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Question 1: : What does the article set out to do? Question 2:…
Question 1: : What does the article set out to do?
Question 2: What is the article about? What is its subject? What are the central concepts and/or theories discussed in the article?
Question 3: What are the key findings or main arguments of the author?
Question 4: Why is the subject of the article interesting and important for managers of multinational enterprises in the contemporary global business world and how would the understanding of the article benefit the managers?
From Mars and Venus to corporations on planet earth
The book Men are From Mars, Women are From Venus by John Gray became a bestseller in the 1990s, ulti- mately selling 15 million copies worldwide in several languages (Gray, 1992). Its premise is that men and women have fundamentally different views of the world, which makes lasting relationships difficult.
Similarly, U.S. and Chinese corporations have different worldviews, which have become fully evident in their responses to the COVID-19 pandemic. Early in the pandemic, Chinese corporations closely followed the direction of the central government in response to the crisis. In contrast, U.S. corporations responded to various state-derived rules, with some opposing even the most basic of measures. Govern- mental relations between the U.S. and China are also strained. In a recent U.S./China summit held in Alaska in March 2021, what were supposed to be high- level talks quickly descended into bickering and re- criminations (Time, 2021). While some saw this meeting as a debacle, others heralded it as a
0007-6813/a 2021 Kelley School of Business, Indiana University. Published by Elsevier Inc. All rights reserved.
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breakthrough as the parties dispensed with diplo- macy, facilitating more candid discussions on important and contentious issues (Wright, 2021). Both post-COVID and post-Alaska, a new chapter in bilateral relations between U.S. and Chinese corpo- rations may be opening in which both parties are cautiously yet candidly learning how to deal with each other.
Corporations from both countries must appre- ciate their differences in this new era so that more solid and fulfilling relationships can be developed. A common assumption is that U.S. and Chinese corporations must be similar as they use many of the same terms and share similar corporate structures. However, post-COVID and post-Alaska, their fundamental differences are clearer than ever. These differences determine their actions, reactions, and outcomes. Under- standing them is essential to helping stake- holders of U.S. corporations understand their best options when dealing with Chinese busi- nesses as part of this “new normal” (Ahlstrom et al., 2020). We examine this issue by first explaining the differences between U.S. and Chinese corporations.
In this article, we combine our experiencedas a teamdof more than 100 years of comparative China business research while living and working in both the U.S. and China. Drawing on institutional theory, we focus on four dimensions to highlight the differences between U.S. and Chinese corpo- rations: (1) corporate governance; (2) underlying corporate philosophy; (3) innovation; and (4) dispute resolution. As we explain later, these di- mensions are interrelated and influence other as- pects of corporate relations and behavior that may lead to misunderstandings and should be examined simultaneously. We then discuss how U.S. man- agers can address these differences. In our anal- ysis, we compare publicly traded corporations from the two countries in which private individuals dominate both ownership and control. We exclude state-owned enterprises (SOEs), which are much more common in China than in the U.S. We also exclude publicly owned but state-controlled cor- porations from China. For simplicity, we use the term corporation to refer to publicly traded orga- nizations from either nation.
2. Institutional differences between the U.S. and China
The institutional setting of a country determines how its market system operates. Thus, under- standing the contexts of U.S. and Chinese corpo- rations can help explain their differences (Jackson
& Deeg, 2008). Institutions are the “humanly devised constraints that shape human interactions and corporate behavior in a society” (North, 1990, p. 3). The two fundamental types of institutions are formal and informal (see Table 1). Formal in- stitutions are devised, implemented, and shaped by the political regime. They consist of laws, rules, and regulations. Informal institutions consist of norms, values, and ethical codes (Peng et al., 2009). Although they provide legitimacy to the formal institutions, the two types are not always in agreement (Boddewyn & Peng, 2021; Stevens et al., 2016). Informal institutions also determine the actual activities that occur when formal reg- ulations are implemented. For example, nations may have laws and regulations requiring corpora- tions to have boards of directors, but the informal norms of society determine the actual roles, behavior, and effectiveness of these boards (Jackson & Deeg, 2008; Young et al., 2001).1 Both formal and informal institutions drive the actions of U.S. and Chinese corporations. However, as Yang and Jiang (2015) have noted, informal regu- lations are particularly influential in China due to the major institutional and economic changes in the country since the mid-1970s.
