign lobbying in China," Professor Kennedy declared, "is as common as water. Just like Chinese companies, foreign companies lobby directly, they participate in trade associations (some foreign-based, and some China-based), and often get their own governments to go to bat for them as well."
The Video Standards Battle
The illustrate how lobbying works in China, Professor Kennedy discussed what he described as "the video standards battle." In 1993-94, a Chinese company and its foreign partner together invented the VCD (video compact disc) player, "basically a souped-up CD player with some video capabilities." Initially these sold very well. These manufacturers decided to sustain high sales by bring out a new standard, which would make the existing standard obsolete, and induce consumers to buy new players to meet the new standards.
Other companies developed an alternative standard: CVD (China video disc). Thus two standards were on the market, and in 1998 the government called the various firms together to pressure them to adopt a new, uniform, and still different standard: SVCD (super video compact disc). The companies that produced to the CVD standard resisted, and began to lobby the government, "all the way up to the vice minister." In the process, the industry divided according to the two standards. Those companies favoring the CVD standard included state-owned, privately owned, and foreign-owned enterprises. Similarly, arrayed against them were state-owned, privately owned, and foreign-owned enterprises that favored the SVCD standard. Both coalitions had companies that were politically well connected.
"In the end, the government, lobbied by both coalitions, decided it could not sustain its original decision to support the SVCD standard, and issued still another new standard, in September 1998, that was a compromise. It include both sides' preferences; it was two standards masked as one."
A Comprehensive View of Chinese Policy Making
Professor Kennedy suggested that we think of Chinese policy making "along two continua." The first continuum consists of the range of firms affected by a particular policy. For instance, at one extreme there may be a policy -- for example, a business license -- that affects only one firm. At the other extreme, there may be a policy -- such as a constitutional amendment -- that affects every firm in the country. In between will be a variety of policies, such as industrial policies, that affect an industry or region."
The second continuum consists of the degree of formality needed to get a policy approved. "There are some government decisions in which the nod of a head will secure a license, and others are much more complicated, requiring multiple layers of meeting and different bureaucracies and is considered several times, and is quite complicated and quite formal."
"Policies that affect just one firm and are very informal -- such as the granting of business licenses and loans -- are the most subject to clientelism and corruption." At the other extreme, constitutional amendments, trans-sectoral laws, internal security policy, and so on, involve "limited consultation with industry." Industry in these cases may be invited to participate; it does "not get involved proactively." In these instances, "the fragmented authoritarian model still works."
It is in intermediate area -- in sector-specific laws and industrial policy -- "where the policy-making process is not entirely informal but is moderately formal, that business lobbying" of the kind Professor Kennedy discussed is to be found.
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Scott Kennedy (Ph.D., George Washington University, 2002) is an assistant professor in the Department of East Asian Languages and Cultures and an adjunct assistant professor in the Department of Political Science at Indiana University. During the first half of 2005 he is a visiting professor at UC San Diego's Graduate School of International Relations and Pacific Studies. Kennedy also recently edited China Cross Talk: The American Debate over China Policy since Normalization, A Reader (Rowman & Littlefield, 2003), an anthology of op-eds, congressional testimony, speeches, and editorial cartoons that present the most memorable scenes from the debate of the past quarter century.
Professor Kennedy’s just-published book, The Business of Lobbying in China (Harvard Univ. Press, February 2005), upon which his talk was based, documents the growing influence of domestic and foreign businesses on national economic policy in China, and also shows that although companies operate in a common political system, economic circumstances shape the nature and outcome of lobbying
Published: Tuesday, April 19, 2005