does the colour of the cat matter? the red hat strategy in china's private enterprises

Does the Colour of the Cat Matter? The Red HatStrategy in China’s Private Enterprises

Wenhong ChenUniversity of Toronto, Canada

ABSTRACT The proliferation of new property rights regimes in transitional economiesprovided an opportunity to examine the interaction between institutions andorganizations. Some private enterprises in China developed the Red Hat strategywhereby they disguised their private ownership by registering as a public-ownedorganization. Drawing on a national survey, this study investigated how institutionalvariations, transaction costs and social embeddedness affected the firms’ Red Hatstrategy. The findings suggest that private firms preferred a fuzzy property rightsarrangement in the early years of market transition. The temporal and regionalvariation of the institutional environment contributed to the adoption of the Red Hatstrategy. High transaction costs – networking cost and resource constraints – werepositively related to the adoption of the Red Hat strategy. Social embeddedness alsoplayed an important role. The reliance on transaction partners in the public sectorincreased the pressure to adopt the Red Hat, while connections with high-rankingcadres facilitated the process. However, private firms opted for clearly delineatedproperty rights as the institutional environment improved. In turn, the decisions ofindividual firms affected the institutional environment at the aggregate level. The RedHat strategy exemplifies the co-evolution of institutional change and organizationaldynamics.

KEYWORDS institutional change, private-owned enterprises, property rights regime,social networks, transitional economy

INTRODUCTION

A property rights regime is the institutional foundation of economic life acrosssocieties. Changes in property rights arrangements are at the center of socio-economic change in transitional economies. While most former socialist countriesexperienced rapid privatization, China’s market transition has been state initiated,gradual and experimental. As a result, the reform created an environment wherethe powerful fist of the state mingled with the emerging hand of the market(Zhou, 2000). Especially in the early years of market transition, the institutional

Management and Organization Review 3:1 55–80doi: 10.1111/j.1740-8784.2007.00059.x

© 2007 The AuthorJournal compilation © 2007 Blackwell Publishing Ltd

environment was characterized by a lack of well-developed market institutions andaccess to resources. As a response, private firms adopted the ‘Red Hat’ strategywhereby they disguised their private ownership and registered as a public-ownedorganization. The Red Hat strategy provides a unique lens to observe the inter-action between institutional change, property rights regime and firms’ strategicchoices of ownership types.

Why did genuine private-owned firms opt to register as public-owned if clearlydefined property rights were more efficient as suggested by the property rightsliterature? Most research on transitional economies has focused on property rightschanges in large state-owned firms. Few studies have examined the propertyrights arrangements in new private firms established since the market transition.Using the 1997 Chinese Private Enterprise Survey (Zhang and Ming, 2000), thispaper aims to fill this gap in the literature.

The new institutionalism literature is interested in how the interplay of rules,norms and networks affect organizational behaviours. Institutional impacts onorganizations are ‘a function of their location in the environment, their size andvisibility, their nearness to the public sphere, their structural position and theirrelational contacts’ (Scott, 2001, p. 178). This study examined private firms’choices to adopt a fuzzy property rights arrangement by drawing on the newinstitutionalism literature, property rights theories, transaction cost theory andsocial embeddedness theory. Specifically, we focused on the Red Hat firms in 1996and the following year, 1997, when the central government recognized the legalstatus of private firms. We explored the questions of what factors contributed to thewearing of the Red Hat by private firms.

The rest of the paper is organized into the following sections. The first sectionwill introduce the Red Hat strategy and discuss how institutional variations, trans-action costs and social embeddedness might facilitate or constrain firms’ choice ofa fuzzy property rights arrangement. The second section describes the dataset andvariable construction. The results are presented in the third section. The paperconcludes with a discussion of the adoption and abandonment of the fuzzy prop-erty rights arrangement and its consequences.

THEORY AND HYPOTHESES

The fate of private firms in China has changed dramatically since the nearlyhalf-century of the communist regime. After being nationalized in the 1950s,private firms were only allowed to operate again since 1978 when the reformsbegan. The economic reform has brought entrepreneurial opportunities withthe number of private firms increasing exponentially. By the mid-1990s, privatefirms were celebrated as China’s growth machine. Yet, as indicated by Partypatriarch Deng Xiaoping’s motto ‘touching the stones to cross the river’, China’s

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transformation from a command to a market economy has been state-initiated,gradual and experimental. While an evolutionary approach reduced the repercus-sions of rapid social change, it led to an uncertain institutional environment withthe coexistence of various ownership types (Nee, 1992). There have been state-owned enterprises (SOEs), collective-owned enterprises (COEs), township andvillage enterprises (TVEs), private-owned enterprises (POEs), joint venturesbetween foreign and domestic firms and foreign direct invested enterprises (FIEs).In the early years of market transition, private ownership lacked institutionallegitimacy and was associated with high property risk and transaction costs(Gregory et al., 2000). Accordingly, private firms were often described as ‘pariah’or ‘underdog’ (Nee, 1992; Tan, 1996).

New firms in any economy have to overcome the ‘liability of newness’ (Stinch-combe, 1965). However, new private firms in transitional China also had to findways to alleviate ‘the liability of privateness’. As a response, private firms in Chinadeveloped various strategies. Some co-opted by giving government officials ‘powershares’ in return for political protection. Some tried to exercise influence byforming business associations, cultivating patron-client ties, or outright bribery.Others chose to escape by transferring property to foreign countries (Tsang, 1996).The Red Hat strategy was the most popular practice whereby genuine privatefirms disguised their private ownership by registering as publicly owned. Accordingto one account, about 70 percent of TVEs and urban COEs were in fact private-owned (He, 2000). Throughout the 1980s, Red Hat firms outnumbered firms thatwere openly registered as private (Dai, 2005). A survey conducted in 1988 inWenzhou, where the private economy was arguably the most developed in China,identified ‘45,000 privately owned firms of various forms under the banner ofcollective enterprises, but only 10 registered private enterprises’ (Tsang, 1996, p.26). Another account revealed that ‘hundreds of thousands of privately-ownedfamily business[es]’ were Red Hat firms (Lu, 2002, p. 18).

To put on a Red Hat, a private entrepreneur often needed good connectionswith government officials and had to pay a ‘management fee’ to the affiliatedgovernment agency or public-owned firm. The following quote is a case in hand.

