The impact of the economic system upon human resource management practices in China.

Introduction

Presently, China's market reform is setting the stage for significant changes in management practices. The responsibility for labor allocation is being shifted from a centralized planning authority to forecasting and planning departments within enterprises. Production and

reward systems are changing, with less emphasis on egalitarianism and a stronger emphasis on efficiency and performance (Shenkar & Chow, 1989). Meindl, Hunt and Lee (1987, cited in Cyr & Frost, 1991) note that managers in China are already showing an increasing interest in using human resource techniques and motivational systems which emphasize productivity at the individual, group, and enterprise level. Current best practices in HRM can make significant contributions to the process of change undertaken by Chinese enterprises.

China's market reform has resulted in the dramatic growth of privately owned enterprises ("Laoban Qiye" in Chinese), township enterprises ("Laoxiang Qiye") and international joint ventures ("Laowai Qiye"). It has been reported that by the end of 1992, there were nearly 140,000 private enterprises employing more than 2 million people while township enterprises produced 1,650 billion yuan (US$ 289 billion(1)) in goods and absorbed 100 million rural laborers (China Daily, 27 May 1993). Similarly, international joint ventures as well as wholly foreign-owned ventures were also growing rapidly. According to Premier Li Peng's Report on the Seventh National People's Congress in March 1992, more than 12,000 new joint ventures were established in 1991, with contracted direct foreign investment totaling more than US$ 12 billion and actual investment of US$ 4.37 billion. With the number of private and township enterprises as well as international joint ventures increasing rapidly, HRM is even more important as these organizations are generally outside of the state planning system and thus have more autonomy than state-owned enterprises to use HRM to assist productivity growth. Furthermore, these enterprises have fostered a new generation of entrepreneurs. They are beginning to appreciate the direct impact of HRM on productivity and organizational effectiveness. Meanwhile, as foreign investors continue to call for a greater role for HRM in their ventures in China, a new role for Chinese HRM is most likely to evolve in these enterprises and ventures.

The transition from a centrally planned economy to a socialist market economy has resulted in significant changes in the economic system, which is and will continue to have major implications for the practice of human resource management (Schuler, 1989). Moreover, as Williams (1993) notes, the role which China is playing as a global economic power is beginning to influence the emergent pattern of world business. These changes necessitate an appreciation and understanding of the different HRM practices under planned and market economic systems, the impact of the changing economic system upon present HRM practices and the implications of such a change for future trends in HRM for China. This will also have practical value for both Chinese managers and Western managers who currently have operations in China or who are contemplating a business venture in China.

However, although the literature has given attention to the impact of cultural, political and technical changes upon HRM (e.g. see Ferris & Judge, 1991: Von Glinow & Teagarden, 1990), little research has been conducted on the impact of different economic systems on management and its implication for HRM practices. This paper will first examine one of the major problems of China's centrally planned economy, that is, the low productivity levels in enterprises. especially in state-owned enterprises (also called "enterprises owned by the whole people" within China). Although the number of state-owned enterprises constitutes only 2.5% of all industrial enterprises in China, they produce 45.6% of the national industrial production and contribute over 60% of total profits and taxes to the state (People's Daily(2), 25 July 1992). This examination will highlight the necessity to shift from a planned economy to a market economy. The paper will then identify the impact of changed economic systems upon HRM and discuss the implications of such a change for future HRM practices in China.

The Centrally Planned Economy and Low Productivity

When the People's Republic of China (PRC) was founded in 1949, the government established a centrally planned economic system modeled quite closely on Soviet practice (Hare, 1983). Under this centrally planned economy, the state "set the norms of economic activities to be followed by the enterprises" (Hsu, 1991: 76). In addition, the unified labor allocation system and fixed wage scale adopted by the government left little discretion for the enterprises in hiring, firing, and wage setting (Von Glinow & Teagarden, 1988; White, 1983). This economic system, as Mclaughlin (1987, cited in Von Glinow & Teagarden, 1988) argued, "managed to feed and employ a population in excess of one billion people" (p.303), and greatly reduced the social unemployment rate (around 2% at 1988 - Jiang, 1991). However, "China's centrally planned albeit reforming - economy," as described by Feinerman (1992: 24), is fundamentally incompatible with the market economy principles used in the most other countries, and has evolved into an ossified model that is contrary to the development of social productivity. This can be seen quite clearly in the continuously decreasing economic efficiency of state-owned enterprises.