The formal and informal institutions of the U.S. and China are determined by their different his- tories and cultures. U.S. society is based on its Judeo-Christian history, while Chinese society has its foundation in the philosophy of Confucius. Centralized power has never been fully trusted in the U.S., which is reflected in its institutions. The judiciary, legislative, and executive bodies oper- ate independently, providing checks and balances to power. In addition, the notion of private prop- erty is enshrined in formal and informal in- stitutions, which strongly reflects the concept of individualism. This can be illustrated by the sus- picion about and opposition to technologies such as facial recognition or public video surveillance in the U.S.
In 1978, China began fundamental reforms and rapidly shifted away from central planning to embrace market competition. The first stock markets were established in Shenzhen and Shanghai in 1991. China’s stock markets operate very differently from those in the U.S., whose New
1 The contemporary literature on institutional theory em- phasizes the dynamic and fungible characteristics of in- stitutions. From this view, institutions not only constrain/ enable actors, but also are enforced or challenged by them to initiate social agency and change (see Aguilera & Grøgaard [2019] and Hodgson [2006]). However, our main aim is to compare how differences in business institutions between the U.S. and China create misunderstandings and friction.
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Table 1.
Degree of formality
Formal institutions
Informal institutions
Dimensions of institutions
Examples
Norms Culture Ethics
Supportive pillars
Regulative (coercive)
Normative Cognitive
Laws
Regulations Rules
York Stock Exchange was founded in 1792 (Young, 2016). Both the formal and informal institutional aspects of the markets in China and the U.S. differ. As former leader Deng Xiaoping famously stated, China’s system is “socialism with Chinese charac- teristics.” Hierarchy and the centralization of power have always been favored in China, due to its Confucian heritage (Tsai et al., 2011).
3. How U.S. and Chinese corporations differ
The institutional contexts of the two countries lead to differences in the way capitalism operates within them, fueling differences in corporate ex- pectations and behavior (Jackson & Deeg, 2008). We compare four dimensions of U.S. and Chinese corporations, as shown in Table 2, to illustrate the differences in both formal and informal in- stitutions. These dimensions are (1) corporate governance; (2) underlying corporate philosophy; (3) innovation; and (4) dispute resolution. How- ever, these are interrelated and should be exam- ined simultaneously as they are affected by a combination of formal and informal institutions, they can be within or external to corporations’ operating environments, and they have been extensively studied by numerous scholars. The differences found within these dimensions may also explain many of the misunderstandings and conflicts that occur when managers and officials from the U.S. and China interact.
3.1. Corporate governance
The corporate governance of publicly traded cor- porations consists of the formal and informal re- lationships between owners, managers, and boards of directors (Young et al., 2001). The formal and
informal institutions involved in U.S. corporate governance have evolved through trial and error over their 200-year history. The interests of shareholders have become the priority, which is consistent with the importance given to private property in the U.S. (North, 2005). A corporate board of directors in the U.S. has the fiduciary responsibility to look after the interests of its shareholders and ensure that the management maximizes shareholder value. In addition, clear rules limit the board’s self-dealing. The U.S. legal system allows shareholders to bring lawsuits against the board if they feel that it has not ful- filled its duties. To ensure effective corporate governance, experts and/or large owners often serve on the board. They are tasked with guiding the chairperson of the board and CEO.
Approximately 80% of listed U.S. corporations have ownership that is relatively dispersed among shareholders, and control is typically in the hands of salaried managers. This arrangement has ad- vantages and disadvantages and often is referred to as the separation of ownership (by dispersed shareholders) and control (by managers). The standard goal in U.S. corporate governance is to create monitoring devices that best align the in- terests of dispersed shareholders and a potentially opportunistic top management team, which is known as the principal-agent problem (Young et al., 2008).
The Chinese refer to their system of corporate governance as the modern management system. It is modeled after that of the U.S., partially to ensure that Chinese corporations meet interna- tional standards. The terminology and most com- ponents found in the Chinese system of corporate governance are markedly similar to those in the U.S. system. Additionally, much of the formal institutional structure and rules are similar. How- ever, below the surface, there are significant dif- ferences in the approaches to corporate governance. One main difference is that almost all corporations in China that are owned by private individuals and publicly traded have majority control by a founding family. In China, the found- ing family typically gives up limited control of a corporation after its public listing. Crossing the threshold from a family firm to a professionally managed corporation is difficult for a firm in any country, but this transition is particularly difficult for firms in emerging economies such as China (Young et al., 2008).