An official who had worked for 10 years in a regional office of the ForeignEconomic Relations and Trade Corporation decided to quit and run his ownbusiness, making use of the extensive network built up in his previous job.Instead of setting up a private firm, he made an arrangement with the localauthority whereby the firm would be officially owned by the authority andsubcontracted to him. According to the contract, the local authority would notinvest any money but would be entitled to 30 percent of the firm’s profit. Inreturn, the local authority would provide assistance in acquiring premises,licenses, electricity and telephone lines, and in dealing with the Tax Bureau onthe firm’s behalf (Chan, 1992, citied by Tsang, 1994, p. 458).

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The Red Hat Strategy and the TVE

In property rights literature, a clear delineation of private property rights is viewedas the prelude to market transactions. Poorly defined property rights give rise toagency problems and moral hazards (Alchian and Demsetz, 1973). Property rightsrequire due interpretation and enforcement. Institutional or technological changesmay shift economic actors’ preference of property rights regime. Yet, contraryto the expectation of many scholars and practitioners, property rights were notimmediately well defined in the early years of the market transition in manytransitional economies. On the one hand, the overlapping claims that emergedfrom socialist property relations made a clear demarcation of property rightsdifficult. However, economic actors deliberately blurred the boundary of publicand private property rights. In post-socialist Hungary, Stark (1996, p. 996) discov-ered the phenomenon of recombinant property as ‘an attempt to hold resourcesthat can be justified or assessed by more than one standard of measure’. However,why did genuine private start-ups – newly founded since the market transition andwithout the burden of contested property rights history – opt for fuzzy propertyrights?

There is a lack of research on institutional impact on domestic start-ups’ strategyin transitional economies (Wright et al., 2005). Less than 10 percent of articles onChinese management or organizations published in 20 international journals from1984 to 2003 were about private sector firms (Tsui et al., 2004). Most research ontransitional economies has focused on property rights changes in state-owned firmsthat were already established before the market transition (Cao et al., 1999; Car-ruthers and Ariovich, 2004; Guo and Yao, 2005). Little attention has been paidto how private firms used property rights arrangements to navigate a risky institu-tional environment.

In fact, many authors (Li, 2005; Luo et al., 1998; Putterman, 1995) have noticedthe Red Hat phenomenon and coined various terms to describe it: ‘disguised privateenterprises’, ‘de facto privatization’, ‘pseudo-collectives’, or ‘pseudo-SOEs’. Theliterature on township and village enterprises (TVEs) indicates that a considerableproportion of TVEs were Red Hat firms (Dai, 2005; He, 2000). However, mostresearch in this literature puts the emphasis on the entrepreneurial spirit of localofficials and the public aspect of TVEs as local governments provided them withcapital, markets, land and labour (Luo et al., 1998; Nee, 1992; Peng, 2001; Putter-man, 1995; Walder, 1996). Red Hat firms were not the analytical focus but ratherthe caveat in these studies. As a result, the Red Hat phenomenon has largelyremained a subject of speculation and anecdote. It is worth pointing out that whilethere must be an overlap between TVEs and Red Hat firms, the two are not exactlythe same. The resurgence of private firms was not an exclusive rural phenomenon.A Red Hat firm could be rural or urban. More importantly, while there weregenuine TVEs founded and supported by local governments, Red Hat firms were

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funded by private investment even though they were registered under publicownership. The lack of research on Red Hat firms says more about the lack of datarather than a lack of theoretical or practical relevance. As the Red Hat strategyinvolved concealment, there have been limited data on the number of Red Hatfirms, let alone firm-level characteristics that would allow for quantitative analysis.

Nonetheless, the TVE literature provides useful insights to understand the RedHat firms. Nee (1992) argued that hybrid organizations of mixed property rightswere an institutional solution to an underdeveloped market and partial reform.Such organizations gained competitive advantage from the interdependence ofprivate entrepreneurs and local governments. Luo, Tan and Shenkar theorizedthat private firms used the Red Hat as a boundary-blurring strategy to ‘double dipin the planning and market sectors of the economy’ (1998, p. 37). Taking theseinsights as a point of departure, the following discussion is organized around threetheoretical perspectives: institutional theory; transaction cost theory; and socialembeddedness theory. Using a more ‘holistic’ approach to integrating formalinstitutions, informal networks, market embeddedness and political capital (Li,2005), I will first examine how the temporal, regional and industrial dimensionsof the institutional environment affected the Red Hat strategy. Secondly, I willexplore the impact of transaction costs, in particular networking costs and resourceconstraint. Thirdly, I will investigate how social embeddedness might facilitate theRed Hat strategy.

Institutional Variations

In the new institutionalism literature, economic actions are viewed as historicallyspecific and embedded in public and private institutions such as laws, rules, normsand their enforcement mechanisms (Granovetter, 1985; Ingram and Clay, 2000;North, 1990; Rao et al., 2003). As a critical resource for economic actors tomobilize support and avoid discipline, legitimacy is a central concern in thisliterature (Meyer and Rowan, 1977). To gain legitimacy, organizations strategi-cally align themselves with dominant institutional logics (DiMaggio and Powell,1983). To paraphrase Meyer and Rowan (1977), the Red Hat strategy could serveas a ‘ceremonial conformity’ as entrepreneurs decoupled their formal ownershiptype and actual economic activities. The legitimacy conveyed by a fake publicownership might help private firms to project a more positive image, gain politicalprotection and diversify property risk. The most interesting question is not whetherbut how institutions matter (Wright et al., 2005). In what follows, I disaggregate theinstitutional environment into temporal, regional and industrial dimensions anddiscuss their effects on the Red Hat strategy.

The temporal variation. Table 1 summarizes changes in laws and policies regulatingprivate firms since 1978. While the trend had been a move from state socialism



hostile to private property rights towards a market economy, it had been a bumpyride. In the beginning years of the market transition, laws and policies regulatingthe private sector were either absent or underdeveloped. Observers portrayed theinstitutional environment as a minefield and managers saw the political and regu-latory sector as the ‘most influential, most complicated and least predictable’ (Tan,1996, p. 33). Operating without a well-defined legal status and at oddswith the official Marxist ideology, it was a common concern among private entre-preneurs that their property would be confiscated. Indeed, they often became theconvenient scapegoats in political campaigns during the 1980s (Oi, 1995; Tsang,1994, 1996).

During 1988 and 1992, significant institutional changes occurred. In 1988, theState Council issued the Private Enterprise Law and a subsequent constitutionalamendment acknowledged the private sector as a supplement to the socialist publicsector. The number of private firms doubled between the years 1988 and 1989(Schönleber, 2000). However, the years between 1989 and 1992 were overshad-owed by the political turmoil of 1989. Private entrepreneurs were encouraged toregister as public-owned or surrender their businesses to government agencies.Tsang reported that in Sichuan province ‘in 1990 the number of private enterprises

Table 1. Changes in laws and policies regulating private firms since 1978

1978 The 3rd Plenum of the CCP’s 11th Central Committee allowed individual industrialhouseholds (getihu) to operate.

1983 The ‘Three No’ policy regulated private enterprises with more than one employee (nopromotion, no public propaganda and no crackdown).

