Firm growth in transitional economies: three longitudinal cases from China, 1989-96

Since the 1980s, fundamental transitions have swept through a huge landmass between the former boundaries separating East and West Germany and China's southern border with Hong Kong. One of the central aims of these transitions in countries such as Eastern Europe, the post-Soviet republics and China is to improve the performance of the economy, which ultimately boils down to the performance of the firm (Wu 1996). Whether these transitions will be successful, to a large extent, will be determined by whether firms in these countries can respond by achieving growth. As a result, more importance is now placed on gaining a better understanding of the growth of the firm in these transitional economies. For policy makers and managers in these countries, the success or failure of the growth of the firm has a direct bearing on the outcome of the transitions. For Western managers, increased interactions with indigenous firms in these countries call for a better understanding of these firms. For organizational researchers, the transitions in these countries offer fascinating grounds to refine and test existing theories and to develop new ones.

The growth of the firm has been studied extensively in the West (Penrose 1959). However, it is unclear whether such Western research will have any bearing on the firm in transitional economies, given the vast differences in the institutional environments in these countries (Peng 1994; Peng and Heath 1996). How then do firms in these countries grow during the transition? Motivated by this empirical question, we undertook an exploratory study on the growth of the firm in transitional economies, drawing on three longitudinal cases from China. Fifteen top managers at three Chinese firms of different ownership types were interviewed over a seven-year period (1989-96). Data generated from these interviews suggest that Chinese firms adopt a strategy of growth that features a network-based strategy with a process of what we call 'boundary blurring' by developing interorganizational relationships with other firms. During the uncertain course of China's economic reforms, this strategy of growth has enabled many firms to access complementary assets while avoiding the politically sensitive issue of ownership transfer.

These findings echo the research on enterprise networks in Eastern Europe and the post-Soviet republics by Burawoy and Krotov (1992), Clark and Soulsby (1995), Filatotchev et al. (1996), Puffer (1994), Stark (1996), Stark and Bruszt (1996), and Whitley et al. (1996). This study, however, joins the stream of research on firm behaviour in transitional economies from a Chinese perspective. Its primary contributions are the longitudinal tracking of the growth of three firms over a relatively long period during the transition, in contrast to most existing works which only take a snap shot at a number of firms at a given time.

There are a number of compelling reasons why China is used as a test case in this study. First, because more people work for organizations in China than in any other country, no social or managerial theory can claim to be complete without exploring its implications in a country where one-fifth of the world population reside (Shenkar and Von Glinow 1994). Second, because China shares an important common legacy with other countries in this group, namely the communist regime and the central planning system, the Chinese experience can help shed light on future organizational evolution in the post-Soviet republics and Eastern Europe (Kornai 1992; Nee and Stark 1989). Finally, because of China's growing importance in the global economy, improved knowledge about Chinese firms, in addition to its theoretical significance, has enormous practical implications for Western firms that have to do business with them (Davies 1995; Kelley and Shenkar 1993). In sum, we believe that China is a 'viable research laboratory' (Shenkar and Von Glinow 1994: 56) in which to examine the growth of the firm in transitional economies.

The paper begins with a literature review on the growth of the firm. Next, the clinical field research process is described. Then we move on to report the findings. The paper closes with implications for future research and practice.

Theoretical Background

An underlying reason behind the growth of the firm is that the firm, headed by its top managers, is motivated to grow (Penrose 1959). Such motivation is usually fuelled by the desire of top management to improve organizational performance, as well as the excitement of associating with a growing organization. Thus, the study of the growth of the firm 'must recognize the exercise of choice by organizational decision-makers' (Child 1972: 10), and start with strategic choices made by top managers.

There are three major theoretical perspectives, each leading to a particular strategic choice. First, the evolutionary perspective focuses on both the desire of top managers to achieve growth, and the firm as a bundle of resources and routines that influence growth (Penrose 1959). Firm growth can be viewed as an attempt by top managers to fully utilize the firm's resources. Firms grow into new areas when the excess capacity in currently under-utilized resources can be utilized better. The internally generated nature of such growth is thus called 'generic' expansion. Apparently, there is a limit to the growth of the firm as no firm is capable of generating internally-driven expansion indefinitely. The principal constraint on the growth of the firm is the availability of capable, experienced managers to spearhead the expansion. Overall, the evolutionary perspective articulates the incremental process of the genetic expansion strategy, and suggests that the prerequisites for such growth are a firm's managerial and organizational capabilities.