Wharton professors Michael Useem, Harbir Singh and Peter Cappelli discuss their new book on China’s fortune makers.

China has come a long way. In just over 30 years, its economy has evolved from a closed market that is centrally planned to soon becoming the world’s largest. That is an incredible feat considering that it lacked a capitalist system and regulatory framework to support its entrepreneurs. So the Chinese did it their way: bootstrapping their enterprises while continuously learning from their own experiences and the outside world.

This “China Way” is documented through the eyes of Chinese executives in the book, Fortune Makers: The Leaders Creating China’s Great Global Companies, by Wharton professors Michael Useem, Harbir Singh and Peter Cappelli, as well as Liang Neng, management professor at the China Europe International Business School (CEIBS). The Wharton professors recently spoke with [email protected] to discuss their book.

Fortune Makers China Way

Fortune Makers: The Leaders Creating China’s Great Global Companies

China Way

An edited transcript of the conversation follows.

[email protected]: What is the “China Way” and how is it different from how other countries conduct business?

Michael Useem: We did a book a couple years ago called The India Way, documenting how Indian companies are similar to, in many ways, but also different from, those in the U.S. Taking that analogy back to China, the “China Way,” in some respects, is no different from what we do here. You need a chief executive, you have to have a chief financial officer, you have to get people to perform, you have to manage the supply chain, you have to market. But in other distinctive ways, Chinese companies are run differently.

Harbir Singh: We did a survey of their priorities and what we found was that the first priority was setting strategy. The second was setting the culture and the third was setting the original architecture. Whereas for U.S. executives, the first priority was investors, then it was external communities, and strategy was way down. So, there’s an interesting contrast.

Peter Cappelli: It comes out of Chinese culture, this difference in the way they operate. Part of that I think [is due to a culture that is] very much top down, with an extreme focus on growth — growing really quickly. Some of that I think is the insecurity of being a capitalist in the country and not knowing when are you really secure, so being bigger is probably better for that.

They’re really good at learning. They know that they are behind the West. They spend a lot of time internally trying to figure out how to learn and get better. They look much like small companies in the U.S. — a boss who makes most all of the decisions largely by himself. The difference is they’re pretty big companies and they still manage to operate that way. Part of that has to do with the culture of the employees who follow orders pretty well still, although I think one of the big challenges is they probably are not going to keep following orders as a new generation comes in.

[email protected]: In your book, you say that the jury is still out as to whether the “China Way” is actually sustainable without the proper internal controls. Do you think that eventually Chinese companies will develop that, and what will it look like?

“We did a survey of their priorities and what we found was that the first priority was setting strategy. … Whereas for U.S. executives, the first priority was investors.”–Harbir Singh

Cappelli: The most distinctive thing about these companies is that within the small circle of, you might think of as the operating committee, there may be seven or 10 people at the top of the companies. There is a lot of loyalty and there is a great deal of trust. And there is a belief among those people that the boss will not fire them — that if you at least come clean with mistakes and you do it soon, you are not going to lose your job.

As a result, there is a belief that there is an extraordinary degree of transparency there. The executives are not hiding problems and they are not worried about surfacing them. If that is the case, you do not need all the internal control systems that we layer on U.S. companies, a lot of internal accounting or bureaucracy. One of the reasons they can move quickly is because they do not have all that. [It is also] one of the reasons they can be cheaper.

Useem: The early entrepreneurs were like the early global explorers. They had no sense of how to start, how to get going, how to build. And they often discovered that in the early years without laws, for example protecting private property, as a young entrepreneur if they were successful they couldn’t even be sure that at the end of the day they were going to be able to hang on to what they had created.

That said, they have created a learning mentality: We just have to figure out how to do this. Let us look at our experience, learn from what works. If it worked, let us do it. If it does not, let us get rid of it. And they were unburdened by tradition. That was the key point even if they did not have an infrastructure to build on in a broader sense: No business schools, for example, to recruit people from. … We think they can sustain themselves because that learning DNA is just part of who they are.

[email protected]: Early on when Chinese entrepreneurs were starting out, they did not have much infrastructure support or regulatory support. Do you feel that that has changed on the part of the Chinese government? Are they more supportive? Are regulations coming along?

Cappelli: There’s an up and down to that. In the early days, the government was hostile to capitalists and they were hostile to a lot of these companies that were starting up. It was quite challenging for the companies to do anything. So it was not that they did not have support; they were actually under attack.

Then there were, for some companies, opportunities that the government did give them: funding through the state-owned enterprises, keeping out foreign competitors to some extent. The local governments in China are the big story with respect to this, not the central government per se. In order to generate jobs, many of these companies got a lot of breaks. They got free land. They got roads, infrastructure — things to get started.

But our sense from interviewing these folks now is that in this later stage, once they are up and running, they just want to stay away from the government. They are like U.S. companies. “I’m here to help,” the government says. And they do not want to have anything to do with them. They understand it is very important to get along with the government and they work to do that and to pay attention to what the government wants.

But they are not expecting help from the government and they do not want to do too much from the government.

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