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University of Sydney Business School
IBUS 6020 Enterprise Management in China
Week 4 Lecture 7
Institutional security
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Institutional security
Market Design
Private Ordering
Blockchain Security
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Legal and institutional security for entrepreneurs
Legal security
– Legal security (Rule of Law)
– Selective legal enforcement
– Expanding reach of civil code
– Prioritising economic over political
rights
Institutional security
– Market Design
– Credible commitment
– Private ordering
– Self-regulation by corporate
entities
– Technological Security
– Blockchain
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Alvin Roth: 2012 Nobel Prize for research on market design
https://www.youtube.com/watch?v=r7vzgexzXOk&t=128s
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https://www.youtube.com/watch?v=r7vzgexzXOk&t=128s
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Matching Markets and Market Places
• Not all markets are commodity markets where prices do all the work.
• Lots of markets are matching markets where you need mutual consent
to arrange transactions.
• Economists often speak of markets, but entrepreneurs speak about
market places.
• Market places have to be designed. They have to be constructed.
• Part of what Market Design is trying to do in economics is to help us
understand what needs to happen for markets to work well.
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Matching markets
1- Sometimes, the market participants do not know about each other because
of "market thinness." In this case, the market suffers from a lack of enough
thickness.
2- In some cases, the cause of dysfunctionality is market congestion and the lack
of opportunities for market participants to know each other. In these cases, the
excessive market thickness causes the market parties not to have enough time to
choose their preferred options.
3- In some markets, due to special arrangements, there is a possibility of
strategic behavior by market participants, and therefore people do not really
reflect their preferences. In these cases, the market is not safe for expressing
actual preferences.
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To function properly, markets need to do at least three things
1. Markets need to provide thickness— they bring together a large enough
proportion of potential buyers and sellers to produce satisfactory
outcomes for both sides of a transaction.
2. Markets need to make it safe for entrepreneurs to reveal or act on
confidential information they may hold. The market must offer
participants incentives to reveal some of what they know.
3. Markets need to overcome the congestion by giving market participants
enough time to make satisfactory choices when faced with a variety of
alternatives.
Roth, A. E., & Wilson, R. B. (2019). How market design emerged from game theory: A mutual
interview. Journal of Economic Perspectives, 33(3), 118-43.
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Institutional features of market design
– Link to entrepreneurship
– What enables different forms of entrepreneurship
– Entrepreneurs are creating new markets
– Entrepreneurs start from market places
– Co-evolution of market places
– Local government and enterprises
– Diversity at national level
– Diversity at market place level
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Examples of Chinese markets and market places
Markets which emerged from local market places
– Markets for consumer goods – 1980s
– Markets for capital goods -1990s
– Markets for capital - informal finance – Shadow banking
– Markets from institutional changes – local government
Market which emerged from institutional voids
– Markets from technological change – Alibaba
– E-commerce
– Peer to peer finance
– Which future markets?
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Stages of Marketisation
• Actors: Farmers & consumers
• Market place: Agricultural produce1979
• Actors: Family enterprises, consumers
• Market place: Local consumer goods1980s
• Actors: TVES & local governments
• Market place: Local capital goods1990s
• Actors: SOEs, POEs, Private entrepreneurs
• Market: National asset markets2000s
• Actors: Investors & innovators
• Market: Global goods & services2010s
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Market Places for China’s private enterprise sector
1979
• Agricultural produce
(e.g. garlic sprouts)
1980s
• consumer goods
(e.g. shoes)
1990s
• Capital goods (e.g.
metal press)
2000s
• Industrial assets
(motorcycle factory)
2010s
• Global consumer
goods (e.g. Lenovo)
2020s
• Global capital goods
& services (Huawei)
Thickness Security Clearance
Collective investment
in greenhouses
Tolerated by urban
administrations
Local demand
Collective investment
in small production
Local government
incentives
Local demand
Business networks,
private management
Local government
shareholding in POE,
Company Law
Regional markets
Shadow banking,
legal ownership
Legalisation National and
international markets
Private and state
entrepreneurship
Central and local
government incentives
Global markets, Belt &
Road markets
Global
entrepreneurship
Regularisation, Anti-
monopoly policies
Patchwork globalisation
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Pro-market institutions
– Pro-market institutions facilitate market-based transactions by the
introduction of supply and demand-based exchanges, price clearing
mechanisms, and autonomous adaptation to environmental changes.
