Entrepreneurs Picking the Right Strategy for Different Stages of Marketisation

During the early stage, when the market economic structure was not yet mature, entrepreneurs who adopted relationship-based strategies were consistently able to grow their companies. This type of strategy is often known as building guanxi, which focuses on building strong connections with government officials.

Having solid connections with government cadres in state-owned enterprises (SOEs) typically resulted in preferential treatment. This “core competency” thus proved to be very useful when an entrepreneur sought to privatise an SOE or build a new company during the early stage of marketisation of China’s planned or state-centred economy.

The intermediate stage of marketisation is typically characterised by turbulence and uncertainties. One important characteristic of this stage was that the rules governing business became murkier. Entrepreneurs often got confused as to whether they should follow the old rules under the planned economy or adopt the new ones under the market economy.

At this stage, being a part of a university research or science park or collaborating with local government institutions proved helpful in alleviating some of that growing pain. We call these “cocooning institutions,” and the strategy to rely on these institutions a “cocoon-based” strategy. This allowed entrepreneurs to experiment with innovative ideas while following some of the old rules, such as building guanxi with government officials. This way, they could shield themselves from some of the institutional uncertainties while playing with new arrangements with a certain degree of freedom.

In the late stage, we found that entrepreneurs who adopted an innovation-based approach were more successful. The late stage of marketisation is characterised by a solid capital market structure, well-developed legal business framework and a low level of government intervention. At this stage, entrepreneurs were generally able to free up their resources and energy from handling guanxi and compliance issues. Instead, they could focus on market research, product development, sales and marketing efforts. These efforts allowed them to be more competitive and profitable, thus building the foundation for exponential growth.

Being in tune with the stage of economic transition in China is thus a crucial skill that can ensure optimal growth and profitability.