By: Li YAN, HEC Montreal: Rick MOLZ, Concordia University and

The Dance of Traditional Local and Western Global Brewers in the Unfolding Chinese Institutional Framework By : Rick MOLZ,
Concordia University
and
Li YAN, HEC Montreal Cahier de recherche N 07-34-08
ISSN: 1711-6309
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Copyright 2007. La Chaire de management stratgique international Walter-J.Somers, HEC Montral.
Tous droits rservs pour tous pays. Toute traduction et toute reproduction sous quelque forme que ce soit est interdite. Les textes publis dans la srie Les Cahiers de la Chaire de management stratgique international W-J.- Somers nengagent que la responsabilit de leurs auteurs. Distribu par la Chaire management stratgique international Walter-J.-Somers, HEC Montral, 3000 chemin de la Cte-Sainte-Catherine, Montral, Qubec, H3T 2A7. All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited. This document is intended to be used as the framework for an educationnal discussion and does not imply any judgement about the administrative situation presented.
The Dance of Traditional Local and Western Global Brewers in the Unfolding Chinese Institutional Framework
ABSTRACT
This paper combines an industry case study and an institutional perspective to describe local-global interactions. We demonstrate that the local-global interaction affects the industry governance structure, and globalization does not always favor multinational corporations; local advantages can also prevail.
We examine the traditional Chinese institutional model and the global corporate model with a case analysis of the Chinese beer industry. We find active players in both models, and evidence of institutional effects at multiple levels, including (1) the different personal preferences for brewed malt beverages, and the time and place these beverages are consumed, (2) the nature of the breweries producing the beverage in terms of responsiveness to local taste, enterprise scale, scope and, distribution system, and ownership and control of the breweries, (3) the influence of national government and culture, and (4) the influence of transnational NGOs. These players are engaged in a complex dance, switching partners, forming and abandoning alliances and all the while struggling to redefine the formal and informal institutional framework that will define the Chinese brewing industry for decades to come.
Our data is gathered from an extensive study of the patterns of change in the history of the Chinese beer industry.
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Copyright HEC Montral
RSUM
Cet article combine une tude de cas d'industrie et une perspective institutionnelle pour dcrire des interactions locales-globales. Nous montrons que les interactions localesglobales affectent la structure de gouvernance d'industrie. Il apparait que la mondialisation ne favorise pas toujours des socits multinationales, les avantages locaux peuvent galement prvaloir.
Nous examinons le modle institutionnel chinois traditionnel et le modle de la corporation globale avec une tude de cas de l'industrie chinoise de la bire. Nous
identifions les joueurs actifs des deux modles, et mettons en vidence des effets institutionnels la multiples niveaux, y compris (1) les prfrences personnelles pour les boissons brasses de malt, et le temps et l'endroit o ces boissons sont consomms; (2) la nature des brasseries produisant la boisson en termes de rponse au got local, lchelle de lentreprise et la varit des produits, le systme de distribution, la structure de proprit et le contrle des brasseries; (3) l'influence du gouvernement national et de la culture, et (4) l'influence des O.N.G.s transnationales. Ces joueurs sont engags dans une danse
complexe, changeant de partenaires, formant et abandonnant des alliances, et luttant pour redfinir le cadre institutionnel formel et informel, qui dfinira le secteur de la brasserie chinoise pendant des dcennies lavenir.
Nos donnes sont recueillies d'une tude tendue des modles du changement de l'histoire de l'industrie chinoise de bire.
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TABLE OF CONTENTS
ABSTRACT........................................................................................................................ 1 RSUM ............................................................................................................................ 2 TABLE OF CONTENTS.................................................................................................... 3 1. 2. 3. INTRODUCTION ...................................................................................................... 4 THE LITERATURE OF LOCAL GLOBAL INTERACTIONS ............................ 5 THE TWO PHASE MODEL OF INSTITUTIONAL ADAPTATION TO GLOBALIZATION .................................................................................................. 13 4. THE CHINESE CASE.................................................................................................. 18 4.A. A BRIEF HISTORY OF INSTITUTIONAL TRANSFORMATION IN CHINA............................ 18 4.B. STRATEGIC AND NON-STRATEGIC INDUSTRIES ......................................................... 21 4.C. THE GLOBAL BEER INDUSTRY ................................................................................. 22 5. DISCUSSION AND CONCLUSION........................................................................... 28
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1. Introduction
China today is unique; it is the only transitional economy of the world that is experiencing a large scale transformation of its institutional framework without an accompanying regime change, change of ruling elite or change of underlying ideology.
China is a paradox; it continues its communist ideology and macro-control, while allowing a socialistic free market economy a controlled free market. It welcomes foreign investment, while constraining entry by foreign multinational corporations. It is moving from a heavy dependence on a rural agrarian economy to a rapidly emerging industrial economy with a rapidly growing middle class. It is a society where traditional culture exists side by side with post modern Western culture. While China has historically insulated its institutional framework from Western influence; today it allows measured Western incursion, but within a traditional Chinese governance system.
In this paper we build a two phase model operationalizing some of the theoretical constructs developed in the literature focusing on institutional accommodation and evolution required for blending different dominant logics in globalization, particularly in societies that have different value systems. We do this by examining the dance of traditional Chinese institutional patterns and Western economic logics as the Chinese economy becomes more open to foreign multinationals. The institutional pattern of the Chinese political economy has been based on communist control, unique Chinese forms of business behavior and economic interaction (such as guanxi), and millennium old Chinese preferences for patterns of daily life. The institutionalized Western economic logic includes patterns of economic interaction based on private ownership, formal contracts and arm length transactions, and global corporations using political pressure to shape their institutional environment.
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We structure this paper beginning with a review of key literature regarding institutional theory of local global interactions during globalization processes. Second, we operationalize the key elements of this literature into a two phase model of localglobal interaction. Third, we review the institutional transformation in China in preparation for investment by Western nations and enterprise, and fourth we develop a case study of the Chinese Beer industry to investigate the two phase model. We conclude with a critique and suggestions for future research.
2. The literature of local global interactions

