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Political economy is one proposed perspective for studying the interactions between the role of the state and economic performance when the neo-classical framework is insufficient to explain the economic dynamism of East Asia. According to neo-classical reasoning, the free market is the key to East Asian successes; there is either no or a minimum level of state intervention (Appelbaum and Henderson 1992) in securing market-based resource allocation. The minimum level of state intervention in detail includes “let the wages rise according to the market conditions, enforce strict safety and environmental standards in order to assure the highest quality products, sharply limit direct cooperation among industry rivals, eliminate such barriers to competition as state monopolies or fixed prices, enforce strong domestic antitrust policies, reject all forms of managed trade, and encourage the creation of a highly skilled work force”(Appelbaum and Henderson 1992).

However, more recent works from the perspective of political economy have begun to cause this perspective to gain weight over free-market theory. The main argument is that the state plays a decisive role in setting and implementing national goals for economic growth (Appelbaum and Henderson 1992). The collective works of political economy have proven that state policy is the most important determinant of the East Asian economic miracle. The governments of these economies have

substantially engaged with and directed economic transformation⁶. As Oi (Oi 1995) has stated, there is planning, but it aims to maximize competitive and comparative advantages for manufacturers within a market economy.

Appelbaum and Henderson (1992) have identified four types of political economy (Figure 2.1) - market rational, plan rational, market ideological and plan ideological. Although this only describes the situation up to 1995, it is undeniable that the development of China’s trajectory has differed from that of other East Asian economies, such as Hong Kong, Singapore, Taiwan, Japan and South Korea. While rapid economic growth has also resulted from economic reforms launched by China’s strong interventionist state, the state-led development has been largely different from its East Asian counterparts. Before economic reforms were implemented, China was a planned ideological political economy in which the state owned and controlled all the economic units. The central government played a dominant role in controlling resource allocation and investment decisions. Since the reforms have gotten off the ground, China has increasingly abandoned central planning and moved towards marketisation (Oi 1995). However, there has neither been political reform nor a rush towards privatization as in Eastern Europe and the former Soviet Union, nor has there been commitment expressed to private property as in other developmental states⁷(Oi 1995). The distinctive form of China’s party-state led growth (Oi 1995) has encouraged the development of theories such as the political economy of reform or the political economy of transition (Roland 2002), which study China as a particular case. They have described the logic of China’s economic reforms as gradualism,

6see detailed forms of intervention, States and development in the Asian Pacific Rim, chapter one by Appelbaum,R.P. and J.Henderson,1992.

7Japan and East Asian Newly Industrialising Countries

decentralisation, and particularism (Wang 2006), which has had a long lasting impact on China’s industrialisation and internationalisation.

Figure 2.1. Four types of Political economy as defined by Appelbaum and Henderson.

Source: Quoted from Appelbaum and Henderson, in Appelbaum RP, Henderson J. 1992. States and development in the Asian Pacific rim. Newbury Park, CA: Sage Publications, p21

Political economy seems to be appropriate for explaining aggressive transnational SOEs and their contributions to economic growth since most of the policies are based on the existing SOEs in order to maintain socialist legitimacy (Wang 2006). Direct forms of support from the central state, such as financial and technological support, and incentives for transnational operations, are mainly distributed to certain large SOEs. According to Zhang (Zhang 2003), it is not a surprising finding that all the transnational operations, mainly SOEs, are under the instruction of the central government. The three waves of China’s transnational business are parallel to the big changes to China’s foreign investment policies; the geographical and sector distributions of transnational corporations are highly related to the orientation of government policies.

However, the real picture is more complicated in terms of private enterprises and their transnational activities under investigation. Without a normal market environment, such as entry constraints, unobtainable financing, court enforcement of contracts, legal provisions for shareholding (McMillan and Woodruff 2002), and without direct support and incentives from the government as enjoyed by the SOEs, private enterprises need to develop alternative and innovative strategies to survive on their own and compete with their counterparts. How have they survived and even become market leaders within such a complex and unfavourable environment? It is probably not sufficient to answer such questions solely from the political economy perspective. Political economy only explains strategic behaviours in a broad institutional context constituted by the state. From the perspective of the state, the analyses focus on the role of the state as both enabler and constrainer. How the government has opened up room for growth as well as how it has shaped and constrained the development of private enterprises make up the central questions to be addressed. However, private entrepreneurs are not only shaped by but also proactively respond to their environment. How does the regulatory environment influence the strategic decisions of private enterprises? What are their coping strategies? Why do they succeed in becoming market leaders and even transnationalise? A discussion of such specific strategic behaviours of firms is absent in the political economy perspective. Therefore, a focus on how certain enterprises have specifically benefited from economic reform and how they have managed to gain more strength than their counterparts requires detailed inspection. In order to fill this gap, this study aims to combine multiple levels of analysis, a micro-level investigation of the strategic orientation of the firm under study, a macro-level investigation of its external environment, as well as the ways in which they interact.