1988 The Private Enterprise Law was released.Constitutional amendment recognized private enterprises as supplementary to the

socialist public sector.The State Council released the Tentative Stipulations on Private Enterprises, which

defined a private firm as ‘a for-profit organization that is owned by individuals andemploys more than eight people’.

1992 Communist Party patriarch Deng Xiaoping inspected Guangdong province and calledfor deepening the transition to the market economy.

1993 Proposals on Promoting the Development of Individual and Private Enterprises and theCompany Law were released.

1997 The 15th Party Congress recognized the legal status of private enterprises.1999 A constitutional amendment acknowledged that ‘non-public enterprises are an

important part of the socialist market economy’.2000 CCP Secretary-General Jiang Zemin invited private entrepreneurs to enter the Party

ranks in the speech celebrating the Party’s 79th anniversary.2003 The 3rd plenary of the CCP’s 16th Central Committee allowed private firms invest in

any economic sector except those involving national security.2004 A constitutional amendment acknowledged ‘citizens’ lawful private property is

inviolable’.

Note: Compiled by the author based on various sources: Buckley (2004); Liu (2004); Schönleber (2000).

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converted into pseudo-collectives was 16 times that in 1989’ (1996, p. 28). Thegrowth rate of private enterprises dropped dramatically between 1989 and 1990(Schönleber, 2000). However, the institutional environment took another turn in1992 when Deng Xiaoping inspected Guangdong – the showcase of China’sreform – and called for deepening the market transition. Private firms founded inthe early years of the market transition faced a more hostile and unpredictableenvironment than those founded later (Tan and Tan, 2005). Hence the following.

Hypothesis 1: Private firms founded earlier in the transition period are more likely to adopt the

Red Hat strategy than those founded later.

The regional variation. Regional differences in natural resources and infrastructurehave ramifications for firms’ contractual relationship. For instance, the trans-portation condition and quality of coal in the eastern, midwestern and westernregions of the USA affected the extent to which coal and energy firms engagedin relationship-specific investment ( Joskow, 1987). In addition to the gradualdevelopment of market institutions over time, there have been great regionaldisparities in transitional China (Tsui et al., 2004). The central government createda further layer of regional variation through differential policy treatment.

Most reform policies started with a few cities or counties. If the experimentturned out to be successful, it would be expanded to more areas and eventuallypromoted as a national policy (Cao et al., 1999). The central government allowedthe coastal region to experiment with market forces earlier and more intensively.Almost all of the special economic zones and industrial parks were first establishedin the coastal region. A fast growing private sector allowed the coastal region tocontribute more to the central government coffers than the less developed regioninland. Accordingly, officials in the coastal region were in a better position toadvocate for even more favourable policies for their jurisdictions than their inlandcounterparts (Tsang, 1994). Private firms first mushroomed in the coastal regionwhere policies were more market oriented than in the inland. Hence the following.

Hypothesis 2: Private firms in the inland are more likely than those in the coastal region to

adopt the Red Hat strategy.

The industrial variation. The industry sector was another institutional factor thataffected the Red Hat strategy. Private firms have only been allowed to enterhigh-tech industries such as biotechnology, pharmaceuticals and the chemicalindustry since the mid-1990s (Lau et al., 1998). The so-called pillar industries(including telecommunications, finance, aviation, energy, etc.) had been the exclu-sive playground of state-owned firms throughout the 1990s (Liu, 2004). Private firmsfaced significantly higher barriers than non-private firms to obtain import andexport licenses. Without such licenses, they had to import and export via designated



state-owned trading agencies, which could appropriate as much as 40 percent of theprofit (Zhang and Hu, 2000). The following example illustrates how private firmsused the Red Hat strategy to circumvent discriminatory government polices.

Renhe invested 30,000 Yuan and set up a private construction enterprise in1983. However, private enterprises were not permitted to operate in the publicutility industry at that time. Therefore, he got affiliated with the Civil Admin-istration Department of the Beijing Municipal Government and his enterprisebecame a construction team under the department’s construction section. Atthat time, the enterprise and the section chief had negotiated a clear, oralagreement that the Civil Administration Department would neither invest norparticipate in the operation of the enterprise. The department would only beresponsible for helping the enterprise to get registered (Zhang, 2004a).

As private firms had been excluded from highly regulated industries for a longtime, wearing a Red Hat was virtually mandatory for them to enter and operate inthese industries. Hence,

Hypothesis 3: Private firms in highly regulated industries are more likely than those in other

industries to adopt the Red Hat strategy.

Transaction Costs

The transaction cost theory focuses on how cost and benefit concerns affect firms’governance mode and strategic behaviour (Williamson, 1994). Firms in transitionaleconomies have higher transaction costs than their counterparts in developedmarket economies (Wright et al., 2005). Moreover, research on transitional Chinahas documented that private ownership gave rise to higher transaction costs –resource constraints, government harassment and discrimination by executives inthe public sector (Nee, 1992; Oi and Walder, 1999; Peng, 2001; Tsang, 1994).

Due to institutional discrimination, private firms compete with firms of otherownership types in an unleveled playing field. The central government gave SOEsor even FIEs privileged access to capital and markets, while local governmentssupported COEs through subsidies and expedited access to raw materials. Bycontrast, private firms had limited access to capital and markets, which was furtherhampered by ‘a prolonged period without well-developed markets for factors ofproduction or assets’ (Naughton, 1995, p. 266). Private firms had to buy rawmaterials at higher prices. They sometimes paid taxes even higher than foreign firmsoperating in China. Even official Party documents admitted that conditions shouldbe created so that firms of different ownership types could compete fairly (Li et al.,2005). A fuzzy property rights arrangement might help private firms to economizeon transaction costs. Ethnographic research showed that adopting the Red Hat

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brought private firms ‘public sector advantages as tax holidays, easier access to bankloans, less bureaucratic harassment and fewer restrictions on trade’ (Wank, 1999, p.79). In what follows, I focus on two types of transaction costs that might motivatefirms to adopt the Red Hat strategy: networking costs and resource constraints.