Globalization has occurred for millennium. Aggarwal (1999) has shown five periods of globalization and a resulting change in the geographic economic center of gravity through global economic processes. These are summarized in table 1.
Table 1: Shifts in Economic Growth Centers (Adopted from Aggarwal, 1999) Shift from region with significant economic development Middle East Southern Europe Northern Europe United Kingdom United States & Canada Shift toward region with economic surplus Southern Europe Northern Europe United Kingdom United States & Canada Northern hemisphere Pacific rim countries Time period (centuries) Mid 13th to mid 16th Mid 16th to mid 18th Mid 18th to late 19th Early to mid-late 20th Mid-late 20th to early 21st
The fifth great change in the economic center of gravity began in the late 20th century with a westward movement toward the Pacific Rim, including a movement to the Western part of North America and the Eastern Asia. As the speed of transportation and communication has increased, the speed at which the economic center of gravity migrates
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has increased. As such, we may today be in the sixth great change, with a movement further into Asia, particularly China.
These great waves of globalization require interaction between the regions. Each locality, region, nation or culture has unique values, traditions, spiritual beliefs and temporal sense. The continuous flow of commerce requires a process to facilitate these flows, and this is done through formal and informal institutional frames. But each locality, region, nation or culture will have formal and informal institutional frames reflecting the uniqueness of their values and traditions. These institutional frames may be exported, imported, adapted through convergence or rejected leading to divergence. History is full of examples of change in institutional frames through the process of globalization. We argue we will always find the powerful logic of economic rationality confronting a traditional local logic accompanying globalization. Without globalization and change in the economic center of gravity, the dominant economic logic of the Western nations can be centered in its home locality, region, nation or culture, but today globalization permeates all economic regions more directly than ever before.
What are the characteristics of the dominant economic logic and the local tradition based dominant logic? When applying the institutional theory approach to the analysis of global- local logics, the complexity inherent in the relations between agents of the Multinational Corporations (MNC) and the local developing country actors becomes central. Each has a different way of seeing the world, and each operates according to different rationalities. These rationalities are mainly determined by the institutional and cultural contexts in which the agents and actors evolve. The cognitive and cultural elements, as well as the normative and regulating aspects of institutions determine the rules, standards and cultural values which, in turn, shape the ways of thinking and the behavior. The normative standards in developing countries are based primarily in culture, history or community while the normative standard in Western countries is more focused
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on issues of cost-effectiveness, and is law/regulation based. Institutional environments shape multiple unique and legitimate rationalities. The institutional processes set the parameters of what is agreed upon as being rational or logical within a given social framework.
We examine two different dominant logics. The first logic is that of Western firms, and we title this Global / Western Dominant Economic Logic. Western MNCs act on the basis of economic rationality and their managers are mentally motivated and guided by the identity referents and the cultural environment specific to the Western companies where these organizations evolve. This rationality is founded on a double legitimacy: technical and economic. It is based on a strategic process of mobilization of specialized resources guided by an orientation toward efficiency. This economic design is well described in management, through the work of Porter (1979) on competition, of Williamson (1979) on transaction costs and Barney (1997) on resources. Managers of Western companies generally adopt strategies strongly determined by this rationality.
The other logic relates to the behavior and strategies developed by actors in emerging countries and we title this Local Tradition Based Dominant Logic. Such behavior and strategies reflect, above all, the institutional logic implemented in each emerging country. This is due not only to the cultural referents (Adler, 1997) specific to the companies in these countries, but also to the institutional frameworks and the organizational operating modes in which these strategies are developed. These are
founded on a traditional legitimacy in which the dominant rationality rests more on the community-based and clan-like social bonds than on economic performance (Inda and Rosaldo, 2002).
Global interaction between agents of Western MNCs and actors in developing countries occurs in the context of particular societies, cultures and ways of life. When
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Western MNCs interact with other Western MNCs these contexts of culture and way of life are quite similar. This is not the case when the Western MNC interacts with actors in developing countries. Developing countries have different conceptualizations of time and space. For example, in a local traditional dominant logic, a long pause to reflect on discussions is consistent with this conceptualization, while the Western economic logic emphasizes quick cost/benefit based decisions. The same decision in a developing country might be based on community continuity, spiritual consideration or tradition, regardless of the economic cost/benefit analysis. The globalized economy has shaken off many territorially conceptions of logic, consistent with the dominant economic logic of the Western countries. This is not as true for the developing countries, where ancestor worship or ancient burial grounds are central to the dominant logic of the society (Inda and Rosaldo, 2002). In these societies the elders are often venerated, and looked upon for guidance and decision making.
The dilemma. We believe these different dominant logics are the core of the problem in explaining difficulties Western MNCs have in developing countries. Both the MNC managers and the actors representing the developing country are blind to their own institutional environment. Just as the child is the father of the man, the Western managers and developing country actors are the product of their institutional context. Their unique institutional context is invisible to each of them, while their opposite counterpart may clearly see the fallacies of the dominant logic of the other. To the Western MNC manager time is money; to the developing country actor time is not money. To the developing country actor, decisions are made after careful consideration of tradition and spiritual guidance. For the Western manager decisions are made based on analytical assessment of costs, benefits, efficiency and deployment of resources. For the Western manager problems and difficulties can be resolved through formal mechanisms codified in regulation; for the developing country actor problems and difficulties are resolved through informal mechanisms and tradition.
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Of course the Western countries have tradition and spirituality, and developing countries have a need for economic growth. This is not the argument. The argument is that the dominant logic, as shaped by the institutional framework, is centered on economic rationality in the Western countries, and is centered on tradition and spirituality in the developing countries. Both Western countries and developing countries experience problems that need to be resolved, and the mechanism for resolving these in the Western countries is largely centered around formal and regulatory institutions, while in developing countries such resolution is largely centered around tradition and well understood, but informal, institutional mechanisms.
