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How do Private Enterprises Develop and Grow in the New Era? - Experience and Enlightenment from Zhejiang

How do Private Enterprises Develop and Grow in the New Era? - Experience and Enlightenment from Zhejiang

Wang Zhikai   Zhejiang University Private Economic Research Center

The high-quality growth of Chinese economy in the new era depends on the Chinese private economy that has grown up in the 40 years of Reform and Opening. This is due to the innovation power of private enterprises that stems from the endogenous mechanism of the market, and innovation-driven development is the inevitable path of China's high-quality development. Therefore, the private economy is the mainstay of promoting China's development in the future, and it is also the important support of achieving high-quality development in the new era. When it comes to the development of private economy, Jiangsu Province and Zhejiang Province are both major provinces in China, and each has its own different paths and characteristics. In terms of well-off society and the enriching effect, Jiangsu's GDP and per capita GDP are higher than Zhejiang's for a long time, and it ranks second in the country all year round. However, Jiangsu is not as good as Zhejiang in terms of per capita disposable income. For example, in 2017, Zhejiang's per capita disposable income was 42,000 yuan, ranking third in the country, while Jiangsu ranked 5th in the country with 35,000 yuan. In 2018, Zhejiang's per capita disposable income was 45,800 yuan (up 9.0%), while Jiangsu's 38,000 yuan (up 8.8%). As a result, the performance of private enterprises in Zhejiang has become more prominent, and they have certain enlightening effect on the further development of private enterprises in Jiangsu and even the whole country in the new era.

 

As the capital of China's private economy, Wenzhou has counted down in Zhejiang Province and has been in the difficult predicament of development since the ‘Eleventh Five-Year Plan’. There are many reasons for this situation, but the most important one is the low-end lock of private economic cluster. Private economic clusters often intervene in global trade with the comparative advantage of low-cost processing and manufacturing. They lack independent technology, independent brands and independent sales channels, and are deployed at the lowest end of the global value chain—standardized manufacturing, and such division of labor is gradually solidified. As for the mid-to-high end of the global value chain, Wenzhou and even the Chinese private enterprises have little involvement, which makes private enterprises generally low income and vulnerable. To break the low-end self-balancing of the private economy, there must be greater external involvement. Breakthroughs in urbanization are needed to bring high-end elements to agglomeration. For these reasons, the transformation and upgrading of private enterprises do not mean that they must be transferred to the emerging high-tech industries. High-quality development also supports the transformation and upgrading of the original industry, such as increasing the added value and extending the value chain.

At present, China's rural revitalization strategy mainly solves the problem of realizing industrial prosperity. The fundamental of industrial prosperity is the problem of the market, that is, looking for a thriving industrial market for rural revitalization. In this respect, the private economy and private capital have obvious inherent advantages. In the rural revitalization and development, finance as a public capital investment should mainly play a role in stimulating social private capital, and introduce private capital to participate in development, so as to effectively solve the problem of capital investment in rural revitalization. Therefore, the private capital and the private enterprises are the basis for the continued revitalization of the countryside.

Another major contribution from the development of private enterprises in Zhejiang is the digital economy. E-commerce, big data, and cloud computing are used to explore new industries and new business models. This new technology has crossed the limits of the system and has realized the superposition of institutional dividends and technological innovation dividends. Its economic benefits are far more than those of overseas Internet companies. The digital economy is also a direction for the innovation of private enterprises, and it is also a tool to help private enterprises realize the industrial Internet and transform the manufacturing industry with information technology. It is in this sense that the private economy can effectively change the development mode of traditional industries, increase the added value of traditional industries and products, extend the chain of them and enhance the value chain by leveraging emerging information technologies and new commercial formats of e-commerce such as ‘Internet +’ and ‘+ Internet’, so as to transform traditional industries into new industries. In this respect, China's private economy, represented by Jiangsu and Zhejiang, has been continuously exploring institutional transformation in the process of Reform and Opening, and has been seeking the innovative path for sustained economic growth in the local region. That created two typical successful models of China's private economy development——the Sunan model and the Wenzhou model.

