INTRODUCTION

China's reform and opening-up policy has provided a platform to showcase the diversity of its local economic development. According to incomplete statistics, in various studies conducted between 1986 and 1997, China had more than 31 regional development models named after provinces, cities, towns and counties (Li Peilin, 2001), among which the Wenzhou Model has drawn the widest attention due to its unique high degree of spontaneity. Wenzhou has experienced rapid economic development since China's reform and opening-up, with GDP increasing from RMB 1.322bn in 1978 to RMB 82.5bn in 2000 with an average annual growth rate of 15.6% (Shi Jinchuan et al., 2002). The Wenzhou Model has the "highly industrialized and low collectivized" (Wang Hansheng, 1990) and "family business-based and market-oriented" (Zhang Renshou & Li Hong, 1990) characteristics, and is a regional development model that promotes industrialization and urbanization through privatization and marketization (Shi Jinchuan et al., 2002).

The non-governmental force that consists of privately-owned enterprises, private capital and private entrepreneurs has strongly driven Wenzhou's economic development and has created a distinct path for Wenzhou's regional economic development. According to statistics, in 2005 the total economic output of the private sector in Wenzhou was RMB 201.236bn, accounting for 93.7% of Wenzhou's total economic output, and there were 29 275 privately-owned enterprises that had an economic output of over RMB 5m (Wenzhou Municipal Bureau of Statistics, 2006). In addition, professional markets with individual characteristics have succesfully emerged across Wenzhou and have gradually formed the "block-like economy" layout with the characteristic of similar industries gathering together in the same areas. The active private sector and centralized industry clusters provide the clearest explanation for the Wenzhou Model.

As China's economy developed more diverse forms of ownership, privately-owned enterprises showed clear advantages compared to state-owned enterprises in terms of production efficiency (Lin Yifu, 1994). Under the planned economic system, state-owned and collectively-owned enterprises needed to provide stable social welfare to their employees, so production technology improvements and efficiency enhancement were not the most important targets for such organizations to achieve. On the contrary, because there were no requirements on social welfare provisions to employees, the most important anticipated target of privately-owned enterprises was to enhance production efficiency and increase market share. It needs to be mentioned that privately-owned enterprises that developed at the beginning of China's reform and opening-up were strictly constrained by the internal system since their establishment and the system they were faced with was more difficult than that for publicly-owned enterprises, particularly in Wenzhou.¹ Despite having an unfair starting point from which to compete, the private sector achieved higher levels of efficiency. This paper focuses on the issue of what mechanisms determine the efficiency of Wenzhou's privately-owned enterprises. In order to do this, it is first necessary to review several explanations from theory-based studies.

1. In the early stages of its existence, Wenzhou's private sector had no legal status in terms of policies and laws, and its operating activities and enterprises' property could not be protected by law (Cao Zhenghan, 2005). Therefore, many enterprises adopted approaches such as operating in other names and "wearing the collective red hat" to avoid being questioned about being "capitalist" or "socialist", thereby achieving relatively stable development under changeable political orientations (Shi Jinchuan et al., 2002).

EXPLANATIONS FOR THE SOURCE OF PRIVATELY-OWNED ENTERPRISES UNDER THE WENZHOU MODEL Property Rights Reform and Internal Organizational Logic

Enterprise organizational action logic and its system origin have been widely discussed in both fields of economics and sociology. Organizational economics analyzes the enterprise structure by virtue of microeconomics, which takes individuals and their own economic benefits as the starting point for analysis. In Ronald H. Coase's famous study on enterprises, enterprises emerge as "a substitute approach to coordinate production" and because there are costs for market transactions, all interacting parties can work out a low transaction cost system through contracts only when property rights are clearly defined (Coase, 1995). Bureaucratic enterprises can effectively develop a set of rules governing property rights that decide resource allocation to overcome production externalities caused by market failure (Alchian and Demsetz, 1972) and information asymmetry (Williamson, 2006) and pursue an effective property rights structure, thereby encouraging authoritative production units to emerge and changing the motivation of individuals with effective production models (Miller, 2003). Oliver Williamson further developed Coase's viewpoint on the enterprise origin and points out that transaction frequency, asset specificity levels and uncertainties are the reasons for different systems to govern transaction behavior, and for frequent and risky investments with high asset specificity, the vertically integrated and unified governing system-enterprise organizations with defined property rights are generally adopted (Williamson, 2006). Analysis by organizational economists suggests that enterprises are improvements to transaction imperfections under market conditions and defined property rights and a series of rational regulations help to achieve efficiency. This thought is also reflected in the study on institutional transition for Wenzhou's privately-owned enterprises. As part of the gradual nationwide institutional reforms, Wenzhou first completed its transition from a planned economy to a market economy using innovation from outside of the system and established a clear and exclusive property rights system that is focused on the private sector. In the new stage of institutional transition-"the new Wenzhou Model" has been established based on the modern enterprise system with "clear property rights, clear powers and responsibilities, separation of the government from enterprises and scientific management measures" (Shi Jinchuan et al., 2002). If we say the transition achieved vertical integration of production during the previous stage-enterprise groups with reduced externalities, information asymmetries and transaction costs (Jin Yongxing, 1999), the major target for the later stage will be to improve the original management approach, such as the separation of ownership and management rights, the application of knowledge management, etc (Chen Ping, 2007).