The results are the two actors often consider the other to be irrational, focused on unimportant considerations and having no sense of the timeliness of the decision. This leads to at a very minimum misunderstanding, missed opportunities, and in many cases conflict. This conflict can sometimes become violent and destructive of human life, communities, societies and entire populations.
Globalization brings these two dominant logics into the same space. Prior to the current wave of globalization, the Western economic dominant logic and the local tradition based dominant logic could easily co-exist, as the two were not frequently rubbing against one another in a way requiring accommodation. The physical, temporal and economic intersections could easily be partitioned, avoiding a need for accommodation or adjustment. Partitioning involves two groups dividing institutional space to avoid conflict. Partitioning was achieved by intermediaries in the form of custom brokers and export agents that would act as boundary spanners between the two different logics, bridging the two different logics. Today this is less possible. The current wave of globalization has reduced the physical, temporal and economic distances, and the growth of direct foreign investment and free movement of investment capital has demanded
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institutional accommodation. The pressure of the close physical and temporal proximity of the two dominant logics makes partitioning (Sorge, 2005) a less feasible solution.
The clash of dominant logics has occurred previously. What we today call the Global / Western Dominant Economic Logic has been successfully exported to countries with more traditional logic. This scenario occurred in the quarter century following World War II, when the American model was successfully exported to Europe (Djelic, 1998). Djelic describes the power of the American logic in influencing the reformation of the European economies destroyed by the war. The American model was characterized by mass production, formalization and vigorous competition. This dominant economic logic focused on profit and corporate capitalism characterized by large firms with dispersed public ownership and the supremacy of markets. Prior to the Second World War the European economies had different logics; the French logic was built around family capitalism and maintaining stability of the social order; the German logic was built around limiting competition, maintaining economic stability and the mid sized firm managed by the entrepreneur. For both countries economic stability preserving traditional work values and the centrality of family and community values were more central than profit maximization, competition and the rule of the market. Djelic demonstrates how the key elements of the American model were exported to Europe, and how the American model was nuanced to accommodate the tradition based dominant logic of France or Germany. The results were European models that took on the dominant characteristics of the American model, but through a layering process by which the local traditional logic influenced the new economic logic.
Djelic documents the steps of the transition. First, there was a traumatic disruption of the local economy (World War II), leading to a national sense of crises. A synergy of objectives emerged among the local population to resolve the crises, and the availability of a successful foreign model acted as a template for rebuilding and resolving the crises.
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The export of the American model was supported by the Marshall economic recovery plan following the war, which helped the European economies recover from the ravages of the war. The successful exportation of the core of the American Model to Europe was followed by the development of the Organization for Economic Cooperation and Development (OECD), which today includes the thirty richest nations of the world, when measured through an economic lens. The members of this elite group today have all adopted a locally nuanced version of the dominant economic logic that emerged from the United States in the quarter century following World War II. 1
Djelic and Quack (2003) further elaborate on the process of the dominant economic logic colonizing the more tradition based societies. Djelic and Quack describe globalization as an interplay between global and local logics, and within these logics exist multiple and conflicting motivations, interests and strategies. The emergent dominant economic logic is nuanced for each locality, just as it was in Djelics (1998) work on Germany and France. The new logic becomes institutionalized incrementally into the formal and informal institutions through a process of layering, in which new institutional rules will emerge through trickle up, trickle down and interactions between the global and local logics, and also from the influence of industry groups or professional associations. The outcome of these interactions are new institutional rules of the game, heavily influenced by the dominant economic logic of the more powerful Western sending nations, but subtly shaped and nuanced by the receiving local tradition. Layering of normative and cognitive elements of the institutional space becomes more influential, while the regulatory rules become less central in the daily decision making of those actively engaged in the daily operational decisions of globalization.
One could argue these thirty economies are really quite different, but this does not hold when compared with other historical models of political economy organization such as feudalism, fascism, communism or slavery. All are based on the market as the economic coordinating mechanism, various mixes of private public ownership, various levels of competition and some form of political democracy.
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Sorge (2005) offers a rich theoretical elaboration of the actual processes of reaching the institutional accommodation of the western dominant economic logic with the local traditional based dominant logic. Sorge argues the process is not about convergence or divergence, but rather about dialectic interplay between actors and agents 2 of the two logics. When the representatives of the two logics are required to interact, as is the case when a Multinational Corporation establishes operations in the community of a developing country, the agents and actors will find the following occurring. When there is no conflict between the institutional frames, agreement is easily achieved. This is most likely to occur when the two cultures are very similar, or when the cultures are different, but one has an empty institutional frame for a particular issue (For example, there is no significant Canadian institutional frame dealing with traditional school curriculum in Uganda, or vice versa). When there is an inconsistency of institutional frames, the resolution will occur through a dialectic process of rubbing together, similar to what Djelci and Quack (2003) proposed. But Sorge further elaborates on the process, which involves a partitioning of institutional space. A partitioning occurs when the two groups agree to disagree, and operationalize this disagreement by establishing separate (or partitioned) formal and informal institution space to support the dominant logic of each. This is a practical solution, but over time there is accommodation of the two institutional frames, and this occurs through the process of uncertainty reduction, dialectic discourse, the emergence of hybrid metatraditions to incorporate the divergent institutional spaces, and myths to create acceptance of the movement away from the two incompatible dominant logics. While this is a form of convergence it is also divergence; the dialectic opposites occur simultaneously, with the convergence creating parallel divergence, retrenchment and provincialization.
Djelic (1998), Djelic and Quack (2003) and Sorge (2005) all acknowledge the different logics of different national / cultural groups. All three argue some form of
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accommodation occurs over time, and all three argue that those who are ignorant of accommodation process will suffer.
3. The two phase model of institutional adaptation to globalization

