Winston Churchill once described the Soviet Union as 'a riddle

wrapped in a mystery inside an enigma.’ Modern China is a very

different story. By definition, the workings of the world’s largest

economy (by purchasing power parity) can’t really be hidden from

view nearly as easily. However, the sheer scale means that certain

aspects of that vast market’s workings are still not all that easy

to understand

Heugens, P.P.M.A.R. (Pursey)

Winston Churchill once described the Soviet Union as \'a riddle
\nwrapped in a mystery inside an enigma.\xe2\x80\x99 Modern China is a very
\ndifferent story. By definition, the workings of the world\xe2\x80\x99s largest
\neconomy (by purchasing power parity) can\xe2\x80\x99t really be hidden from
\nview nearly as easily. However, the sheer scale means that certain
\naspects of that vast market\xe2\x80\x99s workings are still not all that easy
\nto understand

Erasmus University Digital Repository

ROTTERDAM SCHOOL OF MANAGEMENT, ERASMUS UNIVERSITY Effective ads: new  technology answers  old questionsBy Linda Couwenberg Improving the supply chain in humanitarian  logisticsBy Erwin van der Laan and Jan van Dalen Rethinking  managerial roles in change initiativesChris Murray talks with Bas Koene   How can auditors  avoid the perils of  aggressive accounting?By Marcel van Rinsum  Why can’t China clean up its act?By Pursey Heugens   The use and misuse of power and  unethical behaviourBy Laura M. Giurge 2nd Quarter 2017Management Knowledge         RSM DISCOVERYwww.rsm.nl/discovery RSM - a force for positive change2nd Quarter 2017   |   17www.rsm.nl/discovery Congress or the Chinese People’s Political Consultative Conference.  The results were not quite what we expected. Perhaps the biggest surprise, initially, was the extent to which the state is not a monolithic actor. In fact, from a certain perspective, there is no state. Instead, in China – probably as in other countries with federal governments – the government is a patchwork of over-lapping jurisdictions and overlapping in-terests. As a result, governmental bodies operating at different levels can exert dif-ferent and even conflicting influences on corporate environmental practices.In general, higher-level agencies are primarily rule makers and lower-level bodies are mostly rule takers. At the mid-level, however, governmental bodies add hardly any environmental regulation of their own, which means that further down, the pressure tends to level off and even weaken. As the ancient saying goes, in the provinces, the mountains are high and the em-peror is far away.Selective enforcementIn the end, when it came to environ-mental sustainability, our analysis One such aspect is the dynamic of en-vironmental regulation. China’s gross domestic product has grown by more than 500 per cent since 1980, advanc-ing from an economy a little larger than Canada’s to an economic super-power. However, but this progress has come at the expense of the environ-ment: in 2006, the country became the world’s largest emitter of greenhouse gases, and in 2009, the leading con-sumer of non-renewable energy. At the same time, despite the fact that the government now has some tough en-vironmental regulations on the books and controls up to 80 per cent of all businesses, it’s made relatively little environmental progress.How can the government be the controlling shareholder and yet not exercise much control over its own companies’ conduct? To find out, we analysed quantitative data collected on Chinese firms between 2008 and 2012 (specifically the 1,425 companies listed on the Shenzhen Stock Exchange and the Shanghai Stock Exchange, both of which since 2008 have mandated envi-ronmental records), as well as qualita-tive data on these companies collected in 2013-2014.We analysed how administrative hi-erarchical distance (the degree of dis-tance from the central government and the level of government holding the control of the firm) affects the en-vironmental regulation of the firm. Our study identified nine levels of adminis-trative hierarchy in China, and assessed their impact on corporate environmen-tal actions. In addition to state owner-ship, our metrics included the level of government subsidy for environmental actions weighted against the revenue of the company, the numbers of times the company was reported to have vi-olated an environmental regulation, and the percentage of top managers who also worked for governmental bodies, such as the National People’s “…governmental bodies operating at different levels can exert different and even conflicting influences on corporate environmental practices.”Winston Churchill once described the Soviet Union as 'a riddle wrapped in a mystery inside an enigma.’ Modern China is a very different story. By definition, the workings of the world’s largest economy (by purchasing power parity) can’t really be hidden from view nearly as easily. However, the sheer scale means that certain aspects of that vast market’s workings are still not all that easy to understand.Why can’t China clean up its act?By Pursey Heugens  Management KnowledgeRSM DISCOVERY18   |   2nd Quarter 2017he/she would point up and say, ‘she’s arranged by the top,’ and nobody would question the interview process anymore. In a more general sense, and in ways unimaginable in the West, Chinese firms consider themselves to be "grandsons" (sun zi, also meaning “being very subordinate”) of the gov-ernment, and therefore subject to its (paternal) authority. Governmental bodies are considered to be like “par-ents” or even “grandfathers” who have the authority to decide everything for the local area, much as senior mem-bers do for a family in a feudal society. Our interviews similarly suggest that Chinese firms feel they have little influence over the content of new envi-ronmental policies by the central