Networking costs. In transitional China, the level of managerial networking increasedwith uncertainty, regulation and competition (Luo, 2003). Lacking the legitimacyenjoyed by SOEs and COEs, private firms were vulnerable to rent-seeking officials.Moreover, established SOEs and COEs tended to do business with their ownkind, due to state regulation, managerial preference or historic connection. Thesestructural disadvantages induced private firms to engage in intensive networking(Xin and Pearce, 1996). Depending on social networks to cope with uncertainty,acquire legitimacy, offset the absence of formal institutional support and search fortransaction partners, private firms had a higher networking cost than firms of otherownership types (Carlisle and Flynn, 2005). Compared with executives in SOEs,private entrepreneurs cultivated networks more proactively and gave businesscontacts more expensive and non-reciprocated gifts (Peng and Luo, 2000). Privatefirms valued social networking as the most effective way of finding transactionpartners (Zhou et al., 2003).

While the Red Hat strategy might be used as a strategy to economize on the hightransaction costs of network building, there might be an unintended consequence.The Red Hat strategy might increase rather than reduce networking costs as afirm, once having put on a Red Hat, might become locked in and develop a strongmotivation to keep the connection going with government officials and businesspartners. Nee suggested that the rise of a fuzzy property rights arrangement wasfueled by firms’ efforts to cope with widespread institutional uncertainties, which inturn led to intense investment in networking (1992, p. 3). In both scenarios, a highnetworking cost might be associated with the Red Hat strategy. Therefore,

Hypothesis 4: The more the resources committed to networking, the greater is the likelihood of

a private firm adopting the Red Hat strategy.

Resource constraints. Another type of transaction cost associated with private owner-ship was the limited access to external capital (Li, 2005; Naughton, 1995). Based onpolitical rather than economic considerations, state-owned financial institutionswere obliged to grant loans to public-owned enterprises. By contrast, they oftenhad a tight fist in lending to private firms. Two-thirds of private entrepreneurscomplained about having a hard time getting loans (Zhang, 2004a). The followingexcerpt is illustrative.

Xipei Jiang remembered vividly that he visited a bank director, bringing speciallocal products such as turtle and trout. Jiang told the bank director that he had



secured a lot of orders from clients and the loan from the bank would have agood return. However, the director could not help him and said, ‘young man, itis not that I don’t support you. But I cannot violate state policy.’ The directorpolitely rejected Jiang’s loan application. When Jiang returned home in theevening, he found the village Party secretary sitting there. The Party secretarymade the special visit to ask whether he wanted to turn his private enterprise intocollective-owned. Jiang had been thinking how to expand and occupy themarket rapidly. At that time, he felt that there was an opportunity. ‘Right. Whynot turn the enterprise into collective-owned?’ However, by so doing, he wouldhave to give up his hard-earned asset of 5 million yuan and turn himself from aboss to an employee. This question put him in a dilemma. Very soon, Jiang gotover with the property rights concern. In order to grow, he put a Red Hat on hishead (Liao, 2005).

The story shows how resource constraint, in this case the barriers to a bank loan,drove private entrepreneurs to adopt the Red Hat strategy. Craving externalcapital from state financial institutions and other investors in the public sector,private firms might have experienced a ‘coercive pressure’ (DiMaggio and Powell,1983) and thus chose the Red Hat strategy. Therefore,

Hypothesis 5: The greater the reliance on external capital, the greater is the likelihood of a

private firm adopting the Red Hat strategy.

Social Embeddedness

Institutional pressure is mediated by an organization’s market and social embed-dedness. The lack of formal institutions often increases firms’ dependence oninformal institutions (Gulati and Gargiulo, 1999). Executives’ social ties are espe-cially important to firms’ strategy in an uncertain environment (Geletkanycz andHambrick, 1997). Network ties established during the socialist period were themost important factor shaping the economic reorganization in the post-socialistera (Grabher and Stark, 1997). In what follows, I discuss three aspects ofsocial embeddedness that might affect firms’ adoption of the Red Hat strategy –market embeddedness, the founder’s social network and the founder’s politicalcapital.

Market embeddedness. Governance practices ‘are not adopted by organizations associal atoms but rather through a process of social construction by networks ofmanagers groping to respond to changes in the legal and political environment’(Davis and Greve, 1997, p. 1). Firms observe and mimic their peers. As one’s peers– especially those who are visible or influential – jump ship, a new organizationalpractice becomes contagious (Greve, 1995). Besides horizontal ties with peers,

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vertical ties with transaction partners – including buyers and suppliers – are anintegral part of a firm’s reference group. The public sector dominated the Chineseeconomic landscape in the first two decades of market transition. Public-ownedfirms made up the majority of most private firms’ suppliers and clients. Privatefirms who mainly dealt with public-owned firms might have been exposed togreater pressure to mimic their transaction partners through adopting the Red Hatstrategy. However, if a private firm primarily transacted with other private firms,the pressure to adopt a Red Hat might be smaller. Therefore,

Hypothesis 6: Private firms that primarily transacted with suppliers and clients in the private

sector are less likely to adopt the Red Hat strategy than those who do not.

Founder’s personal network. Entrepreneurs access resources through personal net-works. In transitional China, private entrepreneurs dedicated great resources totrade up with high-ranking government officials (Carlisle and Flynn, 2005; Pengand Luo, 2000). The Red Hat strategy required good connections with govern-ment officials (Tsang, 1996). Having a high-ranking cadre in the core networkmight facilitate the adoption of the Red Hat strategy due to the strength of ties andthe resources commanded by the network contact. Therefore,

Hypothesis 7a: Private firms with connections to high-ranking cadres are more likely to adopt

the Red Hat strategy than those without such connections.

However, as local governments had been accommodating in handing out RedHats, they benefited financially from tax revenue as well as politically frombeefed-up statistics. In some regions, the Red Hat was put onto private firms ratherthan being sought after by private entrepreneurs. Tsang (1998) argued thatnetwork ties with high-ranking officials were a valuable, rare resource that wasdifficult to imitate and could be a source of competitive advantage. Peng (2004)indicated that trust and solidarity embedded in kinship networks was an informalinstitution that shielded private entrepreneurs from predatory officials and econo-mized transaction costs. Thus, connections with high-ranking cadres might providesufficient protection and access to resources, which in turn reduced the need for aRed Hat. Hence,

Hypothesis 7b: Private firms with connections to high-ranking cadres are less likely to adopt the

Red Hat strategy than those without such connections.