We build on the above literature by proposing a two phase model of institutional adaptation to globalization. Phase one precedes phase two, and has as its level of analysis inter-governmental and governmental - transnational organization interaction. Inter-
governmental refers to interaction between the sending country government, usually a Western country, and the receiving government, usually a developing or emerging economy. Governmental - transnational organization interaction refers to interaction between a global transnational organization, such as the World Trade Organization, World Bank, International Monetary Fund, International Labor Organization, or the United Nations Development Program, usually representing the interests of the Western countries, and the receiving government, usually a developing or emerging economy. Phase two follows, and has a Multinational Corporation/local institutional level of analysis. Figure 1 diagrammatically presents our model.
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------------------------------------------------------------------------------Figure 1 --------------------------------------------------------------------------------
Local reaction is weak.
Phase I interaction
National institutions 1. Unilateral Policies & Actions 2. Bilateral agreements and compromises
Transnational institutions 3. Multilateral Consensus Political: UN, EU Economic: IMF, WTO, WB (Washington Consensus) Technological (ISO ) Human: UNESCO
Global Level interactions:

Inter-government interactions (UN, WTO ) Macro-economic level policy making (IMF ) Advocate universal human rights
Local power is growing.
Phase II interaction
Micro-economic level interactions Local needs and realities Local culture, tradition and history
Multinational Enterprises (Global)

Financial resources, Sophisticated management expertise, Reliable logistic technologies and networks, Effective market developing skills, Global industrial and operational standards (Tech) Global industry dominance and trend leader
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Global force is dominating.
Developing Countries (Local) Local Enterprises Local Level Interactions:
Global force is overwhelming.
Direct:
Western Developed Countries (Global) Indirect:
The focus of our model is the global-local interactions, which Djelic and Quack (2003) argue are based on layering of global and local formal and informal institutions, and Sorge (2005) argues are based on a dialectic of local tradition and global logic. Our model incorporates both of these concepts. These layering actions take place in the middle box. The dialectic takes place first in the phase one interaction between the middle box and the top box, and second in the phase two interaction between the middle box and the bottom box.
Using a temporal analysis, we argue in phase one the Western governmental and transnational organizations dominate in establishing a global framework for phase two. In phase one the sending country (which for simplicity we have simply identified as Western or OECD countries) interacts directly and through transnational institutions with governments of the receiving country. In phase one the level of analysis is government to government, or transnational institution to government. The sending country enters into a dialectic conversation and negotiation with the receiving country to establish an institutional framework that is familiar and comfortable to sending country Multinational Corporations. In this process, an institutional framework is negotiated that facilitates the next period, the phase two interaction.
In the phase one interaction there is direct pressure from national institutions in sending governments on the institutions in the emerging economy. This direct pressure may be in the form of unilateral policies or bilateral agreements and compromises. The unilateral policies are likely to implemented when the receiving country has no existing institutional frame in a particular domain, and the imported institutional frame does not conflict with existing action systems within the receiving nation. Bilateral agreements emerge over time through a dialectic process (as described by Sorge, 2005) that is consistent with both a global institutional frame and the local traditional frame. Similar
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pressures are applied indirectly through the transnational institutions. In phase one the local receiving government adjusts readily when two conditions exist: first, when the emerging nation has an empty set of formal institutions relating to the pressures exerted by the national and transnational institutions, and second there are no informal traditions that conflict with the objectives of the sending nation. If the developing country is weak economically, politically or militarily, the global force is overwhelming. In phase one the developing country will be most easily overwhelmed by the sending country dominant economic logic when the county needs direct foreign investment, does not have unique valuable resources, lacks significant political alliances with powerful countries, is weak militarily and has a traditional based dominant logic that is either largely consistent with that of the sending country, or alternatively, sufficiently different that there are no conflicting institutional norms that must go through a process of intuitional partitioning (Sorge, 2005) to reach accommodation.
Phase one interactions set the entry institutional frame for phase two, when Multinational Corporations enter. It is the Multinational Corporations that have the financial resources, management expertise, technical competencies, organizational skills, and logistic networks needed for the developing country to reach its economic goals. The Multinational Corporation will bring with it global industrial and operational standards, best practice techniques, global command of economic resources, and networks of suppliers and customers. These standards reflect a dominant economic logic based on the Western model of the human experience.
It is between the middle box and the bottom box where the global and local interactions take place, and it is here that the layering of institutions occurs. It is where the preceding dialectic process reaches stability through a process described by Sorge (2005), and where a change in relative balance between the local influence and the global influence occurs. This rebalancing between the local and global occurs because of the
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success of the entry of Multinational Corporations, thereby improving the economic strength of the receiving country. In phase two the local influence is growing due to the developing countrys improving economy, but the global force continues to dominate.
It is phase two that potential for serious problems emerges. In phase one, the Western country and its transnational agents are largely searching for opportunities to engage in economic interaction with the developing country. These phase one actions (unless they become operationalized militarily) are largely based on comparing institutional frames of the Western and developing country, and negotiating an institutional fit through a dialectic process. Initially there are few or no intertwined economic projects, and the emergence of difficult intuitional conflicts is likely to be met with either withdrawal or prolonged negations.
This change in phase two, as economic interaction and investment has occurred, and the potential for economic loss accumulates. There is a change in the nature of the interaction between the local traditional actors and the global economic agents, as the interactions are now on a person to person level with the MNC management cadre interacting directly with the local workforce and community. Under certain conditions this may lead to conflict, as Sorge has shown that when an outside institutional force enters a more tradition based society, the outside force will often consider itself superior, constructing a new set of institutional arrangements leading to authoritarian rule and domination, inevitably leading to backlash (Sorge, 2005:71). This danger is exacerbated for two reasons. First, in phase one the actors in the emerging economy, being weak, have reached accommodation heavily centered on the Western economic dominant logic. This fact supports the second reason; the logic of the Western MNC managers has been legitimized. The MNC managers are often not cognizant of the importance of the local tradition based dominant logic, and if they were, would likely see it as irrational or
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irrelevant. This creates a double danger of false acceptance of the dominant economic logic and a corresponding ignorance on the part of the Western MNC manager.
The phase two interaction is the more critical of the two. Phase one is primarily a preliminary interaction between governments or governments and transnational institutions for the purposes of creating an institutional framework for Multinational entry into a developing country. Phase two is where the actual working interaction takes place, where the dialectic is more important, and the chance for conflict and standoffs occur. The power of local tradition is growing faster vis a vis the power of the global economic forces. The global economic forces continue to be dominant, but these forces loose some of their punch locally. The Multinational Corporate management cadre is well versed and knowledgeable about management and techniques to maximize the benefits of an economic dominant logic, but not about institution building or accommodation in a developing economy. As the power tips slightly away from the multinational management cadre and their expertise in global economic management toward the local actors, the local traditions, needs and realities become more central. If the MNC management cadre is not cognizant of the legitimacy of these pressures, the dialectic processes break down and distance between the local tradition and global economic forces increases. This can lead to violence in the worst case scenario, but it can clearly lead to difficulties for the MNC to achieve their economic objectives.
4. The Chinese case

