Environment-strategy-performance relations in small businesses in China: A case of township and village enterprises in Southern China

In contrast to market economies, which are predominantly shaped by privately-owned businesses, transitional economies (that is, former centrally-planned economies) are characterized by a diversity of organizational forms generally including state-owned, collectively-owned, privately-owned, and foreign joint ventures. Of these, collectively- and privately-owned firms are mostly small businesses (Chow and Fung 1996; Nee 1992). Although the formation and expansion of small businesses have been features of all transitional economies (Naughton 1994), the Chinese economy (one of the most notable centrally-planned economies in the past) has relied on collectively-owned businesses whereas other transitional economies have built mainly upon growth in the new private sector (Perkins 1994). The Chinese case demonstrates that the key feature of structural transformation is the development of new' firms, especially small businesses, rather than privatization per se. This development creates competition and drives market expansion, leading to a decline in state control and monopolies. Although privately-owned small businesses now make up an important part of the Chinese economy, collectively-owned firms are much more important (Byrd and Lin 1989). Relative [TABULAR DATA FOR TABLE 1 OMITTED] to urban collectives, rural collectives (namely, township and village enterprises, or TVEs), have played an important role in accelerating China's phenomenal growth and shaping its economic reforms (Jefferson, Rawski, and Zheng 1992). Although the management of Chinese TVEs has received increased scholarly attention, the majority of the writing has been anecdotal in nature. Few scholars have vigorously examined the issue either empirically or theoretically (Nee 1992). In order to help redress this deficiency, this study aims to illuminate how strategy aligns with environment and how this alignment influences the performance of small TVEs. We argue that small TVEs strategically respond to the external environment as wary prospectors in order to ensure their survival and growth. This implies that these small businesses are proactive and innovative in aligning with environmental characteristics such as dynamism and complexity. [TABULAR DATA FOR TABLE 2 OMITTED] Overall, the results based on the analysis of a survey of top managers in small TVEs located in Southern China support our predictions. TVEs in China TVEs are all those rural non-state enterprises that are subordinate to township or village governments and are owned and operated collectively. They represent an intermediate property form which has been shaped by a rapidly changing environment where market forces are incrementally replacing the state planning mechanism and encouraging greater efficiency and flexibility in business. According to China's Statistical Yearbook (1995), there were 24.94 million TVEs and 120.18 million employees working in these organizations in 1994. In the same year, the share of industrial production by TVEs was 30.46 percent of the nation's total; TVEs have thus become one of the country's dominant output contributors (China Statistical Yearbook 1995). While about 70 percent of large firms, particularly those owned by the state, have undergone losses in the past years, TVE net profits and contributed taxes have been increasing (see Table 1). In no other transitional economies have TVEs played such a dynamic role. An overwhelming majority of TVEs are small businesses. As Table 1 shows, the average TVE in all sectors had fewer than six employees in 1995. The average net fixed assets for TVEs were US $3,881 (in 1995). TVE development has been going on for only a short time, and administrative restrictions have hindered their expansion. The dependence of the bulk of TVEs on their own retained earnings and on funds raised within the township or village to meet investment needs has also limited their size. Interestingly, despite their small size, TVEs are relatively efficient. …