Political capital. A strong body of literature has engaged in a debate about therelative importance of political capital, defined as Chinese Communist Partymembership and cadre status, during market transition. While some claimed arelative decline (Nee and Cao, 2005), others argued that the state redistribution



system remained powerful in resource allocation (Bian and Logan, 1996).However, few dispute that Communist Party membership and high-ranking cadrestatus signaled political loyalty and were rewarded with insider information andprivileged access to resources, which could be converted into great economicadvantage (Rona-Tas, 1994). Party affiliations and cadre status became a form ofcapital, involving accumulation, investment, as well as return. Various formsof capital – human, social, financial and political – are intertwined and mutuallyreinforce one another. For instance, a high-ranking cadre was likely to be bettereducated and have more social capital. Yet, each form of capital often had itsindependent effect (Nee and Cao, 2005).

Owners’ Party membership and cadre status helped private firms to secure bankloans and bypass red tape. Private entrepreneurs with political capital were lesslikely to feel institutional discrimination than those without (Li et al., 2005).If political capital could compensate for a lack of legitimacy and economizetransaction costs, founders with political capital might be less motivated to choosethe Red Hat strategy. Hence,

Hypothesis 8: Private firms whose founder has political capital are less likely to adopt the Red

Hat strategy than those without.

METHOD

The paper draws on the 1997 Chinese Private Enterprise Survey (Zhang andMing, 2000), designed and administered by the Institute of Sociology at theChinese Academy of Social Sciences and the research office of the All-ChinaFederation of Industry and Commerce. The survey was based on a representativesample of 1,171 private enterprises in 250 cities and counties in 21 provinces,self-governed cities and autonomous regions. Respondents were the founders orthe principal investors of the firm.

Sample

Private-owned enterprise is a term that is often used loosely in transitional China.A broad definition may include all economic entities outside the public sector –individual industrial households, private firms, joint ventures between foreign anddomestic firms and foreign invested firms (Tsui et al., 2006). Overlap and cross-linkages between ownership types make private firms ‘the most elusive forresearchers and its statistics vary widely across sources’ (Gore, 1998, p. 145).Focusing on domestic private entrepreneurial firms, the 1997 survey used a narrowdefinition for private-owned enterprises. One question in the survey asked therespondent ‘in which year did you register as private-owned?’ All surveyed firms

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were private-owned when the survey was conducted in 1997, except for 51 caseswith missing values.

In this paper, the definition of private firms is further narrowed through theexclusion of individual industrial households (getihu). According to the PrivateEnterprise Law released in 1988, a private firm is a profit-making economic entitythat hires eight or more employees and whose assets are owned by individual(s).Those with fewer than eight employees are considered individual industrial house-holds. However, some private firms adopted the ‘small hat strategy’. Although theyhired eight or more people, they chose to register as individual industrial house-holds by under-reporting the number of employees. Since the 1997 survey did notprovide enough information to distinguish genuine individual industrial house-holds from those who chose the small hat strategy, individual industrial householdsare excluded from the analysis. In addition, firms founded before 1978 or in 1997were excluded. Firms created before 1978 were not included because private firmshave only been allowed to operate again since 1978 following the ban in the 1950s.Firms founded in 1997 were excluded as the survey measured firm-level charac-teristics in 1996 but not in 1997. These sample selection strategies reduced thenumber of cases from 1,171 to 637. The means and standard deviations of vari-ables before and after the sample selection were compared and the changes weresmall. The data analysis focuses on the Red Hat strategy in 1996. That is, it onlyprovides a snapshot of the Red Hat strategy in 1996 and the results should beinterpreted with caution.

Measures

The dependent variable – the definition of the Red Hat firm. There was no question in thesurvey that directly asked whether or not the firm had once adopted the Red Hat.The survey did ask respondents about their registered ownership type in thefounding year and in 1996 respectively and the year in which the firm registered asprivate-owned. The questions were formulated as follows:

Question 6A. ‘In which year did you begin your own enterprise? At that time, what was the

registered ownership type?’

Question 6B. ‘In which year was your enterprise registered as private-owned?’

Question 6C. ‘By the end of 1996, what was the registered ownership type?’

In this analysis, a Red Hat firm is defined as a genuine private firm that registeredas public-owned in 1996. By definition, firms that were previously public-owned butprivatized later should not be considered as Red Hat firms. To identify the Red Hatfirms, the key is to make sure that firms that once registered as public-owned were



indeed genuinely private-owned. That is, the firm must have been set up through theinvestments of private persons. Based on question 6A, firms in the survey werefounded by private person(s), although a considerable proportion of them chose toregister under a public ownership type when they started up (Fig. 1).

Besides question 6A, additional information confirmed firms’ genuine privateownership. A descriptive analysis of firms’ capital composition strongly supportsthe notion that firms were primarily funded by capital from private persons. Onaverage, close to 80 percent of the capital in the founding year was the founder’sown investment and 55 percent of the firms solely relied on investment from thefounder. By contrast, close to 90 percent of firms did not receive any investmentfrom any level of government or public-owned enterprises in the founding year.The average investment from governments or public-owned enterprises made up0.1 percent of firms’ total capital in the founding year. In 1996, on average, about80 percent of the capital was the founder’s own investment while 54 percent of thefirms relied entirely on investment from the founder. Accordingly, 85 percent ofthe firms did not receive any investment from governments or public-owned firmsand the average investment from such sources made up 0.3 percent of firms’ totalcapital in 1996. As firms were primarily funded by private investment and rarelyreceived any public investment, it is logical to assume that they were genuinelyprivate-owned. The dependent variable – wearing the Red Hat in 1996 – is abinary variable coded as 1 if the registered ownership type in 1996 was public-owned and 0 if private-owned.

The independent variables. There are three sets of independent variables. All refer tofirms’ characteristics in 1996, unless otherwise noted. The first set involves the

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Figure 1. The proportion of Red Hat firms in each founding year from 1978 to 1996Note: N = 612.Source: 1997 Chinese Private Enterprise Survey.

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three dimensions of the institutional environment: the temporal, regional andindustrial variation. To capture changes in the institutional environment over time,private firms are grouped into three cohorts: that of 1978–1988, 1989–1991 andpost-1992 cohort. Both 1988 and 1992 are selected as the cutting-off pointsbecause major changes in laws and policies regulating private firms took placein these two years. The region in which private firms located is divided into thecoastal region and the inland, coded as 1 and 0, respectively. The industrialvariation is a dummy variable with highly regulated industries (including energyindustry, insurance and financial industry, real estate and high-tech industry)coded as 1; other industries are coded as 0.