– Pro-market institutions provide rules, regulations, property rights protection,
and contract dispute resolution mechanisms that reduce exchange hazards.
– Pro-market institutions enable the entry and operation of additional
economic actors, improve the quality of potential exchange partners.
– Profit incentives, and contract enforcement under market arrangements,
motivate exchange partners to fulfill exchange agreements, increasing the
firm’s assurance of a fair exchange relationship.
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Private ordering
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Private ordering
• Private ordering is the regulation, enforcement and dispute resolution by
private actors, as opposed to actors in the public legal order. The private
legal order is located in the shadow of the law in two respects.
• On the one hand, it may be situated outside the realm of State law and
thus raises questions into the division of power between private and public
actors, and into the latter’s negative and positive obligations.
• On the other hand, the law may also cast a shadow on private ordering,
as a benchmark.
Liu, L. and Weingast, B.R., 2017. Taobao, federalism, and the
emergence of law, Chinese style. Minn. L. Rev., 102, p.1563.
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Example: Taobao villages
Dr Barney Tan Business School (https://youtu.be/ozxP0GGl828)
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Private ordering & Taobao: A fiction example in a village
Liu Neng:
Online shop in Taobao
Zhao Si’er:
Live in the same village
I don’t like it, full refund (25 RMB).
Not my fault, No way!
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How to solve the dispute?
• Formal institution:
• Call the police for 25 RMB shirt?
• A lawsuit for 25 RMB shirt?
• Informal institution:
• Asking help from the village head?
• Solving the issue with violence?
• Or, through the platform (Taobao)
• The private ordering of Taobao
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Liu, L., & Weingast, B. R. (2017). Taobao, federalism, and the
emergence of law, Chinese style. Minn. L. Rev., 102, 1563.
– When a startup in the West invents
a new form of consumer electronics
and creates a website from which to
sell its products, all of national law
stands behind it, helping to reduce
various forms of fraud, theft, and
encroachment on intellectual
property. Similarly, disputes that
arise between the firm and its
customers, suppliers, or competitors
are negotiated in a rich legal and
commercial environment.
– As this legal function of Taobao has
become more complex and
systematic, the central government
appears to have acquiesced in
Taobao’s assertion of authority to
experiment with various components
of private law, including contracts,
property rights relevant to the
platform, prevention of theft and
fraud, and especially the resolution
of disputes.
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Delegating institution building
Liu & Weingast (2017)
– Facing tremendous political barriers to establishing legal market
infrastructure, the state can effectively transfer a part of the development
of law to private actors that are limited in scope.
– Using as context China’s e-commerce market, we observe a private building
of legal market infrastructure sponsored by online platforms.
– We argue that Taobao is not simply an exchange platform, but one in the
process of developing a modern legal system that enforces contracts,
resolves disputes and prevents fraud.
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Taobao creating private law
– The most fundamental service Taobao provides is access to a market
supported by a private legal system in the process of developing the rule of
law.
– Taobao has the means to create law, Chinese style, because it is a private
supplier of legal infrastructure for its market and users when the state-run
legal institutions are weak. Of course, to gain the protection of this legal
infrastructure, traders must join and trade using Taobao.
– Taobao addresses three major problems intrinsic to trade:
(1) contract enforcement; (2) fraud prevention; and (3) dispute resolution.
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Taobao’s private ordering
(1) Contract Enforcement
Through Institutionalized
Reputation Mechanisms: The
Online Rating System
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Taobao’s private ordering
(2) Fraud Prevention Through
Risk Framework: Big Data,
Manual Review and State
Coercion
Review system two-way: buyers
also have their own credit system,
and the seller can see the buyer’s
credit level.
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Taobao’s private ordering
(3) Dispute Resolution: Through Crowd-Sourcing Justice: User Dispute
Resolution Center & 7 days returning policy
(4) Supporting Institutions: Payment and Escrow – these can be used
for enforcement
7 days return policy Payment to seller stay with Alipay until
the buyer “confirmed” the order
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Alibaba and Fintech reform (Caixin Global 10/4/2021)
– China’s market regulator fined Alibaba Group Holding Ltd. a record
18.2 billion yuan ($2.8 billion) for violating antitrust laws.