4.a. A brief history of institutional transformation in China In Phase one of our model, the receiving nation is weak, eager for foreign direct investment and willing to modify its institutional structure to comply with the preferences of the investing nations and enterprise. Beginning in 1979 the Chinese government implemented a series of reform measures to make its economy more
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welcoming to investment from Western countries. All reforms have been oriented toward reforming the institutional structure and increasing enterprise autonomy (Child, 2000; Hassard et al., 1999). The first effort of the central government was the Contract Responsibility System (CRS), which included a sequence of reforms 3 intended to decentralize responsibility to the enterprises themselves, limiting central government interference with direct negotiations for foreign investment. These included pilot experiments in management (1979-1983); the introduction of enterprise responsibility systems (1983-1985); the management contract systems reform (1986-1991), and the management mechanism transformation (early 1992-1994) (Wang, 1994). The Contract Responsibility
System did not achieve the desired outcomes, and was plagued by problems of unintended disparities between enterprises, a short term orientation on the part of management, a negative effect on government revenue from taxes and only a limited improvement in the quality of managerial decisions (Hassard et al., 1999). The CRS was phased out beginning in 1994.
In 1994 the government established a new institutional reform program, called the Modern Enterprise System and the Group Company System (1994-present). The intent of these twin reforms was to prepare China for membership in the World Trade Organization, corporatize State Owned Enterprise, and to reform the enterprise governance institutional structure (Hassard et al. 1999). The difference between these and the earlier reforms was a focus on enterprise governance, including the development of governance structures such as boards of directors and the creation of specific shareholder ownership and property rights. The
constrained by normative and regulative rules. Actors are persons functioning within an informal action system, a collectivity of individuals who share a common goal or value system, without a formalized entity.
3
The names of the various reforms differ depending on the translation and the source.
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development of these governance structures was intended to break the link between enterprise and government, creating a positive tension that would result in a reformed institutional structure, more familiar to Western agents.
But the outcome was incomplete and the lack of an appropriate institutional structure for a market economy, such as a predictable legal structure and regulations, created a "post-hierarchy" and "pre-market" situation. The executives of Chinas State Owned Enterprise were faced with uncertainty and confusion caused by the sporadic and changing institutional environment as evidenced by ongoing government intervention, surplus workers, outdated equipment, and serious deficits. The shrinking of control by the central government did not do enough to create a stable and predictable institutional environment.
As a result, there was a mismatch between the enterprise reform and reform of institutional structure. The State Owned Enterprise sector underwent large change due to enhanced enterprise autonomy, the impact of market forces, rapid growth of domestic demand for downstream products, efforts to integrate with the world economy and the states policy to promote large businesses. The required institutional reforms were gradually emerging, largely as a result of the need for the enterprise to have an institutional environment consistent with its foreign partners expectations, local initiatives, and interaction with international investors.
These reforms fit with Phase one of our model, where the receiving government responds to direct pressure for institutional reform from the more powerful Western nations or transnational organizations. Importing the institutional frame may have been inconsistent with traditional Chinese informal mechanisms, such
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as guanxi, but it was consistent with the Chinese governments desire to accelerate economic growth and create a favorable investment climate. China lacked significant political alliances with Western member nations. This created an environment where the formal institutional frame was adapted to Western expectations, but the informal and traditional institutional frame was largely unchanged. If Western multinational enterprise were unable to recognize the need to work beyond the formalized institutional frame, they would face difficulties in establishing a strong position within the Chinese market economy.
4.b. Strategic and non-strategic industries In the process of adjusting the institutional framework to attract foreign investment, the Chinese government identified certain industries as strategic, and others as non-stratetgic. The strategic industries were those central to national defence, had control of key natural resources, were natural monopolies or large State Owned enterprise. Foreign investment or foreign control in these industries was limited and tightly restricted. Many firms in strategic industries were partially privatized, but the Chinese government maintained overall control.