The second set of independent variables measure the two types of transactioncosts associated with private ownership – networking costs and resource constraint.Networking costs are measured by the proportion of net profit after tax that isdedicated to networking or so-called ‘social intercourse’. Respondents were askedto explain ‘how was the net profit after tax of your enterprise in 1996 distributed’within six categories: (i) investing in expanding production; (ii) spending on socialintercourse; (iii) dealing with all kinds of appropriation (Tanpai); (iv) spending on allkinds of charitable donations ( Juanzeng); (v) dividends for investors; and (vi) others.The proportion of net profit after tax dedicated to networking is calculated as theproportion of ‘social intercourse’ expense in the sum of the six categories. Resourceconstraints are measured by the proportion of capital raised from external sourcesand thus indicate firms’ reliance on external capital. One question in the surveyasked for the amount of capital in 1996 from the following sources: the respon-dent’s own investment; various levels of government; public-owned enterprises;other individual investors; overseas investors; and others. As long as the capital wasnot from the founder’s own pocket, it is considered as capital from external sources.

The third set of variables focuses on the firm’s market embeddedness, thefounder’s network connection and the founder’s political capital. Respondentswere asked about the ownership type of their firms’ stable suppliers and clients.Market embeddedness is constructed as a dummy variable coded as 1 if both stablesuppliers and clients were private owned and 0 if this was not the case. Thisvariable is a proxy of firms’ reliance on transaction partners in the private sector.The founder’s network connection is a dummy variable measured by the presenceof at least one high-ranking cadre in the founder’s core network consisting ofparents, spouse, children and the closest friend. This variable refers to the founder’snetwork connection at the time of founding. Political capital is measured by twodummy variables: (i) whether the founder was a Communist Party member; and (ii)whether the founder was once a high-ranking cadre. Party membership refers tothe respondent’s political affiliation in 1996 and high-ranking cadre status refers tothe founder’s status before founding. In addition, the logarithm of total capital andannual sales revenue in 1996 are included in the analysis for statistical controlpurposes.



RESULTS

Descriptive Statistics

Table 2 reports descriptive statistics of variables used in the analysis. In 1996, closeto 13 percent of private firms founded before that still wore a Red Hat. About 27percent of private firms were founded between 1978 and 1988, 19 percent between1989 and 1991 and 54 percent after 1992. More than half were founded in thecoastal region. About 13 percent of firms had entered the highly regulated indus-tries in 1996. Private firms experienced high transaction costs and resourceconstraints. In 1996, an average of 16 percent of net profit was dedicated tonetworking. Overall, only one-fifth of firms’ capital came from external sources.The overwhelming majority of private firms relied on public-owned suppliers andclients in 1996 as only 8 percent transacted primarily with other private firms. Atthe time of founding, close to 30 percent of founders had at least one high-rankingcadre in their core networks. While 18 percent of the founders were CommunistParty members by 1996, 12 percent had once been a high-ranking cadre beforefounding their business. Table 2 also provides the correlations between variables.The temporal and regional variation of the institutional environment, capitalconstraint, market embeddedness and founder’s network connection to a high-ranking cadre were significantly correlated with the Red Hat strategy in 1996.

Results on the Hypotheses

Table 3 reports the results of a logistic regression estimating the effects of institu-tional change, transaction costs and social embeddedness on the likelihood of theRed Hat strategy in 1996. A test of variance inflation factors (VIF) suggests thatthere is no significant multicolinearity.

Institutional variations. Private firms founded in the early years of the market tran-sition were significantly more likely than those founded later to wear the Red Hatin 1996. However, there was no significant difference between private firmsfounded between 1989 and 1991 and those founded later. Thus, Hypothesis 1 isonly partially supported. Consistent with Hypothesis 2, private firms in the inlandwere significantly more likely to wear the Red Hat in 1996 than those in the coastalregion. Although private firms operating in the highly regulated industries seemedto be more likely to wear the Red Hat, the effect was not statistically significant andHypothesis 3 was rejected.

Transaction costs. Supporting Hypothesis 4, private firms with higher networkingcosts were significantly more likely to use the Red Hat strategy in 1996. However,the effect is only marginally significant (p < 0.1). Consistent with Hypothesis 5,resource constraint encouraged the Red Hat strategy in 1996. The proportion of

70 W. Chen


Tab

le2.

Des

crip

tive

stat

istic

san

dco

rrel

atio

nsof

vari

able

s

Var

iabl

eM

ean

SD

12

34

56

78

91

01

11

2

1R

edH

atin

1996

0.13

0.33

Inst

itu

tion

alfa

ctor

Coh

ort

219

78–1

988

0.27

0.44

-0.1

2***

319

89–1

991

0.19

0.39

0.15

***

-0.0

7†

Post

1992

0.54

0.50

4R

egio

n(c

oast

alre

gion

=1)

0.53

0.50

-0.0

6†-0

.29*

**0.

055

Indu

stry

(hig

hly

regu

late

din

dust

ry=

1)0.

130.

330.

05-0

.02

-0.0

10.

02

Tra

nsa

ctio

nco

sts

6R

esou

rce

com

mitt

edto

netw

orki

ng0.

160.

160.

010.

00-0

.08†

0.03

0.00

7R

elia

nce

onex

tern

alca

pita

l0.

210.

280.

14**

*-0

.09*

**-0

.05

-0.1

0*0.

03-0

.10*

*So

cial

emb

edd

edn

ess

8T

rans

acte

dpr

imar

ilyw

ithpr

ivat

efir

ms

0.08

0.28

-0.0

8*0.

01-0

.06

0.03

0.00

-0.0

50.

04

9C

onne

ctio

nsto

high

-ran

king

cadr

ein

the

core

netw

ork

0.30

0.46

0.18

***

0.01

0.00

0.02

0.07

†-0

.08*

**0.

13**

*0.

01

Foun

der’

spol

itica

lCap

ital

10Pa

rty

mem

bers

hip

0.18

0.39

-0.0

1-0

.06

-0.0

30.

08*

0.07

†0.

010.

07†

0.00

0.02

11H

igh-

rank

ing

cCad

re0.

120.

320.

040.

07*

-0.0

50.

000.

04-0

.04

0.12

***

-0.0

20.

10**

0.12

***

Con

trol

vari

able

sT

otal

capi

tal(

in1,

000

RM

B)

1,04

42,

786

12T

otal

capi

tal(

in1,

000

RM

Blo

gged

)5.

610.

550.

19**

*0.

16**

*0.

000.

000.

05-0

.09*

**0.

12**

*-0

.10*

*0.

12**

*0.

12**

*0.

06

Rev

enue

(in1,

000

RM

B)

321.