Power of Social Networks and Market Relations

Compared to the logic of economics that focuses on the influence of optimizing the structure of property rights on enterprise efficiency, sociology focuses on the influence of social structure on enterprise development. In the analysis of sociology regarding organizations, enterprises and markets along with mutual benefit and power in the political field are taken into consideration within the crucial factors for organizational development. In Richard Swedberg's opinion, sociologists often refer to the "organizational field" (2005: 99) and there are two relatively prominent directions in terms of the "organizational field" namely social network analysis and market transition theory, with the former focusing on the relationship between enterprises and their position in the social structure and economic benefits they obtain, and the later carrying out research on enterprise behavior from the perspective of socialist country transition.

Social network analysis was first seen in Mark Granovetter's "embeddedness" discussion.¹ In Granovetter's view, economic behavior is "embedded in continuously changing social relations" and "social relation networks are irregularly embedded in various departments of the economic life to varying degrees" (Granovetter, 1985). He emphasized that economic systems are special because they "use resources for collective actions" (Granovetter, 1992; Swedberg, 2005). Social network analysis considers the position of enterprises in the social structure and the mutual connection between enterprises as objects of study and when the network forms structural holes due to a lack of certain connections, subjects in the position (including enterprises) can utilize the structural advantages to control the network structure (Burt, 1992; Granovetter, 2006). Empirical studies show that enterprise relations can influence capital acquisition, and embedded connections and face familiar connections can create different effects (Uzzi, 2008). Granovetter (2005) also thinks that highly coupled network structures generate cooperation more easily compared to non-coupled or weakly coupled structures and can avoid benefit conflicts. Using the "embeddedness" viewpoint to analyze Wenzhou's privately-owned enterprises, we can see that market structure and enterprise development are interdependent. For instance, in the early stage of the private sector's development, because no official financing support was provided, the private sector could only raise funds by itself or through the non-bank money market, thereby promoting the prosperity of the non-bank money market; non-governmental finance departments targeted at enterprises that needed business debt and credit through certain geographic and blood relationships, then these enterprises obtained a "strong relationship" guarantee, thereby obtaining capital guarantees for development. Shi Jinchuan et al (2002: 24) pointed out that during the development of Wenzhou's enterprises, extensive market-oriented phenomena have been commonly seen, i.e. the range of resources that can be traded by Wenzhou people is extremely broad. From this point of view, Wenzhou's social relations (including combinations and competition between enterprises)-like modern capitalist society written by Karl Polanyi-are "embedded" in the economic life.

1. Embeddedness is a concept proposed by Karl Polanyi. In his book The Great Transformation, he proposes that economic activities in the pre-capitalist era were embedded in social communities and social life in the capitalist era is embedded in the economy (Polanyi, 2007).

Local Economy and Political Power in Transition

During the development of Wenzhou's private sector, many have questioned whether the government played the role of "doing nothing". This issue has led to wide-ranging arguments over the past few years despite research showing that the local government's negative governing has effectively protected the private sector. However, clearer theory debate believes the local government's positive intervention and guidance has directly driven the development of Wenzhou's private sector (Pan Wei, 2003). This viewpoint is reflected in the discovery of market transition theories, and a great deal of empirical studies regarding China's market transition have pointed out that the development of the private sector, which is outside of the system, is still influenced by reallocated power (Rona-Tas, 1994; Parish and Michelson, 1996; Walder, 1995; Oi, 1992; Lin, 1995). Local financial autonomy allowed by the reforms has stimulated the local government's positive economic approach and the local government's role is now as a protector (Parish and Michelson, 1995) or a manufacturer vying for benefits (Walder, 1995). Due to path dependence, the state and local bureaucrats shall continue to intervene in economic activities. The bargaining capability held by authorities when participating in the market shall ensure their power is not diminished and the dependent relationship that enterprises have towards the local government can take the form of financial and tax control or family network implementation authority (Lin, 1995). Compared to the South Jiangsu Model where the government promotes collectivism and has implemented control mechanisms on enterprises, the Wenzhou government indeed has been "doing nothing" to a certain degree. However, Wenzhou's private sector has benefited from the flexible policies offered by the local departments of the Communist Party of China and the government, and the political support from grassroots organizations, so enterprises can implement system innovation under less restriction from traditional systems and China's existing policies. Apart from relieving pressure from the external environment, the Wenzhou government has also rectified the economic order and launched relevant policies to support the development of privately-owned enterprises (Shi Jinchuan et al., 2002). In addition, one study points out that the deals between power and money, and the combination of the government and enterprises are prominent in Wenzhou: the government utilizes the control of rare resources such as land to carry out rent-seeking activities which publicly intervene in market competition and disturb market order (Zhou Xinghong, 2001). All the above mentioned studies show that the development of privately-owned enterprises is affected by the local political environment, and even in Wenzhou which is an "early developed" market society political power still has great economic value.

