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OctEditor’s Note:
Opinions of the Central Committee of the Communist Party of China and the State Council on Creating a Favorable Environment for Healthy Growth of Entrepreneurs and Carrying Forward Entrepreneurial Spirit to Make Their Roles Better Played (hereinafter referred to as the Opinions) was issued on September 25. The Opinions points out that entrepreneurs play a major role in economic activities. This marks the first time the central authorities define the status and value of entrepreneurial spirit in a special document. What underlies the special document issued by central authorities to encourage and carry forward entrepreneurial spirit on the eve of the 19th National Congress of the Communist Party of China? What positive signals are releasing to entrepreneurs?
Alfred D. Chandler Jr., a noted business historian, believes that the history of industry is that of entrepreneurs to some extent. Innovations in the history of industry are not only the bounden duty of technicians, but also the mission of entrepreneurs. Some large entrepreneurs are sensitive to technological and industrial innovations and can turn them into new business and industrial models to realize their value and promote mutualism.
In neoclassical economics, it is limited to simply trace price discovery mechanism to the market but neglect the key role of entrepreneurs in price formation, opportunity spotting and risk taking. This results in the fact that in the process of simply “transplanting” Western textbooks, we ignored the role of entrepreneurs and thought that as long as we established the market and enterprises, buyer-seller relationships and some trading rules in the market, we could optimize market-based resources allocation.
Market-based resources allocation must be built upon internal management of some organizations. Additionally, such allocation is not static and an important link of dynamic efficient allocation is innovation, which comes from entrepreneurs. We should clearly recognize the identity of entrepreneurs and on this basis, properly handle the relationship between the government and the market, between state-owned and private assets and between state-owned and private enterprises.
Rights: protection of property rights is the endogenous power source
Entrepreneurs’ value discovery and innovation ability can hardly be simply quantified in the market and the value they create can hardly be expressed by buyer-seller relationships. Hence, whilst taking risks, entrepreneurs should have some rights. Only in this way can they bring into full play their initiative.
How can entrepreneurs’ rights be safeguarded? It depends on healthy development of market economy. A healthy market, in the first place, has a well-defined trading system: first, clear property rights; second, breaking monopolies.
Market competition is accompanied with risks, which requires someone to undertake core risks and control internal resources in enterprises. Such “someone” refers to entrepreneurs. Instead of being simply equal to price system, a sound market system comprises not only the property right system, but also a “system of entrepreneurs”.
Looking back, in the course of building a socialist market economy in the past, clear property rights were reflected in the 16-character policy and a number of relevant documents, but none referred to core functions and roles of entrepreneurs.
This is directly associated with problems in the current market economy. We find that entrepreneurs show low enthusiasm for innovation and even get slack at it; many entrepreneurs have even distorted their values and resorted to speculation simply in pursuit of profit maximization. China has witnessed serious phenomena of industry hollowing and bubble as well as pursuit of immediate interests. On the other hand, the growth of private investment declined sharply. Meanwhile, as property rights are not well protected, capital flight of a certain degree takes place.
To solve these problems, efforts should be made at fundamental level. Protection of property rights is the key, especially, private property rights should be protected in the same manner as public ones, which is repeatedly emphasized here. As is known, one shall have his peace of mind when he possesses a piece of land; if rights and interests of entrepreneurs cannot be properly protected, excellent entrepreneurs and entrepreneurial spirit can hardly be nurtured. Thus, protecting property rights plays a fundamental role.
Risks: power rent-seeking is the greatest harm
According to Joseph Schumpeter, monopoly might impair the impetus for entrepreneurs’ innovation. Profits can be created in many modes such as perfect competition, complete monopoly and complete regulation, but entrepreneurs’ value does not simply equate profit creation.
Entrepreneurs’ value should lie in creating profits, creating value and giving back to the society amid benign market competition. Such value creation depends on none of administrative monopoly, natural monopoly and various social activities. Actually, China has reached a new historical starting point, on which it should prevent excessive expansion of the government power. Accordingly, a rule of law-oriented and service-oriented government should be built.
A correct move is the new government-business relationship stressed by General Secretary Xi Jinping over the past five years. Firstly, streamlining, power delegation, combination of eased restrictions and enhanced regulation and improved services should be further promoted. Secondly, government power model should be changed, with a negative list required for definition of corporate behaviors and a power list required for government power. Thirdly and more importantly, government functions should match China’s industrial upgrading and transformation of economic development mode, namely transforming from an investment-oriented, omnipotent and control-oriented government in the past to a service-oriented, limited and rule of law-oriented government. Only with properly defined power can the government better serve the market, allocate social resources at a more macroscopic level and solve various market failures in market-based resources allocation.
What’s more, it must be stressed that private entrepreneurs should be provided with a more relaxed innovation environment. This includes a favorable investment climate, as entrepreneurs have no opportunities to seek new value creations without such investment climate. Additionally, this includes protection of property rights and the right to equal competition, among others.
Besides, the aristocracy should be restricted from disrupting the market, thus radically changing the previous government-business relationship. Since the 18th National Congress of the CPC, cracking down on the new aristocracy, especially combined capital and power, has become an endeavor to improve the business environment.
Should the previous unhealthy government-business relationship continues, we can hardly build a just market environment, in which case rent seeking will occur and have an impact on the entrepreneurial spirit.
To truly bring about a batch of entrepreneurs and establish the entrepreneurial spirit compatible with the socialist market economy, China must fundamentally crack down on bureaucratism and the new aristocracy, eliminate administrative monopolies and build a just and rule-of-law market. Only in this way can the entrepreneurial spirit truly take shape.
Innovation: state-owned enterprises should introduce the manager system
The socialist entrepreneurial spirit we are talking about is without doubt different from its Western counterpart. The biggest difference lies in how to define the entrepreneurial spirit of state-owned enterprises.
Advocating the entrepreneurial spirit implies special attention on state-owned enterprises: problems such as the perfection of the internal governance system in new state-owned enterprises, untangling of the relationship between Board of Directors in a new state-owned enterprise and State-owned Assets Supervision and Administration Commission (SASAC) of the State Council should be further solved.
In the mode of professional managers, state-owned enterprises are not necessarily managed by officials and most managers should be professional. Official managers’ power should limited to strategic positions, without excessively interfering with decision making in routine operation.
SASAC, as the investor of state-owned enterprises, should provide its judgments on some strategic issues. Meanwhile, it must bring into full play the entrepreneurial spirit of professional managers, so that they can allocate resources according to industry and market rules. Such balance should be the key to a scientific system for state-owned enterprises governance in the future.
This of course poses higher requirements on professional managers in state-owned enterprises: firstly, they must fundamentally understand some major strategic initiatives with respect of socialist market economy; secondly, they must observe market rules. As a consequence, the entrepreneurial spirit of state-owned enterprises is more demanded than the Western one to some extent.
In general, China is undergoing great economic and social transformations at present. On the one hand, entrepreneurs should get adapted to the New Normal; on the other hand, they should lead such New Normal, seize new opportunities therein and promote the structural transformation of China’s economy as a whole through innovation in technologies, products, business models and management ideas.
The future of economic transformation and upgrading relies mainly on innovation, which is the core function of entrepreneurs. In this period, entrepreneurs should undertake more responsibilities and at the same time, a favorable innovation environment should be built for the exertion of the entrepreneurial spirit.
(The author is Vice President of Renmin University of China (RUC) and Executive President of The National Academy of Development and Strategy, RUC. The article is an abridged version of an interview)
Opinions