389

8.6

13R

even

ue(in

1,00

0R

MB

logg

ed)

2.99

0.67

0.23

***

0.11

**0.

020.

000.

06-0

.14*

**0.

10**

-0.0

50.

07†

0.08

*0.

08*

0.55

***

Not

es:

†p

<0.

10;*

p<

0.05

;**

p<

0.01

;***

p<

0.00

1.N

=63

7.



external capital significantly increased the likelihood of the Red Hat strategy.Thus, Hypothesis 5 can be accepted.

Social embeddedness. If a firm’s regular transaction partners primarily consisted ofprivate firms, it allowed for relative independence from the public sector, whichsignificantly reduced the likelihood of wearing a Red Hat in 1996. Hence, Hypoth-esis 6 can be accepted. However, the effect is only marginally significant (p < 0.1).The presence of a high-ranking cadre in the founder’s core network at the time of

Table 3. The effect of institutional environment, transaction costs and social embeddedness on theRed Hat strategy in 1996 (logistic regression)

Model 1 Model 2

B (SE) Exp(B) B (SE) Exp(B)

Institutional factorFounding year (post-1992 as reference group)1978–1988 (H1) 0.72 (0.29)* 2.061989–1991 (H1) -0.28 (0.40) 0.75Region (coastal region = 1) (H2) -0.60 (0.27)* 0.55Industry (highly regulated

industries = 1) (H3)0.26 (0.35) 1.29

Transaction costsResource committed to

networking (H4)1.34 (0.76)† 3.83

Reliance on external capital(H5)

1.33 (0.44)** 3.78

Social embeddednessTransacted primarily with

private firms (H6)-1.30 (0.75)† 0.27

Connections to high-rankingcadre (H7)

1.02 (0.27)*** 2.76

Founder’s political capital (H8)Communist Partymembership

-0.19 (0.35) 0.83

Founder was once ahigh-ranking cadre

-0.18 (0.38) 0.83

Control VariablesTotal capital (in 1,000 RMB

logged)0.45 (0.26)* 1.57 0.08 (0.27) 1.08

Annual sales revenue (in 1,000RMB logged)

0.89 (0.23)*** 2.44 0.96 (0.25)*** 2.61

Constant -7.32 (1.29)*** 0.00 -6.17 (1.38)*** 0.00-2 Log likelihood 447.98 402.61Nagelkerke R Square 0.11 0.23

Notes:† p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001.

72 W. Chen


founding significantly increased the likelihood of the Red Hat strategy in 1996.Private entrepreneurs whose core networks included high-ranking cadres werealmost twice as likely as those without such connections to wear the Red Hat. Thus,Hypothesis 7 can be accepted. Communist Party membership and previous high-ranking cadre status negatively affected the Red Hat strategy. However, botheffects were not statistically significant and Hypothesis 8 must be rejected.

The analysis suggests that the temporal and regional variations of the institu-tional environment affected firms’ adoption of the Red Hat strategy. High trans-action costs associated with private ownership – networking costs and resourceconstraints – encouraged private firms to embrace the Red Hat strategy. Marketembeddedness, measured as the ownership type of the firm’s stable suppliers andclients, affected the decision to put on a Red Hat. If firms primarily transacted withother private enterprises, the likelihood of adopting the Red Hat strategy wassignificantly reduced. Connections to high-ranking cadres facilitated the adoptionof the Red Hat. However, political capital seemed to have had no significantimpact on the Red Hat strategy.

DISCUSSION

Navigating in an uncertain institutional environment, private firms used anambiguous property rights arrangement as a strategy to circumvent discriminatoryregulations and reduce transaction costs. Yet, as shown in Figure 1, the proportionof Red Hat firms among new private start-ups in each founding year from 1978 to1996 declined steadily from the late 1980s. Only 4 percent of private firms foundedin 1996 adopted the Red Hat strategy.

If we follow the insights of the property rights theory, it seems that the Red Hatstrategy was not an efficient choice, at least in economic terms. In analysis notreported here, the Red Hat strategy did not lead to superior performance in termsof firms’ return to sales (ROS) or return to asset (ROA) in 1996, after controllinginstitutional factors and firm characteristics. That is, firms adopting the Red Hatstrategy were not economically more efficient than those with a clearly definedproperty rights regime. Disguising themselves as state-owned or collective-ownedenterprises meant that Red Hat firms had to share their problems, such as socialwelfare provision and administrative intervention (Lin et al., 1998). Poorly definedproperty rights expose them to appropriation and disputes, which may jeopardizetheir long-term growth (Dai, 2005).

As superior organizational performance is contingent on the extent to which afirm’s strategy matches with the environment, a fuzzy property rights arrange-ment only served private firms when the institutional environment was ambigu-ous and transaction costs were high. As market institutions became moredeveloped and many constraints on accessing resources were removed, privatefirms gained a more stable legal status and higher legitimacy (Guo and Yao,



2005; Zhou et al., 2003). These institutional changes led to the declining attrac-tiveness of the Red Hat strategy and the proliferation of well-defined privateproperty rights.

Not only had the Red Hat strategy been abandoned by new start-ups, it had alsolost the favour of incumbents as those who had adopted the Red Hat began to shedtheir camouflage. In 1997, the same year as the 1997 Chinese Private EnterpriseSurvey was conducted, the 15th National Congress of the Communist Partyrecognized the non-public sector as an important part of the socialist marketeconomy. Accordingly, local governments modified bylaws to encourage privatebusinesses. According to one account, close to 10,000 private firms in big cities tookoff the Red Hat and formally registered as private-owned in the following years(Qian, 2001).

The Red Hat story is ending. Some had a happy ending on stock markets whileothers had a bitter finale at court where private entrepreneurs were convicted ofmisappropriating state assets or tax evasion. A fuzzy property rights arrangement,once hailed as an institutional innovation that facilitated economic development,the Red Hat strategy has fallen from grace in recent years and indeed may be aphenomenon of the past. Yet it was a peculiar phenomenon in a peculiar historicalperiod. Indeed, the Red Hat is now considered a ‘time bomb’. As one economistcommented,

Now there are three types of Red Hat firms . . . The first type has taken off theRed Hat . . . Now that they have solved the problem of property rights arrange-ment, they develop relatively well . . . The second type is still wearing the RedHat. They have not solved the problem yet. Therefore, their developmentvaries . . . It is said that those who wear a Red Hat have a time bomb on theirhead. The first type of firms have safely removed the bomb, the second type hasnot removed the bomb yet, while the third type blew up when removing thebomb. That is, in the process of clarifying property rights, they were not recog-nized as private-owned but state- or collective-owned (Zhang, 2004b).