In the non-strategic industries foreign MNCs are relatively very free to invest, compete and interact with local firms. In these industries there was no local dominant player. At the early stage of the industrial transition, foreign MNCs had significant strategic advantages in capital, management expertise, and precious savoir-faire. The foreign MNCs were invited to invest and transfer knowledge to the Chinese industrial economy. Many MNCs provided guidance for market development and the industrial transition, while generating large profits and gaining market share for their Western owners.
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In most non-strategic industry, there was less and less government intervention and the market was free most of the time, although there was some local protectionism at the level of provincial government. The non-strategic industries enjoyed a more open process through which the industry was being restructured, allowing foreign global corporations a much freer hand in influencing the unfolding of the institutional framework.
The beer industry is non-strategic, allowing greater foreign direct investment, opportunities for foreign MNCs to shape the institutional environment, and for the market to sort out winners and losers.
4.c. The global beer industry The global beer industry is increasingly controlled by a small number of large brewers. Table 2 identifies the largest global brewers, and table 3 shows beer consumption in selected countries. The beer industry is increasingly consolidated, and global brewers are looking to increase market penetration in countries with relatively low levels of consumption per person.
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Table 2: Worlds Largest Brewers, 2003 Brewer Millions of hectoliters produced Anheuser Busch 154 SAB Miller 128 Interbrew 120 Heineken 109 Carlsberg 82 Source: Theuvsen, L and Ebneth, O. (2004)
Table 2: Beer Markets in Selected Economies, 2004 Per capita Beer Market Beer Population Production Country Consumption Concentration (millions) (million (HL per (top 2 brands) hectoliters) person) Argentina 38.4 12.8 .33 94% Austria Brazil Canada China Czech France Germany Japan Mexico Poland U.K. U.S.A. 8.1 178.4 31.5 1304.0 10.2 60.1 82.4 127.5 103.4 38.5 59.2 294.0 8.7 85.6 23.1 291.0 18.8 16.8 106.2 65.5 68.5 27.7 58.9 233.0 1.07 .48 .73 .12 1.84 .28 1.29 .51 .66 .72 .99 .79 63% 85% 85% 23% 65% 76% 27% 74% 100% 65% 45% 68%
Source: World Beer and Drink Forum, 2005 and World Bank Statistics
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China is the worlds most populace country, has a low level of beer consumption per person and has no local brewers with dominant market position, making the market attractive for the five large global brewers. As a non-strategic industry, the Chinese government has signaled the appropriateness of the global brewers to invest in the Chinese beer market. The Phase I interaction created an institutional structure that was appropriate and fit the global industry model of the Western brewers. The question then moved to Phase II: could the multinational brewers develop a layering of institutions and a dialectic with local consumers, brewers and distribution mechanisms to be successful in China?
Beer has only very brief history in China. In 1900 a Russian firm established the first brewery in China, Ulubulevskij Brewery, in the northern city of Harbin, which later became a part of the Harbin Brewery. In 1903 in the Shandong Province, German merchants built the Anglo-German Brewery, which later became the very famous Tsingtao Brewery. Today, these are two of the largest brewers in China. However, for many decades, their products were only for the rich and Western expatriates in major Chinese cities.
With economic reforms of 1979, China opened its long shut door to the world. Beer was seen as an exotic foreign drink, and caught the eye of Chinese people. In the 1980s, the Chinese beer industry grew at an average annual rate of more than 30%. By the end of 1988, the number of brewers reached 813, although almost all were small local brewers with low output, producing low quality beer with little variety. China grew to be the third largest beer producer after Germany and the United States. The local beer market was highly fragmented, with very low brand concentration. Even 16 years later in 2004, after strong industry consolidation, China still had the lowest beer market concentration in the world (Table 2 and 3).
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The major international beer producers were lured by this rapid-growing billion person market with increasing affluence, and relatively low consumption rates per capita (Berzins, Podolny, & Roberts, 1998) which foreign producers interpreted as a positive indicator of gigantic future potential. Heineken and Carlsberg became first foreign
brands in China; however, in early 1980s they could only be found in special economic zones or in some open cities, and marketed in exclusive special stores for foreigners and luxury hotels. In 1992 four other foreign brewers entered the real Chinese market; they were San Miguel, Asia-Pacific Breweries, Pabst and Becks. Three years later, the number grew to 16 and by the year 2001, all major foreign brewers had operation in China, including Annheuser-Busch, Carlsberg, Heineken, South African Breweries, Kirin, Asahi, Fosters, Lion Nathan, Miller, Sapporo, and Bass Ginsber (INSEAD, 1998).
These multinational brewers made multi million dollar investments in state-ofthe-art production facilities and their latest brewing technologies. They made the Chinese beer industry a dream industry, with all the best equipment in the world. Many foreign brewers constructed their plants based on forecast for demand ten years out. International brewers launched nationwide marketing campaigns (Everatt & Dawar, 1999) that most Chinese local small brewers could not afford. Demand for some foreign brands was so strong that a three or four year waiting lists occurred.