It has been reported that Chinese industries continue to incur heavy losses and have been suffering low productivity (Economic Daily.(3) 2 November 1992). By the end of 1991 the total loss suffered by Chinese enterprises was as high as 31.04 billion yuan (US$ 5.44 billion), and the amount lost increased by 392% compared to 1988. This loss resulted in a 67.8% decline in total profit. Furthermore, according to official statistics, from January to August of 1992, one-third of the over 400,000 state-owned industrial enterprises were still losing money, and another third were on the verge of incurring a loss. As a consequence of low productivity, even though Chinese employees work 73 more working days each year than their counterparts in the United States and 55 days more than those in Japan, income per capita in 1990 was US$19,840 in the United States, US$ 21,000 in Japan and only US$ 330 in China.

Low productivity leads to low efficiency which in turn results in heavy losses. This situation has put a heavy burden on the Chinese government and greatly impeded the development of economic reform. In 1990, the subsidization to those enterprises making losses reached a staggering 57.85 billion yuan (US$ 10.1 billion) a year. Since 1949, China's economic development has been characterized as high input, fast speed but low output and low efficiency, which in colloquial terms means that work sufficient for two people is done by three while wages of two people are distributed among the three (Zhang, 1992). This situation caused a low explicit unemployment rate in the whole society at the cost of a high implicit unemployment or underemployment of employees within the enterprises. According to Tu (1991: 350), China's unemployment rate is not 2% as is commonly reported, but close to 12% if implicit underemployment within the enterprises and countryside were taken into account. Either the government or enterprises must bear the cost of an oversized workforce and its low efficiency level.

Under past practices, there was no linkage between individual performance and remuneration: "All enterprises ate from the big pot of the state and all workers ate from the big pot of the enterprise" (Lu, 1989:10). White (1983) points out that as a result of a centrally planned economy and the intention to maintain an explicitly low unemployment rate, the Chinese government has been challenged by issues such as

"the quantitative problem of providing enough jobs to keep pace with the expanding urban population; the qualitative problems of ensuring that jobs were productive rather than just make-work, of reducing the high level of over-staffing in State enterprises, and of increasing the accuracy of the fit between skills and training on the one hand and economic needs on the other (p.257)."

The centrally planned economy with its job-protection policy and egalitarian reward practices created the situation of the "iron rice bowl" (in Chinese, "iron" here means "firm" or "secured"), which means employees "have been entitled to lifetime employment, guaranteed wages and cradle-to-grave social welfare regardless of productivity" (Von Glinow & Teagarden, 1990: 87). The "iron rice bowl" is believed to be one of the main reasons for low productivity, as it greatly depresses the enthusiasm, initiative and creativity of the enterprises and their employees (Lu, 1989: Warner, 1993; Zhong, 1992).

As Granick (1991, cited in Warner, 1993) notes, "a key element in the enterprise reforms was aimed at ending the practice of the iron rice bowl" (p.55). The seventh National People's Congress held on 20 March 1992 stressed that economic restructuring in 1992 would concentrate on the reform of enterprises and would take further steps to eliminate egalitarianism (Li, 1992). However, a more significant step was taken in China's economic reform at the Chinese Communist Party's Fourteenth Congress held in October 1992. At this Conference it was made clear that the goal for the economic reform was to establish a socialist market economic system to take over the old centrally planned economy. The adoption of a "socialist market economy" was referred to as a "theoretical breakthrough" (People's Daily, 30 October 1992), because the market economy used to be regarded as the outcome of capitalism. It was the first time that "the Party gave its stamp of approval to market economics as the catalyst of China's future prosperity" (Miller, 1993: 23).