Thought Derived from Cultural Traditions

As an aspect of culture, the effect of Wenzhou's local traditional concepts on the private sector has also been discussed within academic circles. Wenzhou's local family culture has a deep influence on the internal structure, management approach and social relations of privately-owned enterprises.¹ Family business operations developed during the countryside industrialization process and its cultural essence has still been maintained even after enterprises have grown much larger. Many enterprise groups in Wenzhou still maintain married couple-owned factories or father and son-owned companies with a very strong family-based approach to business management (Zhu Kangdui, 1997; Ma Jinlong, 2001). However, one study points out that with the further development of enterprises, more and more deficiencies in family-based management have been exposed, which are mainly reflected in aspects such as the employment system, decision-making abilities, democratization level and power to attract talented people. Innovation must be introduced into family business management to establish scientific management and adopt a modern approach to business management (Zhang Renshou, 2000).

1. In Wang Xiaoyi's (1996) view, family systems and family concepts in grassroots society are a part of local culture. The effect of this culture on regional society must be analyzed under the state's macro social culture background. Wenzhou's family business activities recovered only when the state relaxed controls on local society.

Since the beginning of the 21^st century, academic circles have maintained a certain degree of enthusiasm towards the Wenzhou Model study and still pay attention to Wenzhou's private sector. In the above explanations for the development of privately-owned enterprises under the Wenzhou Model, there is an analysis of organizational systems and cultural characteristics from the perspective of inside the enterprises and there are also observations on supporting resources provided by the local government and the market system to enterprises from the perspective of outside the enterprises. Therefore, two theoretical assumptions can be made regarding the efficiency mechanism of Wenzhou's privately-owned enterprises: (1) Optimization of the internal systems of enterprises enhances efficiency, including the establishment of a modern property rights system and business management approach to reduce the influence of family culture. (2) Resources that can be obtained from outside enterprises determine enterprise efficiency and the more resources enterprises obtain from the local government and the market system, the higher the efficiency. This paper focuses on the relationship between the two theoretical assumptions. First, the two theoretical assumptions do not compete with each other, and provide an integrated and not an alternative explanation of the enterprise efficiency mechanism. Second, the effectiveness of the two theoretical assumptions varies in different enterprises. Among many external characteristics of enterprises, this paper chooses enterprise size as an element for observation because enterprise size not only reflects the increase in competitive strength in market competition, but also reflects the input of enterprises to internal system reforms and their grasp of external opportunities, while also being an index that is easy to measure. Hence, the hypothesis for this study is that the internal systems of enterprises and external supporting resources generate varying influences on the efficiency mechanism of privately-owned enterprises of differing sizes.

DATA, MEASUREMENT, AND METHODS

This paper uses data from the 2007 enterprise sampling survey compiled by the Wenzhou Administration of Industry and Commerce to analyze privately-owned enterprises, with the population data consisting of Wenzhou's privately-owned enterprises. 1 000 copies of the survey were distributed and 728 copies were returned, 725 copies were used to present survey results. Random and nonrandom sampling methods were adopted. Nonrandom sampling was initially used based on aspects such as the industry distribution characteristics of Wenzhou's privately-owned enterprises, their status in Wenzhou's economy (such as core industries and industries with special characteristics) and their development levels in different areas, and according to certain proportions, samples were particularly selected from core industries, and cities, counties and towns where privately-owned enterprises are clustered together. Then privately-owned enterprises were randomly selected as samples.