In the U.S., even in cases in which the founding families retain significant ownership, their control is much less pronounced than in China due to the institutional conditions that commit U.S. boards of
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Table 2. Differences between U.S. and Chinese corporations U.S. corporations
Chinese corporations
Concentrated ownership and dispropor- tionate power of board chairman
Top management consists of managers that are hired based on the recommendation of the CCP
Boards have a responsibility to the gov- ernment first and minority shareholders second
The market for company control does not exist even in principle
Political considerations Social policy
Profit maximization
Government-coordinated R&D
Group-coordinated initiatives and incre- mental improvements
Conservative approach
More likely to favor second or late mover
No judicial independence
Outcomes more likely to rely upon re-
lationships and political connections
A settlement is more likely to be reached through negotiations between unequal parties
Less inefficient, and outcomes can be reached regardless of the letter of the law
Dispersed ownership
Top management consists of professional founders/managers that make their way through the ranks and are hired on the recommendation of the board
Boards have a fiduciary responsibility to maximize shareholder value
The market for company control exists at least in principle
Shareholder wealth maximization Company social responsibility
Company R&D
Individual initiative and breakthroughs Reliance on IP protection
Calculated risk-taking
More likely to favor the first mover
Corporate governance
Underlying company philosophy
Innovation
Commercial dispute resolution
Decentralized and independent court system
Rulings determined by precedent and argued by independent lawyers
Cumbersome and inefficient
Highly litigious and may focus on following the letter over the spirit of the law
directors to fiduciary responsibility for all of their shareholders’ interests. Fiduciary responsibility in the U.S. can lead to boards of directors being personally sued if they do not monitor managers effectively and ensure that the value is maximized for all shareholders. Although Chinese corpora- tions also have rules and laws designed to protect minority shareholders, the formal and informal institutional structures make them more difficult and less likely to be enforced. Chinese family corporations more commonly seek to ensure continuous control after public listing by placing family members or close associates as the chair- person of the board and in key management posi- tions. Weaker laws with less enforcement also
offer less protection for minority (nonfamily) shareholder interests. In Chinese corporations, the main source of conflict in corporate governance is between the concentrated shareholders (repre- senting the family) and the minority shareholders, which is known as the principal-principal agencyproblem (Young et al., 2008).
Boards of directors are often accused of being beholden to the chairperson of the board in U.S. corporations. However, Chinese boards often merely represent a rubber stamp due to the cul- ture of centralized power. This results in a greater centralization of power, and boards of directors are not likely to challenge the chairperson. Higher power distance and a tendency to defer to those in
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authority reinforce this situation. Unlike a U.S. CEO, the CEO of a Chinese corporation implements the decisions made by the chairperson of the board rather than acting as the key strategic decision- maker. Thus, the role of a CEO in China is often similar to that of a U.S. chief operating officer (COO).
3.2. Underlying corporate philosophy
The underlying corporate philosophy of a corpora- tion determines its purpose. The notions of under- lying beliefs, meanings, and strategic intent are commonly addressed in strategic management and organization theory. While each corporation’s phi- losophy is unique, we focus on the broad themes that are shaped by national institutions (Jackson & Deeg, 2008). In the U.S., the environment created by formal and informal institutions limits the role of government in business. The U.S. public is suspicious of a government’s ownership of the means of pro- duction. The term socialism is often used as a derogatory political term. This informal attitude against government involvement is codified in formal institutions such as the legal system and court rulings. Although corporate social re- sponsibility (CSR) has gained traction in recent years with more attention being paid to environmental, ethical, and social issues, profit is still regarded as the primary driving force for the vast majority of corporations. U.S. boards of directors, for the most part, strive to maximize shareholder wealth.