– A four-month investigation by the State Administration of Market
Regulation (SAMR) concluded that Alibaba unfairly squeezed out
competition among online retail platforms by forcing vendors to choose
between its services and those of its rivals.
– The probe also found that Alibaba impeded the free flow of goods and
services, stifled innovation among platforms, infringed the rights and
interests of online sellers, and harmed consumer interests.
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http://www.samr.gov.cn/fldj/tzgg/xzcf/202104/t20210409_327698.html
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Ex-post regulation
Apr 27, 2021 08:11 PM
FINANCE
In Depth: The Rectification and Remaking of
Ant Group
https://www.caixinglobal.com/2021-04-
27/in-depth-the-rectification-and-
remaking-of-ant-group-101700657.html
– https://www.caixinglobal.
com/2021-04-27/in-
depth-the-rectification-
and-remaking-of-ant-
group-101700657.html
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Emerging regulatory framework
https://www.caixinglobal.com/upload/regulations_ant_grou
p_has_to_wrestle_with.pdf
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International features of the Basle III Market risk framework
chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.bis.org/bcbs/publ/d457_inbrief.pdf
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Ex ante and ex post legislation
Ex ante legislation refers to laws or
regulations that are designed to prevent
undesirable outcomes before they occur.
It's a proactive approach to lawmaking
that aims to anticipate and address
potential issues, risks, or problems before
they have a chance to manifest.
For example, in the financial industry, ex
ante regulations might include capital
requirements for banks to prevent
insolvency.
Ex post legislation refers to laws or
regulations that are designed to address,
correct, or penalize behaviors or actions
after they have occurred. This reactive
approach to lawmaking focuses on
providing remedies, enforcing penalties,
or establishing corrective measures in
response to violations or undesirable
actions that have already taken place.
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Ask your neighbour
What are the advantages and
disadvantages of ex-post
legislation?
CHA
T
One point
each?
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Blockchain security
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Can China and blockchain work?
https://www.weeklytimesnow.com.au/news/world/can-china-and-blockchain-work/video/ef1dd1b2a7f5c43d429e8425a68dfa5e
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Blockchain 区块链
The primary purpose of blockchain was to facilitate peer-to-peer transactions
without the need for a central party. In this technology, no single party takes
responsibility for the security of a special blockchain network. Thus, all users of
the system may have access to the data on the network.
Blockchain technology supports private ordering in China by offering a
decentralized, transparent, and secure framework for conducting transactions
and managing contracts without the need for a centralized authority. This
technology aligns well with the principles of private ordering, where economic
activities and governance structures are organized through private agreements
and mechanisms rather than through state intervention.
https://www.cnbc.com/2022/05/16/china-blockchain-explainer-what-is-bsn-.html
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Blockchain used in local government enterprise interaction
– Shenzhen: Blockchain-based Invoicing and Tax Management
– Zhejiang: Government procurement
– Guangzhou” Supply chain management
– Hainan: Data sharing and administrative services
– Fujian: financial services and support for SMEs
– Chengdu: Regulatory compliance
See also
How China’s local governments and academia propel blockchain business
https://www.brookings.edu/articles/how-chinas-local-governments-and-
academia-propel-blockchain-business/
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Blockchain’s Potential in the International Business Context
https://journals.sagepub.com/doi/full/10.1177/00081256231202266
– 1. International transport and logistics
– 2. Carbon management and trading
– 3. Traceability and provenance
– 4. Authentication and anti-counterfeiting
– 5. Cross-border payment and trade financing
– 6. Cooperation among competing industry players
– 7. Multi-country regulatory compliance
– 8. Cross-border supply chain management
– 9. Cross-border insurance claim settlement
– 10. Cross-border remittance
Du, J., Nielsen, B. B., & Welch, C. (2023). From Buzzword to Biz World: Realizing Blockchain’s
Potential in the International Business Context. California Management Review, 66(1), 124-148.
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Forms of security for entrepreneurs
1. China’s Rule by Law provides legal security for entrepreneurs that can be
limited by government action
2. Local governments provide policy security by committing to policies
3. Market design can provide secure marketplaces
4. Private ordering can secure whole industries Can smart technology create
security for entrepreneurs?
5. Technology such as blockchain create protect and secure information
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Website
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Thank you!