Using the 2007 privately-owned enterprise survey, the study under this paper has adapted the major dependent and independent variables. The dependent variable uses the return on equity (net profit / net assets) to measure the efficiency of each privately-owned enterprise. Independent variables are taken from two aspects: (1) the internal organizational systems of enterprises; (2) external support obtained by enterprises. The first aspect appears in the questionnaire in the form of four variables: the property rights system, decision-making style, strategic planning and source of managers of enterprises, which are respectively encoded to dummy variables. The property rights system takes measurements from five levels: sole trader business, partnership, limited liability company, shareholding cooperative system and others. The decision-making style takes measurements from four levels: intuitive individual decision-making, intuitive team decision-making, individual decision-making after rational analysis and team decision-making after rational analysis. Strategic planning takes measurements from four levels: no plans, temporary plans, incomplete strategic plans, and systematic and meticulous strategic plans. The source of managers takes measurements from two levels: family members and relatives, and talented employees. All dummy variables are accounted for in model 1. The second aspect is measured through subjective questions in the survey. This paper reviews assessments on the current conditions of enterprises that are completed by the persons in charge of each enterprise to extract information on the three market-related items: market competition environment, ¹ non-governmental financial support and relationship networks within Wenzhou, and three government-related items: government service and policy support, national and local tax support, and land resources. The degree of importance and satisfaction for each item are summarized into a binary variable that only takes the value 0 or 1. A value of 1 implies the item has been assessed as "important and satisfactory", because if the person in charge of an enterprise believes the item is important, it will imply the enterprise will invest in this and if the enterprise is satisfied with the item, it will imply the enterprise has obtained significant returns from this aspect. Model 2 includes a total of 6 binary variables that measure the external support obtained by enterprises.

1. This index reflects the government's support to a certain degree because the market environment usually can't operate without the government's protection and adjustments.

This paper uses enterprise size (measured by the number of enterprise staff) as the control variable. According to the standard used to classify enterprise size in the Company Law of P.R. China, ² enterprises that have less than 40 employees are classified as small-sized enterprises, enterprises that have 40-400 employees are classified as medium-sized enterprises and enterprises that have over 400 employees are classified as large-sized enterprises.

2. Because this survey targets privately-owned enterprises in the manufacturing industry, the standard to classify enterprise size adopts the standard used in the manufacturing industry.

EXPLANATIONS OF RESULTS

The results of the regression analysis show that the two models differ when explaining the efficiency mechanism of privately-owned enterprises of differing sizes. When not grouped by enterprise size, according to the results of the F-test, the overall applicability of model 2 is slightly stronger than model 1. Among the variables showing regression significance in model 1, decision-making style and strategic planning present conflicting results, and the "rational decision-making by the team of leaders" that has the highest rationality provides around a 20.1% improvement to enterprise performance, while in terms of strategic planning, "no plans" that has the lowest rationality is the most effective approach to enterprise efficiency, and the regression equation shows any plans generate a negative effect on enterprise efficiency. The independent variables in model 2 are "relationship networks within Wenzhou" and "land resources", with the former having a 17.2% positive effect on enterprise efficiency and the later generating a 16.9% negative effect on enterprise efficiency. This shows the enterprises that place an emphasis on obtaining land resources from the local government surprisingly perform worse than those enterprises that do not.

When grouped by enterprise size, more evident differences are seen in the two models. For the efficiency mechanism of large-sized enterprises, the overall applicability of model 1 is far higher than model 2. Among the variables showing significance in model 1, "intuitive decision-making by the team of leaders" helps the most with 74.6% to improve the performance of large-sized enterprises and the effect of "no plan" is more obvious than when not grouped by enterprise size. In the regression analysis regarding medium-sized enterprises, the overall applicability of model 2 is evidently higher than model 1. Among the variables showing significance in model 2, "non-governmental financial support" significantly improves with 19.1% for the efficiency of medium-sized enterprises, whereas "market competition environment" shows a 27.6% negative influence which indicates that the local government's actions to improve the market environment have not generated actual benefits to medium-sized enterprises. Neither model 1 nor model 2 provides a strong explanation for the efficiency mechanism of small-sized enterprises.

It is worth noting that other variables in this study-property rights system, family management, and policy and tax support from the government to privately-owned enterprises-have no significance in any of the regression equations. If possible inaccuracies in the study are not taken into account, it will be necessary to think further about the possible explanations for the phenomena seen.

DISCUSSION AND OPINIONS

The results of the regression analysis initially prove the assumptions for this study to be correct. In existing studies, explanations for the efficiency mechanism of Wenzhou's privately-owned enterprises can be seen from two aspects-the internal organizational system of enterprises and external social resource supply for enterprises. This paper discovers that both of these aspects have an influence on enterprise efficiency. The efficiency of medium-sized enterprises mainly depends on resource supply from the local government and market, while the efficiency of large-sized enterprises mainly depends on the optimization of the internal organizational system. Of course, this does not assume the two aspects can replace each other. It is definitely possible for privately-owned enterprises to balance the two aspects during their development. However after enterprise size grows beyond a certain size, the benefits obtained from internal system optimization will exceed the benefits gained from obtaining more external resources.

