China’s Informal Institutions: the Case of Private Enterprise in Wenzhou

Abstract

The private enterprises have been growing at a rapid pace during the last 20 years in China. The private sector now accounts for 62 percent of the total economic activity, contributing 71 percent of gross industrial output (China’s Bureau of Statistics, 2008). Despite this impressive growth, the private sector is still facing formal institutional restrictions, such as limited state bank loans, heavy tax burdens, higher requirement for registration and licensing, competitions from state-owned counterparts, and so on (Bramall, 2008). The survival and prosperity of private enterprises, to some extent, have to resort to the adaptive informal strategies by bending governmental rules. One of the Chinese cultural byproducts, guanxi, that is, an interpersonal network, plays a significant part in this process. Previous research has shown that guanxi, especially the patron-client ties, can help entrepreneurs reduce potential risks, facilitate business transactions, create alternative financing channels, and promote business success (Leung and Wong, 1995).