As far as the innovation model of private enterprises in Zhejiang is concerned, there are three main types.

First, cluster innovation with the low-voltage electrical appliances in Liushi Town as an example. The innovation of private economy to regional industries can be analyzed from three aspects. To start with, regional agglomeration forms the geographical scale advantage of regional industrial development, agglomerates production factors and releases scale effects to promote industrial innovation. Then, specialized division of labor improves the performance of regional industrial organizations, creates specialized regional innovative products and innovative technology centers. Finally, social collaboration promotes the overall heightened regional industrial structure and raises the level of regional urbanization.

Second, professional market innovation with Yiwu Commodity City as an example. Yiwu Commodity City has developed from ‘small commodities, big market’ to ‘small commodities, big industries’ and ‘small enterprises, large clusters '.  Now it is mainly based on online transactions. The benefits of such innovation in business model promoted in Zhejiang are significant, such as the ALIBABA e-commerce platform, Taobao, Tmall, Alipay, Ant Financial.

Third, independent innovation with Wanxiang Group Enterprise as an example. Wanxiang Group neither allows others to control and monopolize the market, nor is it satisfied that the United company Scheler provides OEM. Instead, it chooses to innovate in learning and develops its market share and influence. This is a kind of independent innovation of single enterprise on scale and group.

The key to the significant achievements of the development of private economy in Zhejiang is the market. On the one hand, market is the key to regional economic and social development. On the other hand, the government has important resources to regulate the local economy. The game between the two determines regional economic and social development, namely industry and urbanization. The communiqué of the Third Plenary Session of the 18th CPC Central Committee clearly pointed out that it is necessary to let the market play a decisive role in resource allocation, and at the same time, to better play the role of the government. This means that, on the one hand, the government must correctly handle the relationship between ‘doing something’ and ‘doing nothing’, accurately clarify the government boundary in the market economy. At the same time, it should, from the perspective of facilitating the development of private enterprises, eliminate those outdated and distorted configurations, eliminate the systems and rules that are not conducive to fair competition of enterprises, and abandon those powers that seek rents and entangle political and business relations to achieve ‘doing nothing’. On the other hand, the government must also be brave in innovation, plan actively, promote regional urbanization, provide a platform for the development of the private economy, solve problems and difficulties in its development effectively, and create a stable, efficient and low-cost business environment for them.

In the successful process of private economy development and innovation, Jiangyin and Hangzhou’s ‘New Manufacturing Plan’ are outstanding typical representatives. Jiangyin, a city in Jiangsu, is the first county in China’s manufacturing industry and the first county in the capital market. The unchanging plot is that private enterprises in Jiangyin adhere to local business and realize the intergenerational transcendence of private enterprises. Therefore, it is the only region in the developed areas of southern Jiangsu that is not reliant on land finance. The ‘New Manufacturing Plan’ is to insist that the government always need to maintain its initial intentions and good style to serve the development of private enterprises with the greatest institutional kinetic energy.

To sum up the development experience of Jiangsu and Zhejiang, especially Jiangyin and Hangzhou, we find that we must continue to insist on the following to develop China's private enterprises further in the new era.

First, development is the top priority forever. The real economy represented by manufacturing is the foundation of economic growth and financial resources forever. Therefore, keeping track of the industry, innovating constantly and intergenerational transcendence in enterprises are needed for the development. Simultaneously, urban development must hold industry and not be over-financialized.

Second, although tax cuts and fee reductions are the real measures to activate enterprise development and people's consumption, the effect depends on the sustainable development of private enterprises. It is helpful to increase supply effectively and open a strong domestic consumer market.

Third, since China enters middle-income countries, increasing investment in education, medical care, and pensions, increasing fair opportunities for regional development, and improving the equalization of public services for people are fundamental measures to start consumption-driven economic transformation and upgrading.