The representative variables in the models cannot fully explain the efficiency mechanism, so this provides room for further discussions. Institutional economics points out that the most significant advantage enabling privately-owned enterprises to achieve higher levels of efficiency than publicly-owned enterprises is their clearly defined property rights system which can provide an effective incentive mechanism. Most of Wenzhou's privately-owned enterprises are derived from the household industry and individual economy, and reforms for such enterprises over the past few years have been focused on changing their approach from a family business approach to a modern company system i.e. a shareholding cooperative system. However, the effect of this transition can not be seen from the results of this study. One possible explanation is: "path dependence" as defined by Douglass North exists in the daily operations of enterprises; enterprises may have clearly defined stock rights, authorization and supervision systems in law or have a set of strict power division and control systems, but they still have the propensity to achieve targets using traditional or habitual approaches during actual business operations. In reality, although most of Wenzhou's privately-owned enterprises have carried out management system reforms which include family leaders leaving office, public transferring of stock rights and employment of professional managers, in terms of key enterprise positions and core operations they may still maintain the original family management approach.

In organization studies, the enterprise system is considered as a highly rational outcome with a hierarchical organizational form and strict plans and standards (Miller, 2003). However, the discovery in this study has challenged this viewpoint. The most effective decision-making style for large-sized enterprises, which should originally have the highest degree of hierarchy, is not rational decision-making by the team of leaders, but intuitive decision-making by the team of leaders that has low rationality. In terms of strategic planning, no plans can generate more benefit than having any plans. This shows enterprises do not inevitably follow the principle of rationality in all of their actions, but the market is composed of "actions that are taken by producers to seek and discover niches through cooperation and sending signals" (White, 1981; Guillen et al., 2006). However, in a market that is disorganized and has too many participants and "noisy" signals, most producers cannot rationally make judgments, but instead passively respond to demand. Therefore, viewpoints such as "following feelings" and "taking no measures is better than taking measures" actually exist.

Showing affection for their hometown and focusing on developing cooperative business relationships were key factors in the development of Wenzhou's privately-owned enterprises at the early stage of market-oriented reforms (Shi Jinchuan et al., 2002). Seen from the results of the survey, relationship networks within Wenzhou can in general still generate a positive effect on enterprise efficiency, but this effect is more obviously seen in large-sized enterprises and is not so obvious in small and medium-sized enterprises. This issue can be analyzed from the aspects of the number of market competitors and the homogeneity of relationship networks. There are a large number of small and medium-sized enterprises and they have similar relationship networks. Each of them can find cooperative partners using their blood and geographic relationships. Under fiercely competitive conditions, having the same relationship network as competitors no longer becomes an advantage, therefore hard power factors such as product quality are more important. Large-sized enterprises can exert strong brand influence, so their hard power conditions such as product quality have been recognized by the industry. In addition, there are not many competitors at the same level, so it is relatively easy to develop a relationship network that is different from competitors and also to benefit from this network.

Government support given to enterprises is not reflected in this paper, but this cannot shake the relevant assumptions for market transition theories. Although Wenzhou's private sector has obtained limited preferences and support in terms of policies and finance since it started to develop in the 1980s, we can still see in some individual case studies that the local government's support and protection to certain enterprises has been the key factor that has enabled them to stand out from the competition. The two variables that significantly influence enterprise efficiency in this study-market competition environment and land resources-indirectly reflect the conditions of a bad market environment and insufficient land resources. The local government's adjustments to the market environment and land approval activities will affect the survival of privately-owned enterprises. When looking at the negative influence of the two aspects, we can use the following interpretation: a number of enterprises participate in market competition and vie for resources and the majority of these enterprises lose in this game that either has no corresponding rules or is full of hidden rules, so an increase in profit is not necessarily seen even though a higher emphasis has been placed on or input has been increased of the two aspects.

This study only uses enterprise size to analyze the differences in the efficiency mechanism of privately-owned enterprises, but does not provide a dynamic and deep analysis of the relationship between the internal operation system of enterprises and enterprise efficiency. If changes to the efficiency mechanism of privately-owned enterprises that occurred during the transition process of the Wenzhou Model are to be further analyzed, apart from more specific studies, it will be necessary to use representative individual case studies combined with the development process of enterprises to carry out further in-depth research.