In contrast, Chinese society places more emphasis on harmony, stability, and governmental coordination, and less on private property and profit maximization. Only as recently as 2003 did China legitimize private business owners by allowing them to join the Communist Party. Sus- picion about unfettered free markets, rather than government involvement in the economy, is rela- tively greater in China. Thus, most Chinese cor- porations support government and social policies against the sole maximization of profit. In China, if the government requests specific actions, corpo- rations are expected to respond despite the costs. Examples include donating to earthquake victims, setting up operations in Africa, joining sanctions against the NBA, and terminating multiyear lucra- tive lease deals with the Swedish chain H&M, which the government decided to target. The support given by formal and informal institutions to this coordinating role by the government in the economy is much greater for Chinese than U.S. corporations.
Overall, the Chinese perspective on the role of business is consistent with the government’s
position of creating a market economy with so- cialist characteristics. Profit is therefore encour- aged in the resulting markets, and the government aims to propel the nation to join the ranks of high- income economies (Bruton et al., 2021). However, the government still dominates the economy to a great extent, and this arrangement is rarely questioned. The Chinese government expects corporations, along with other elements of soci- ety, to move toward a harmonious relationship through the goals and objectives it determines.
One analyst noted that the Chinese govern- ment can be perceived as “riding in the back seat” of Chinese corporations (Mamudi et al., 2019), which consider nonmarket and political factors much more closely than U.S. corporations. Strategies are formed for many reasons other than profit maximization, such as maximizing employment, enhancing social benefit, raising national pride, and addressing other national priorities determined by the government. Share- holder returns, and specifically the returns to nongovernmental minority shareholders, are lower on the list of priorities. This is in contrast to the U.S., where business and government are separate and often have a hostile or contentious relationship, and shareholders’ returns are the priority.
3.3. Innovation
Innovation is an important component of any modern corporate strategy, and U.S. and Chinese corporations have different approaches to it. The institutional basis of innovation involves informal norms and individual attitudes, in addition to formal laws and regulations. The U.S. prides itself on being a nation of innovators, creators, and in- ventors. To encourage innovation and creativity, a comprehensive system of intellectual property (IP) protection has been developed. At an informal level, U.S. citizens are more individualistic and often develop their own uniquely creative paths, and, accordingly, there is a stigma against imitating others. At a systemic level, the U.S. model of innovation requires strong IP protection, as this helps to deliver new products and can even create entirely new industries. Innovation is also undertaken with a high chance of failure, which has less stigma attached to it. A strong set of legal protections, therefore, ensure clear ownership and control of IP.2
2 The IPR history of the U.S. is very different from what it is today and features substantial IPR violation (see Peng et al., 2017).
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The Chinese model of innovation is different. This does not mean that Chinese corporations are not innovative (Greeven & Yip, 2019). The nation’s corporations lead the world in many areas, including drones, online payments, facial recog- nition, and 5G communications. China also has formal IP protection, but the laws are often poorly enforced. In addition, there is less emphasis on being a first mover and less stigma against imitating others. Chinese innovation often fea- tures incremental improvements on the break- throughs of others. Chinese patents tend to be based on improving processes to reduce produc- tion times, improve quality, or minimize costs (Economy, 2018). China has been successful in utilizing Western IP and innovating in terms of new business applications. The large and flexible manufacturing base and extensive supplier base enable Chinese corporations to scale up produc- tion and quickly adapt to changing customer needs (Lewis, 2013). Chinese innovation involves close government and external stakeholder coordina- tion, enabling even the largest organizations to quickly adopt new technologies.
3.4. Dispute resolution
U.S. and Chinese corporations also differ in terms of the use of formal contractual or informal commer- cial agreements to resolve disputes between parties. Social norms (informal institutions) regarding how entities interact with each other, in addition to formal codes and laws, determine the perceptions of disputes. The U.S. and China appear to have similar laws and regulations regarding dispute resolution, but there are fundamental dif- ferences in how the legal systems of the two nations operate, which in turn affects dispute resolution in commercial settings. The U.S. legal system is based on common law derived from its British heritage. Federal judges are typically appointed for life, and the system is designed to limit influence from the legislative or executive branches. Cases are deter- mined on past precedents and are argued by attor- neys, who strictly adhere to the letter of the law. The basis for determining commercial outcomes in most situations in the U.S. is well established. This system has the advantages of continuity and decentralized power, but it is slow, inefficient, overly litigious, and costly.