gov-ernment, even though there may be some room to bargain with local gov-ernments over the pace and scope of their implementation.For now, foreign investors com-mitted to making sustainable invest-ments in China should keep in mind suggested that two kinds of com-panies tended to be the worst: very large national companies, which have some protection from the government, and locally controlled companies, which tend to have their own set of regional protectors. Not only are the laws enforced more selectively with respect to com-panies the nearer their ownership is to entities in one the nine administrative strata we identified, but the govern-ment incentives at each of these strata tends to favour companies whose own-erships are rooted at that particular level. At the national level, for instance, the political and economic importance of the success of state champions such as Sinopec, the government oil compa-ny, tends to encourage more selective enforcement actions. At the local level, leaders focus in a similar way on the economic growth of their region, both because they de-pend on local revenues for economic development, and because most offi-cials see local economic advancement as the key to political promotion. When lower-level governments control firms, officials tend to implement regulations only partially rather than pass up the jobs and revenue promised by the growth of the local firm. Another insight we gained from this study is how environmental protection evolves in a country where civil society is largely undeveloped. In China, the advocacy groups that act as a check on the private sector and government reg-ulators in the West are either weaker or non-existent. In such a context, most of the mature market playbook regard-ing how to prod companies to pursue environmental goals – such as stake-holder dialogue, and the influence of non-governmental organisations – isn’t really applicable.Instead, the society is extremely hierarchical. Our interviews taught us that individuals, organisations, and so-ciety in general are constantly aware of the power of the administrative hierar-chy. For example, Chinese managers and officials strive “to avoid troubles whenever possible” while they show deferential behaviour towards hierar-chically superior individuals or organs.Each time my co-author, who con-ducted the interviews, was introduced by the CEO’s secretary to an interviewee, “…I suspect that the country won’t be able to focus on conservation until China’s next Five-Year Plan and President Xi or his successor puts a new plan in motion.”Why can’t China clean up its act?(continued)By Pursey Heugens  2nd Quarter 2017   |   19www.rsm.nl/discovery government’s 2017 annual report fo-cuses on environmental protection, compared to one per cent in 1985. However, although the authorities rec-ognise the environment as an impor-tant issue, for now economic growth and combatting corruption remain higher priorities. Companies too are concerned. As one manager told us, ‘Although we are now more developed, pollution has intensified. Our minds are chang-ing against this backdrop… It is, of course, difficult to fix it immediately… More promising outcomes may materi-alise in three to five, or even 10, years.’For what it’s worth, I suspect that the country won’t be able to focus on conservation until China’s next Five-Year Plan and President Xi Jinping or his successor puts a new plan in motion. The good news, however, is that when China puts its foot down, the world trembles. As the success of the “tigers and flies” anti-corruption programme has demonstrated, the government the fact that the companies that tend to be the most compliant tended to be somewhere in the middle – companies that are too far from the central gov-ernment to win any protection from the highest echelons, but also too far from local and provincial government to be favoured as a home team. These companies in the middle, at the bend of this inverted U, tend to have the best environmental record.When will China go green?Is any of this changing? Yes and no. For the sake of the planet and human-kind, I certainly hope so. Certainly, the government is aware of the challenge: the amount of attention that it has paid to environmental issues in recent Five-Year Plans has grown enormously over the past 15 years. In the 13th Five-Year Plan (2016), “Green Development” has been promoted to one of the five cru-cial development concepts to facilitate building a prosperous society in China. Moreover, almost 12 per cent of the can move rapidly once it makes a com-mitment. Once the government starts focusing more on environmental pro-tection, the effects are likely to be felt everywhere.Overall, I am moderately hopeful that China will do the right thing even-tually. Whether that will happen soon enough for polar bears to still be stand-ing on firm ice remains to be seen. This article draws its inspiration from the working paper Government’s green grip: multifaceted state influence on corporate environmental actions in China, written by Ruxi Wang, Frank H. Wijen and Pursey P.M.A.R Heugens.Pursey Heugens  is  Professor of Organization Theory, Development, and Change, Department of Strategic Management and Entrepreneurship, Rotterdam School of Management, Erasmus University.  EMAIL   pheugens@rsm.nl

Why can\'t China clean up its act?

Winston Churchill once described the Soviet Union as 'a riddle wrapped in a mystery inside an enigma.’ Modern China is a very different story. By definition, the workings of the world’s largest economy (by purchasing power parity) can’t really be hidden from view nearly as easily. However, the sheer scale means that certain aspects of that vast market’s workings are still not all that easy to understand

Why can't China clean up its act?

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