Do Local Institutions Affect All Foreign Investors in the Same Way? Evidence from the Interwar Chinese Textile Industry

Abstract

This article analyzes the impact of employment institutions on Japanese-, British-, and Chinese-owned textile firms in China during the 1920s and 1930s. Despite Britain's domestic position as a world productivity leader, Japanese firms enjoyed a 70 percent productivity advantage over both British and Chinese competitors. The divergent performance of Japanese and British investments in China is explained by differences in management practice. Japanese firms had domestic experience with employment institutions similar to China's and applied labor management strategies that functioned well under these institutions. British firms lacked the institutional experience necessary to adapt management strategies to Chinese institutions. n the first half of the twentieth century, Japan rapidly absorbed industrial technologies from the West, while other Asian countries such as China and India lagged behind. In textiles, British managers and investors established plants in India, but productivity in these firms stagnated during the first half of the twentieth century, and many of these firms became unprofitable in the face of cheap imports from Japan. A key question in understanding twentieth century development is why Japanese firms were able to transform productivity levels in their economy, while other developing country firms, some run by experienced Western managers, failed. To understand this puzzle, I investigate attempts of British and Japanese firms to transfer textile technology to China during the 1920s and 1930s. The analysis reveals some of the pitfalls which

The Spread of Modern Industry to the Periphery since 1871

“…Forcing out independent shop bosses and installing technically trained managers enabled some firms to secure steep productivity increases (Cochran, 2000, pp. 191ff;Zeitz, 2013). Chinese yarn producers matched the rising productivity of China-based Japanese firms and outperformed British-owned rivals during 1924-36; in factory weaving, incomplete data show Chinese firms raising output per loom from 59 to 84 per cent of the levels recorded by Japanese-owned industry leaders (Zeitz, 2013, p. 125;Chao, 1977, p. 313).…”

Industrialization in China

“…technically trained managers enabled some firms to secure steep productivity increases (Cochran, 2000, pp. 191ff;Zeitz, 2013). Chinese yarn producers matched the rising productivity of China-based Japanese firms and outperformed British-owned rivals during 1924-1936; in factory weaving, incomplete data show Chinese firms raising output per loom from 59 to 84 per cent of the levels recorded by Japanese-owned industry leaders (Zeitz, 2013, p. 125;Chao, 1977, p. 313).…”

Family business development in mainland China from 1872 to 1949

“…Zeitz compares the productivity among Japanese-, British-and Chinese-owned firms in the textile industry. 10 His evidence indicates that Chinese local firms actually outperformed their British counterparts in cotton spinning, despite the fact that British firms had the most advanced technology. As Chan points out, 11 successful Chinese family businesses were able to build on managerial techniques borrowed from abroad, take into consideration the unique cultural and societal environment in China, and develop new forms of organisation and management.…”