In contrast to the independent judiciary in the U.S., there is no separation of powers in China. The judiciary is part of the executive branch of the government, and the goal of the court system is to
support the government. Chinese society favors more flexible contractual arrangements rather than the more litigious and rule-bound approach in the U.S. (Wang & Madson, 2013). In addition, the respect and protection of IP are lower, resulting in the infamous shanzhai culture in which Chinese products are often almost identical to other products (Hennessey, 2012).
This flexibility of the Chinese legal system en- ables legal decisions to be made more efficient and powerful parties can accomplish goals more quickly than in the U.S. It also facilitates a less litigious so- ciety, and sometimes more favorable outcomes can be reached. However, this also means that Chinese businesses often consider the signing of a contract to be the beginning of negotiations rather than the end. It also means that connections and influence (guanxi) have greater importance in dispute reso- lution in China. When Chinese and U.S. corporations (or government officials) come into contact, these differences in the approach to dispute resolution can cause significant misunderstandings and result in conflict (Yang & Jiang, 2015).
4. The Skyworks-ZTE example
To illustrate how the four dimensions are embedded in both the formal and informal institutional con- texts of U.S. and Chinese corporations, we compare Skyworks Solutions (henceforth, Skyworks), a U.S. corporation headquartered in Woburn, MA, and ZTE, a Chinese corporation headquartered in Shenzhen, China. Both are technology corporations and have encountered conflicts when doing business together. We illustrate how these four dimensions, based on the differing institutional environments of each corporation, have exacerbated misunderstandings and increased conflicts.
4.1. Corporate governance
ZTE manufactures a large portion of the world’s telecommunications equipment. Despite being publicly traded, it was largely controlled by a single individual, Hou Weigu, who controls approximately 30% of the firm’s equity and its parent holding corporation. Mr. Hou was also chairman of the board until 2018 when he resigned, due in part to the conflict with Skyworks (discussed in more detail later). The makeup of the board of directors before 2018 clearly illus- trated this control, as nearly all members were family and associates of Mr. Hou. Although ZTE has all the trappings of good corporate governance,
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including various board committees, codes of conduct and ethics, and a corporate governance charter,3 monitoring and oversight of the board was minimal. Mr. Hou was the dominant force in running the company before 2018.
Skyworks manufactures semiconductors for use in radio frequency and mobile communications systems, and Apple is a key customer. As is typical of U.S. corporations, there is no dominant owner, although institutional investors, such as pension and mutual funds, have a considerable stake with major ownership in the hands of the Vanguard Group, BlackRock Fund Advisors, and Vulcan Value Partners (CNN Business, n.d.). This reflects a recent trend in U.S. corporate governance: an in- crease in institutional shareholder activism. Insti- tutional shareholders have become instrumental in protecting shareholder value for U.S. corporations as the market for corporate control has receded. Neither the CEO, the chairman of the board, nor any other individual or family, holds a significant share of outstanding stock.
4.2. Corporate philosophy
ZTE’s and Skyworks’ corporate philosophies differ significantly. Like most U.S. corporations, Sky- works attempts to steer clear of politics. The corporation avoided joining an industry association established to lobby the government for the semiconductor industry until 2017. Although Sky- works manufactures most of its products in the U.S., its corporate leadership maintains that this is not primarily for nationalistic reasons. Skyworks’ corporate philosophy is firmly rooted in environ- mental responsibility. In 2019, Skyworks’ efforts included saving 106 million gallons of water and reducing landfill waste by 51 tons over the previous year. Skyworks takes cues from its institutional owners and focuses on shareholder value.
Unlike Skyworks, ZTE was initially closely asso- ciated with a government body, China’s Ministry of Aerospace. ZTE has published annual CSR reports since 2008, which include initiatives to protect the environment. However, ZTE sees itself mainly as an integral part of the nation and plays a role in national aspirations. It is closely associated with the government, which promotes ZTE as part of an industry regarded as critical to the nation’s future. While ZTE is interested in profit, this is not its highest priority. These two corporations with contrasting philosophies perform different roles in society.
