Institutional changes during the development of a business

Author: Zhang Zhongmin Lu Xinglong
Publisher:
Publish Date: 2003-08-01
Features: These three challenges are: (1) How to theorize the study of long-distance trade in 19th-century China; (2) How to integrate the study of business history and political history in early 20th-century China; (3) How to explain the vitality of commercial networks in early 20th-century China.
II. The External Institutional Environment for the Development of the Corporate System—Analysis of Market Development
According to the definition of institutions, enterprises, markets/Government, and families are merely aspects of institutions. New institutional economics, starting from the study of enterprises, began with an article titled "The Nature of the Firm." Coase proposed the transaction cost theory in the article, arguing that the firm is a substitute for the market. With the contributions of renowned economists such as Alchian, Demsetz, and Zhang Wei Chang, new institutional economics has become increasingly clear about the concept of the firm. It holds that the sole reason for the existence of the firm is to save transaction costs, and the relationship between firms is a market relationship, even an advanced market relationship—specifically, a factor market relationship. The separation of product markets and factor markets externally (market) and internally (firm) is solely to save transaction costs. The introduction of the transaction cost theory has injected new vitality into institutional economics. It has presented a comprehensive challenge to mainstream economics (including demand theory, supply theory, firm theory, and market theory) from a fresh perspective.
Neoclassical economists assume that all markets are perfect and that information costs are zero, thus market supply and demand automatically adjust to achieve equilibrium. However, in the real world, information is not free but has costs. Due to market imperfections, transaction costs increase. New institutional economists have discovered the potential for internalizing these induced profits and the inevitability of institutional innovation.
It is well known that commodity exchange appeared early in Chinese history. Since the Ming and Qing dynasties, when Beijing became the capital, China's prosperous regions were in the Jiangnan area. Therefore, a traditional market commercial network characterized by long-distance transportation, centered on the Grand Canal and the Yangtze River system, had long been established domestically. The traditional financial network that mediated this market, represented by Shanxi, had also taken shape. However, the main actors in the market were farmers and small producers, engaging primarily in local market adjustments and long-distance transportation for government consumption. This was fundamentally different from the modern market economy, where production is mediated for the purpose of exchange—selling to buy.
After the Western powers forcibly opened China's doors, foreign goods took over thirty years to break through China's natural economy based on the combination of agriculture and textiles, allowing Western new-style enterprises and goods to enter the Chinese market. As mentioned earlier, modern Chinese enterprises began to emerge during the Self-Strengthening Movement, following a path of first state-owned and then private, first military and then civilian industries. Meanwhile, as the Qing Dynasty collapsed, the traditional financial system that mediated China's traditional market—the—also disintegrated. New-style financial institutions—banks—were established only after the emergence of modern companies in 1897, and the central bank came into existence much later, in the 20th century.
In reality, modern Chinese companies emerged under conditions where the traditional commodity market, new-style financial institutions, and labor market had not yet been established. In other words, modern Chinese enterprises and modern