Five years later But the honeymoon of international brewers with Chinese market last only several years. After phenomenal success in the early years of market access, global brewers
faced very tough and chaotic competition with local competitors. By the late 1990s, some global brewers were retrenching or retreating, even selling their new state-of-the-art production facilities to local brewers. Others were struggling and suffering operating losses of millions of dollars each year, and many wished they had never entered China.
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By the end of 1990s, the top ten brewers in Chinese beer industry were all local companies; representing around 21% of market share.
Expatriate veterans of this beer war of the 1990s were traumatized by their experiences (Everatt & Dawar, 1999) in the worlds second largest beer market. Tim Murrary, a former sales and marketing manager for Australian based Fosters, (the brewer that entered China in 1993), described his experience in Chinese market as: . . .the corporate Vietnam it is hard to get over (Lawrence, 2000).
This unexpected weak performance of the global was in contrast to the success of local brewers. In spite of older plants, generally untrained management teams,
problematic human resources, lower product quality and weaker marketing capabilities, local beer producers seemed to be winning this competitive beer war. As foreign brewers retrenched, local brewers took advantage of this situation to acquire leading edge technology and modern facilities in a very cheap price. More importantly, the Western production model with well trained personnel was transferred to local brewers.
The following are some issues that global brewers in Chinese beer industry were facing, which were not solved effectively. Lack of long term market strategy that recognized unique Chinese traditions when entering local market; No efficient logistic system (Underdeveloped distribution channels and infrastructure); Neither prepared nor familiar with destructive and chaotic competition Western marketing approaches were inconsistent with traditional alcohol consumption in China; High price-sensitivity of consumers.
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In fact, the foreign brewers did not scrutinize the market structure, nor understand the market mechanism or their customer. After their advantage of foreignness had gone, their carefully planned global strategy became a burden, which constrained their interactions with local Chinese market realities. The foreign MNCs failed to adequately enter into a learning dialectic with the local Chinese actors, and failed to understand Chinese traditions in terms of where and how alcohol was consumed, marketed or distributed.
Another five years later Local brewers dominated the Chinese beer market. They had an extraordinary growth in that period. The competition brought industry consolidation. Large local, regional and national brewers appear. The global brewers started a new round of heavy investment in this industry, with a new strategy. Instead of building fully owned new plants they attempted to control or take a significant stake of local dominant brewers. Some of the foreign MNCs, such as SAB, Interbrew, and Annheuser-Busch even tried to buy-out and take control some very big national brewers. Most Western brewers directly invested in local brands and their distribution channels. The role of the foreign brewers in the industry was more like that of an investment banker rather than that of a brewer. The foreign brewers learned from their prior failure; they entered into a dialectic with the local actors cognizant of the informal institutional environment, and sought to mobilize their financial resource to restructure the market and institutional structure. This created the layering of the Western Brewers business model with the traditional Chinese model.
Summary: Step one: During the ownership reform, many small Chinese local brewers were privatized; while large ones were kept as State Owned Enterprise. Step two: Major global brewers started to enter Chinese market in 1992. They had phenomenal success due to their attractiveness as foreign, inspiring more
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international brewers to enter Chinese market. Partitioning takes place, with elites and expatriates favoring foreign beers. Many local brewers failed in competition. The initial foreignness of the Western brewers was sufficient to attract consumers, even though the business model was inconsistent with Chinese tradition. Step three: Other local brewers survived, recovered and grew fast, recognizing the vulnerabilities of the imported model of the Western brewers. Foreigness no longer was sufficient. Partitioning continued, but the power shifts from the foreign MNCs to local brewers. Global brewers retrenched and even retreated, others struggled. More small local brewers were founded and entered the market. Chinese SOEs started to acquire small local brewers and rapidly expand. Industry consolidation appears. Local brewers dominated the Chinese market in late 1990s. Step four: Global brewers adopted new strategy, recognizing the value of entering into a dialectic with local actors cognizant of traditional values. Global brewers invested consistent with the new layering of informal institutional pressures. The
Western brewers act like investment bankers, trying to acquire a dominant stake to control successful local brewers, and to integrate the deep traditional knowledge of the local beer industry. Partitioning breaks down, a non-partitioned industry emerges with a mix of Western global brewers, Chinese SOEs and small local brewers.
5. Discussion and Conclusion

