In 1984, the Chinese leader, Den Xiaoping, approved the formation of fourteen new Special Economic Zones (SEZ) in addition to the original four (Shenzhen, Zhuhai, Shantou and Xiamen) which had been created in 1979.' All of the SEZs are located in the coastal cities of China in order to further enhance the expansion of international economic cooperation, and thus speed up China's socialist modernization.
This note focuses on China's new economic initiative program, which features small- and medium-sized firms. It examines the implications of China's efforts, their success or failure, and the place of American businesses in this program. The concluding section describes the major problems encountered by Chinese and foreign investors and identifies some business opportunities for American small businesses in China.
Data for this note were collected through a field study in which the author and other ISCB members participated-an effort involving many unstructured interviews, discussions, and plant visits. This study stemmed from an invitation extended by China's State Economic Commission through the U.S. Citizen Ambassador Program. The author, as a member of a twentyseven person small business management team, toured five major Chinese provinces under this project.
Major strategies developed by the Chinese government include the creation in 1978 of the Chinese Research Society for the Modernization of Management (CRSMM) and the establishment in 1984 of the State Economic Commission and the Coordinating Center for Business Cooperation (CCBC). The CRSMM is charged with conducting research and making recommendations for the improvement of micro andmacro economic management, while the CCBC is responsible for advising and coordinating the activities of small- and medium-sized firms dealing with foreign investors. Special Economic Zones (SEZ) were first established in 1979 to facilitate international trade and give experimental private ownership firms the opportunity to succeed.
Many privately operated, state-licensed firms have been started as a result of the recommendations of the CRSMM. A total of 463,200 small- and medium-sized firms was reported in China at the end of 1986. In China, a small business is broadly defined as an enterprise (state or private) with one thousand or fewer employees. Some small businesses operate under state and local government control while many more function more freely in the Special Economic Zones. One of the results of China's open-door policy is the growth of small business operations, relative to the large state-owned companies which until recently were predominant.
According to the deputy director for the State Economic Commission, Zheng Zhaaquiao, these new, small businesses are very flexible and can turn out new products in shorter periods of time than other Chinese enterprises. In addition, they have become a major source of new employment and are providing much needed modern technologies.
Individuals or groups that contracted with the state to conduct small business operations enjoy higher incomes than their counterparts who work for a monthly salary. Based on the contract or lease agreement, a percentage of profits is paid to the state while the remainder is used by the contractors for salaries, reinvestment, and a welfare program which includes community and/or staff bonuses. Division of profits in this manner is optimal for private businesses within the SEZs, but mandatory for those outside the zones. Furthermore, individuals operating a "contracted" enterprise must pay a personal income tax if they earn more than 800 yuan (y800) per month. This tax, which is paid by the enterprise, is applicable to contracted firms both inside and outside of the SEZ.
Except for small businesses started by individuals in the SEZs, the ownership of "initiative-based contract responsibility system" enterprises still rests with the state. …