Limitations

The findings are subject to several limitations. First, as the survey targeted firmswho formally registered as private-owned in 1997, there might be a selection basisas private firms who did not take off the Red Hat at that time were not included.Therefore, the data may underestimate the impacts of institutional environmentand transaction costs on the Red Hat strategy. Secondly, the measurements of theinstitutional environment – the temporal, regional and industrial dimensions – inthe data tend to be crude. Thirdly, the analysis is a cross-sectional analysis offirms’ Red Hat status in 1996 and thus the relations identified may not becausal. Fourthly, the study did not analyse why private firms decide to remove

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the Red Hat. This would be an important and interesting topic for futureresearch.

Contributions and Implications

Despite these caveats, this paper makes a few contributions. First, the Red Hatstrategy and the trend towards a clear delineation of private property rights are atopic of both applied and scholarly importance that has remained largely unex-plored. There has been a paucity of empirical research on private firms’ strategicchoice within institutional constraints in transitional China, in particular how theyused a fuzzy property rights arrangement as a strategy. Using a national surveydataset, this paper helps to fill a gap in the existing literature.

Secondly, by integrating three theoretical perspectives, this paper provides afine-grained analysis of how institutional variations, transaction costs and socialembeddedness affected private firms’ strategic choice of property rights arrange-ments. At first glance, it seems that private entrepreneurs did not understand whatthe Party patriarch Deng Xiaoping meant when he said, ‘It doesn’t matter if a catis black or white as long as it catches mice’. However, a closer examination revealsthat the colour of the cat did matter, as the institutional environment favoured onecolour over another. Facing a hostile and unpredictable institutional environmentwith underdeveloped market conditions, private firms established in the earlierstage of the market transition were significantly more likely than those foundedlater to adopt the Red Hat strategy. Private firms located in the more marketoriented coastal region were less likely to adopt the Red Hat, compared with thoseinland. The findings are consistent withthose of existing studies that firms preferreda fuzzy property rights regime in an underdeveloped market and partial reform(Nee, 1992; Tian, 2000).

Thirdly, the paper provides insights into the interaction of institutions andorganizations as a major mechanism of social change (North, 1990; Scott, 2001).The Red Hat story exemplifies the co-evolution of institutional changes and orga-nizational dynamics. The results support property rights theories developed inadvanced economies. While private firms preferred fuzzy property rights in theearly years of the market transition, they opted for clearly delineated propertyrights as the institutional environment improved. Adopting and abandoning theRed Hat ‘as long as it catches mice’, private firms showed great flexibility anddynamics.

Peng (2001) commented that many institutional innovations touted in the earlystage of the market transition faded as market reform proceeded. With the wisdomof hindsight, the Red Hat strategy seems to be a transitional expediency. However,as Dobbin and Baum (2000, p. 2) argued, ‘for sociologists, the goal is to explainhow context and history contribute to management trends, after those trends havecome and, sometimes, gone’. The Red Hat strategy has faded, but not without



some long-term consequences at the organizational and the macro level. Thereis a growing literature suggesting that public- and private-owned firms differsignificantly in their strategies and performance (Ralston et al., 2006). The initialorganization imprint often has a persistent impact. Firms of fuzzy property rightsarrangements tended to adopt more innovative, provocative and risk-taking strat-egies (Luo, 1999). Ownership type is a powerful predictor of organizational culture.Firms of different ownership types adopt such distinctive strategies that Chineseexecutives use the ownership type as a shortcut for classifying firms into differentstrategic groups (Peng et al., 2004).

The rise and fall of the Red Hat strategy manifests North’s insight that ‘bothwhat organizations come into existence and how they evolve are fundamentallyinfluenced by the institutional framework. In turn they influence how the institu-tional framework evolves’ (1990, p. 5). Even though the pace and scope of themarket reform in China has largely been controlled by the state, private firms donot merely respond to the institutional environment. Their organizational adap-tation affects the institutional environment at the aggregate level and thus hasimportant implications for the social transformation that China is undergoing. TheCommunist Party formally invited private entrepreneurs to enter its ranks in 2000.A constitutional amendment in 2004 acknowledged that citizens’ lawful privateproperty was inviolable (Buckley, 2004). Symbolic gestures, perhaps, but they begthe question of who is changing whose colour.

In 2005, domestic private firms contributed to half of China’s GDP (Zhao,2006). Yet, the playground has not been fully leveled and private firms are stilldiscriminated in access to markets and finance. Former Red Hat firms may put onthe Red Hat again, in order to bypass barriers against obtaining import and exportlicenses or gain priority in winning government contracts (China EconomicWeekly, 2004; Zhang and Hu, 2000). Wright et al. (2005) argued that institutionaltheory would become less important as the market developed in transitional econo-mies. However, the game of cat and mouse still seems to be going on in transitionalChina.

Transitional economies offer a fertile ground both for testing and refiningtheories developed in mature market economies and for discovering new theories.As the institution building is ongoing and the market is in the making, it isimportant to understand firms’ property rights arrangements as the interactionbetween market transition and individual economic decision-making. The under-standing of the Red Hat strategy would be greatly advanced by comparing privatefirms’ property rights arrangements and governance modes before and after 1997,the year in which critical policy changes regarding property rights issues happened.Future research should trace the trajectory of property rights change in firms’ lifecourses and explore the extent to which former Red Hat firms may have distinctstrategies, organizational culture and performance, compared with firms of otherownership types.

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NOTES

I would like to thank Eric Fong for providing the dataset, Joel Baum, Xingshan Cao, JosephGalaskiewicz, Jan Jantzer, Li Lulu, Brian Silverman, Anne Tsui, Barry Wellman, Xueguang Zhouand two anonymous reviewers for comments. I appreciate financial support from the Social Scienceand Humanities Research Council of Canada, the Vivienne Poy Chancellor’s Fellowship in theHumanities and Social Sciences, Bell Canada and the Dr. David Chu Fellowship in Asia PacificStudies.

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Wenhong Chen ([email protected]) is a doctoral candidate in theDepartment of Sociology at the University of Toronto. Her research interestsinclude social network analysis, economic sociology and the interaction oftechnology and society. Wenhong’s dissertation examines the patterns, causesand consequences of transnational entrepreneurship.

Manuscript received: January 1, 2005Final version accepted: November 7, 2006Accepted by: Joseph Galaskiewicz

80 W. Chen


mailto:[email protected]

does the colour of the cat matter? the red hat strategy in china's private enterprises

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