3 https://www.zte.com.cn/global/about/investorrelations/ company
4.3. Innovation
Skyworks and ZTE also approach innovation differently. Skyworks holds patents for several types of proprietary innovation. They are first movers in the area of high-performance analog semiconductors and provide front-end solutions for smart energy applications such as water and gas metering. Skyworks focuses on cutting-edge technology that allows it to charge a premium. This differentiation strategy is consistent with the high wages demanded by high-tech firms in the U.S. Skyworks even discusses the importance it places on the protection of IP in recruitment interviews, as IP is central to its innovation process, which is the case for most U.S. corporations.
ZTE also places much importance on innovation. It claims to hold the second-highest number of patent applications worldwide. ZTE is closely connected to the Chinese government through various contracts, and some argue that it receives what amounts to government subsidies via more- than-generous contracts. In addition, ZTE co- ordinates with the central government in formu- lating its corporate strategy. ZTE’s innovations, therefore, tend to be incremental, coordinated through government effort, and often based on the breakthroughs of other corporations.
4.4. Dispute resolution
ZTE and Skyworks have a history of disputes in terms of technology and, as the discussed differ- ences suggest, they approach conflict and dispute resolution differently. For many years, Skyworks has sold products to ZTE, and ZTE modifies them over time and applies them to its products, which it then claims as its innovations. ZTE has viewed itself as an important customer of Skyworks and has felt entitled to adapt some of the innovative features as its own. ZTE’s leadership has not viewed the technology issue as critical and has not taken their mutual contracts seriously.
But ZTE was accused of acquiring wireless technology that was stolen from Skyworks and another U.S. corporation, Avago. This resulted in Hao Zhang, a university professor from Tianjin, being convicted of stealing secrets from 2010 to 2015 that had military and commercial applica- tions from Skyworks and Avago. Mr. Zhang was conducting research for Skyworks and was indicted in April 2015, along with five other Chinese na- tionals, on charges of economic espionage and trade secret theft. The stolen trade secrets enabled the Chinese government-affiliated
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university to build a state-of-the-art film bulk acoustic resonator (FBAR) fabrication facility, which provided components to Chinese state companies, two military institutes, and ZTE (Gertz, 2019). The stolen material was related to surface acoustic wave (SAW) and bulk acoustic wave (BAW) filters, which are used in wireless devices. The FBAR technology market was esti- mated to be worth $1 billion at the time of the theft, and the estimated cost to develop the stolen technology was over $50 million.
ZTE obtains approximately 60% of the elec- tronics in its flagship smartphone from suppliers in the U.S. and has a history of spats with Skyworks over IP and other issues. In 2018, the Trump administration banned U.S. firms from doing business with ZTE. The impact was initially devastating and led to the removal of Mr. Hou from the chairman position and a reorganization of the board of directors. In addition, official ties between ZTE and the Chinese government were reduced, which to some extent forced a change in its corporate philosophy. ZTE agreed to pay a $1 billion fine and allowed U.S. enforcement officers to monitor the company, hence altering its corporate governance (Davis et al., 2018). After nearly 2 months of shutdown, President Trump had a phone conversation with President Xi and personally intervened to lift the ban on ZTE. The U.S. government’s involvement had a dispropor- tionate effect on ZTE and forced it to change in terms of two of the dimensions we have identi- fied: corporate governance and corporate philos- ophy. Thus, the Chinese corporation moved closer to the corporate governance regime of U.S. corporations.
The Skyworks and ZTE examples demonstrate how conflict between U.S. and Chinese corpora- tions can be resolved. However, many other disputes between U.S. and China counterparts occur along similar lines and never reach such a clear resolution. Many do not have a high-enough profile to necessitate the involvement of gov- ernment officials, and numerous U.S. corpora- tions simply muddle through without any real satisfaction.
5. How U.S. corporations can deal with China in the post-COVID and post-Alaska world
After World War II, U.S. corporations were able to dictate many of the rules of engagement when conducting business with corporations from other countries, but this is no longer an option. In the
post-COVID, post-Alaska world, differences will remain and perhaps even increase. President Biden, in his first State of the Union address, identified economic and political competition with China as one of the greatest challenges facing the U.S. today and in the future. Likewise, the Chinese supreme leader, Xi Jinping, continues to assert that China will forge its path and will not bow to outside pressure to reform its system. He envisions a world in which business rules are written to reflect China’s increasingly powerful position. Wang Jianlin, chairman of Dalian Wanda G