Lessem and Palsule (2002) argue that globalization is synonymous with a powerful drive toward world economic exploitation in which the rich legislate to realize their advantage in all possible markets. In so doing, they simultaneously disenfranchise local actors and conceal negative social and environmental impacts.
The work by Djelic (1998), Djelic and Quack (2003) and Sorge (2005) demonstrates that in many countries local actors are gaining power to balance global
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forces and local realities. In this process local informal institutional factors become more and more influential in the globalization process. Research has shown that national culture and tradition does matter (Farashahi & Molz, 2004), and that global corporate governance and local institutional factors are interactive. Although the local-global
relationship has not yet been fully defined, there has been an increase in research on the topic of local-global issues. Recent studies have collectively given us a descriptive and normative understanding of the complex strategic, organizational and administrative issues involved in managing MNCs in a constantly changing and complex local-global competitive environment.
Eisenhardt (1998) proposed the perspective in middle in which she argues the economics-based management and strategic theories are under-socialized, and institutional theory is over-socialized (Aguilera & Jackson, 2003). Therefore, an in-themiddle Confucian approach (which is traditional Chinese) to moderate both perspectives might be a way to solve the conflicts. Theorists have also proposed powerful models of how MNCs organize worldwide operations in order to manage across boarders and balance local demands and global vision (Bartlett & Ghoshal, 1989). The Montreal Local-Global Research Group define the local-global relationship as dynamic, the interaction of two rationality: the Western-developed, economics-centered rationality and the local tradition based reality. When competing in transition and emerging economies, MNCs are facing the local realities, local culture and tradition, values and norms of behaviors, lead by the local institutional rationality.
With a more profound understanding of local reality and institutional environment, some local competitors outperform global giant Multinational Corporations and dominate the local market. Some developing country firms have even become multinational in the past decade.
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This paper outlined a dynamic two-phase local-global interaction model, which gives a more complete view of globalization; and how globalization influences the local institutions and how local specific institutional characteristics reshape the globalization process. Different national industrial and institutional characters will lead to different international institutional governance systems. Using the Chinese beer industry as a case illustration, we showed how local companies can successfully make the industrial governance system favorable to them. This paper implicitly supports the notion of the local-global relationship as dynamic, interactive and interdependent, influenced by historical values and norms; culture and tradition are community based and history embedded.
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References Adler, N. 1997. International dimensions of organizational behaviour. Ohio: SouthWestern College Publishing. Aggarwal, R. (1999). Technology and globalization as mutual reinforcers in business: Reorienting strategic thinking for the new millennium; Management International Review, 39: 83. Aguilera, R. V., & Jackson, G. 2003. The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management. The Academy of Management Review, 28(3): 447. Barney, J.B. 1997. Gaining and sustaining competitive advantage (Reading, Mass: Addison Wesley). Bartlett, C., & Ghoshal, S. 1989. Managing Across Boarders: the transnational solution: Harvard Business School Press. Berzins, A., Podolny, & Roberts. 1998. Lion Nathan and the Chinese Beer Industry Case:SM-47: Stanford University. Child, J. 2000, Management and Organizations in China: Key Trends and Issues, in J.T. Li, A.S. Tsui, and E. Weldon (Eds.), Management and Organizations in the Chinese Context (pp 225-244), Basingstoke, Hampshire: Macmillan Press Ltd. Djelic, M-L. 1998. Exporting the American model. Oxford: Oxford University Press. Djelic, M-l. & Quack, S. 2003 Globalization and institutions: redefining the rules of the economic game. Northhampton, Ma. E. Elgar Eisenhardt, K. M. 1989. Agency Theory: An Assessment And Review. Academy of Management. The Academy of Management Review, 14(1): 57. Everatt, D., & Dawar. 1999. South African Breweries International: Devising a China Market Strategy Case 900A924: Richard Ivey School of Business, University of Western Ontario and Harvard Business School. Farashahi, M. and Molz, R. 2004 A Framework for Multilevel Organizational Analysis in Developing Countries. International Journal of Commerce and Management, 14(1): 59-78.
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Hassard, S., J. Sheehan and J. Morris 1999, Enterprise Reform in Post-Deng China, International Studies of Management and Organization, 29, 3, pp 54-83. Inda, J. X., & Rosaldo, R. 2002. Introduction: A world in motion. In J. X. Inda, & R. Rosaldo (Eds.), The Anthropology of Globalization Blackwell Publishing. INSEAD. 1998. Chinas Beer War No. 398-090-391 to 398-100-391: INSEAD EuroAsia Center. Lawrence, S. V. 2000. Beer Making: A Thirst For Success. Far Eastern Economic Review(December). Lessem, R., & Palsule, S. 2002. From local identity to global integrity. Leadership & Organization Development Journal, 23(3/4): 174. Porter, M. 1979. How competitive forces shape strategy Harvard Business Review. March April. pp. 137-145. Sorge, A. 2005 The Global and the Local: Understanding the Dialectics of Business Systems. New York: Oxford University Press. Theuvsen, L and Ebneth, O. 2004. Exporting Globalization in the Brewing Industry Internationalization Strategies of World Wide Leading Brewers. Paper presented at the International Food and Agribusiness Management Association conference, Montreux, Switzerland, June 12-15, 2004 Wang, Z.M. 1994, Culture, Economic Reform, and the Role of Industrial and Organizational Psychology in China, in H.C. Triandis, M.D. Dunnette, & L.M. Hough (Eds.), Handbook of Industrial and Organizational Psychology, 4, pp 689-725. Williamson, O. (1979) Transaction cost economics: The governance of contractual relations Journal of Law and Economics October pp. 233-261.
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By: Li YAN, HEC Montreal: Rick MOLZ, Concordia University and

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The Dance of Traditional Local and Western Global Brewers in the Unfolding Chinese Institutional Framework By : Rick MOLZ,

2. The literature of local global interactions

3. The two phase model of institutional adaptation to globalization

Local reaction is weak.

Global Level interactions:

Local power is growing.

Multinational Enterprises (Global)

Global force is dominating.

Developing Countries (Local) Local Enterprises Local Level Interactions:

Global force is overwhelming.

Western Developed Countries (Global) Indirect:

4. The Chinese case

5. Discussion and Conclusion

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