E-Magazine
Ping Zheng
One of the striking features of China’s economic reforms and its transformation from a command to a market economy is the rise of the private sector. Private companies play a key role in market economy as a vehicle for economic growth and the creation of jobs and wealth. However, the practice of private entrepreneurs raises ethical issues of business operation in the market place. Ethical issues here refer to actual business conduct challenging fundamental moral principles, which often include breaches of justice and violation of rights. Ethical dilemmas are observed when profit-seeking entrepreneurs respond to various shareholders, including business partners, employees, government agencies and society as a whole (Weiss, 2003). Based on a case study of an emerging entrepreneurial venture, ethical conflicts occurring underneath of entrepreneurial processes are discussed under market socialism.
Background of Case Study Company SLAF in Shenyang China
SLAF as a joint venture garment company was set up in 2003 through a merger between a collective-owned enterprise SL and a private ownership company AF. The ‘collective-owned enterprise’ is the type of business that legally reflected the ownership of all the employees but was governed by local authorities under market socialism. Following reforms of privatization, AF, a privately-owned trading company bought out 51 percent of the shareholding of SL, becoming the major shareholder. This new venture has over one thousand employees and a fixed asset value of US$2.5 million in manufacturing equipment and facilities. This allows for an annual production capacity of one million garments. Its main markets comprise of domestic cities and overseas countries, such as Japan, South Korea, Europe and the USA. Although SLAF owns two fashion trademarks, the majority of their business comes from manufacturing and processing large orders of branded products for overseas companies.
Ethical Dilemmas in SLAF
Private owner vs Government shareholder
The new venture has undergone rapid growth and expansion. The entrepreneur has brought effective market mechanism and incentives into the business. Increasing orders from overseas clients and the change to a customer-focused management structure has transformed this venture into a profitable success in the first two years. However, with the influx of profit in the second year, two partners diverge their views on how profit should be retained. The private entrepreneur attempts to reinvest all the profits for expansion instead of sharing them with the employees and the partner. Two key functions in SLAF - Finance and Marketing - are directly controlled by the private owner. This shakes the stability of the venture, embedding hidden dangers of a split as the shareholders continue to receive no profits.
Legal vs Illegal
Since the legal infrastructure of China’s market economy is incomplete, there are ‘grey areas’ apparent in related legal rules and procedures, causing the use of non-legitimate business operations. Due to a prevalent social culture in favour of trust and personal relationships, private entrepreneurs tend to ignore legitimacy in business operation and instead, try to find ‘short-cut’ ways to success, such as ‘the use of bribery’. There is a strong belief that informal business relationship (‘Guanxi’) is greater than legal and contractual processes. Such values direct their behaviour to manage their businesses in non-legitimate ways, which may contravene legal frameworks.
Capitalist vs. Socialist Values
Private entrepreneurs tend to maximise profit by all means. As emerging capitalists under market socialism, driven by market opportunity and capitalism values, seeking for profit is the ultimate objectives of the entrepreneur, which can conflict with conventional socialist ideology. In order to reduce the cost of production, the work conditions for employees tend to be reduced to a minimum level.
The collective-owned enterprise in the past had provided basic welfare services as nursery houses for employees with children, free meal subsidies, holidays and paid sick leave. Employees also enjoyed annual bonuses, company accommodation and medical-care welfare. Employees in the former company were treated as part of a big collective with certain respect and equality being the key values of belief under socialism.
Today, in contrast, SLAF is dominated by private ownership under the market economy, with these employee welfares and benefits mostly eliminated. Moreover, longer work hours are enforced with no paid overtime and only 2 non-work days are allowed each month. Staff salaries are also fixed at a minimum rate. Rural labourers are hired on an ad-hoc basis with no contract. Thus, temporary rural labour do not have any job security with the possibility of immediate dismissal without pay.
As Mr. Tang, manager of Operations comments, dismissed employees have reported SLAF to the State Labour Inspection Department on many occasions for breach of labour rights with no results. Poor conditions for shop-floor workers in the garments production factories are common, not only in SLAF but elsewhere in Shenyang, a heavy industry based city. The company is more powerful than individuals and it has strong connections with officials in local authority. There is no trade union or any association to represent labour rights to protect their interests. Employees who want to stay employed keep silent and do not complain, due to fear of dismissal.
In the case of SLAF, conflicts in ethical values to certain extent reflect the contrasting difference between market values and socialist ideals, revealing the primitive nature of capitalist exploitation in the early stage of growth. When entrepreneurs encounter the dilemma of profitability and morality, materialism triumphs. These phenomena are inevitably taking place in the transition to market socialism. This challenges the Chinese government to seek solutions for overcoming contradictions in the mode of capitalist production.
Learning from the West and Marx’s theory, it is important to realize capital’s intrinsic limitations and the act of civilized violence of excessive labouring (Lu, 2009). Though over the last two decades, China has achieved remarkable performance of market economy development, rapid emergence of private sector and entrepreneurial activities raise the serious issue of business ethics. The Chinese government needs to provide effective protection on labour from unethical exploitation and violation of rights, particularly on the vulnerable groups such as rural workers and low-skilled labour; otherwise it will impact upon the healthy growth of market economy.
A comprehensive legal framework for a fair market competition is needed; in consequence, proper monitory systems should be further developed to regulate the entrepreneurial conduct and enhance moral standards of business practices. China is still in the transition of market economy, increasing market myopia behaviour of private entrepreneurs and profit-driven orientation would likely impose destructive influence on the formation of healthy markets and affect sustainability of business development in long run.
Dr Ping Zheng, University of Essex
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