Management Practices under Planned and Market Economic Systems

In order to understand the impact on management practices of the transition from a planned economy to a market economy, it is essential to see the differences of these two economic systems as far as the enterprises and their management are concerned. The comparison made will draw distinctions between the two systems with regard to five factors:

1. resource allocation;

2. operational independence of enterprises;

3. economic independence of enterprises;

4. workforce motivation;

5. compensation practices.

1. Resource Allocation

Under a centrally planned economy, all resources were strictly controlled by the state. The distribution of the material supplies was centralized and was done in accordance with the state unified economic plan (Yang, 1989). The enterprise was not concerned about sourcing and sales, as the central plan guaranteed both the delivery of inputs and a set price for all products (Borgonjon & Vanhonacker, 1992). On the other hand, it was also impossible for the enterprises to arrange their own resources either in terms of money, materials, or human resources. According to Mr. Li, the Deputy Minister of Labor before the economic reform, state-owned enterprises had no right to change either the total amount of their payroll or the total number of employees (People's Daily, 13 December 1992).

With regard to human resources, each year the government would work out the quota for employment. Each local labor bureau would then assign a quota to the enterprises without considering whether there was a good match for each enterprise, let alone the match between the individual's personal ability and the type of work assigned. Enterprises did not have the authority to use selection processes which are common in Western enterprises (He & Shu, 1992; Nelson & Reeder, 1985; Warner, 1993). This unified labor allocation system has caused many problems within the enterprises such as an oversized workforce, low productivity, low labor mobility, underutilization of education and training, and under-skilled or inappropriately skilled workforce (People's Daily, 19 August 1992).

In contrast, in a market economic system, enterprises have the autonomy to seek the resources they need. Enterprise managers understand that they cannot be guaranteed to get whatever they want. Resources are regulated by the market, and the enterprise has to compete to obtain the resources it desires. Take human resources as an example, state-owned enterprises are now facing critical issues as how to attract and retain key employees. The recently noted high rate of labor withdrawal from state-owned enterprises has demonstrated both the failure of the unified labor allocation system and the competitiveness of skilled people in a market economy. These will be discussed later in this paper.

2. Operational Independence of Enterprises

When enterprises were strictly controlled by the planned economy, "the state exercised rigid and excessive control over the day-to-day operations of enterprises" (Sha, 1987: 691). Sha further notes that this strict control is actually the result of the notion that the ownership of state-owned enterprises should be reflected in their direct operation by the state. This explains why state-owned enterprises were also called state-run enterprises before the 14th Party Congress. Operations, especially in regards to the quantity of products, remained extremely restricted. What the enterprises needed to do was to fill the quotas set by the state. The products of state-owned enterprises were distributed by the state regardless of their design and quality. In this situation, the enterprises had few obligations to the state and no marketing problems. As a consequence, there was little motivation to improve design and quality, reduce costs or increase productivity.

However, under a market system, the ownership of an enterprise can be separated from the authority to operate and manage the enterprise (Hsu, 1991). "State-run" has been changed to "state-owned" and these two terms can no longer be used interchangeably (People's Daily, 2 December 1992). State-owned enterprises are responsible for their own operation and management. While the ownership still belongs to the state, the enterprises have the right to organize their own production and assume responsibility for their own profit or loss. Thus, state- owned enterprises were pushed into the market and had to compete on an equal basis in the market. The operation of products had to be organized according to the demand of the market and the competitiveness of a product had to depend upon its price and quality. As a result, the enterprises had to consider how to use most effectively their human resources in order to raise productivity, reduce costs and increase market share.

These new policies and the change of the economic system also made it possible for the chief executives of enterprises to change from simply being administrators following orders of the state. The government issued the Enterprise Law in 1988, and in July 1992 the "Regulations for Changing the Methods of Operation of Industrial Enterprises Owned by the Whole People" (hereinafter referred to the Regulations), which would serve as a guide for the implementation of the Enterprise Law. The Regulations clearly state that in a market economy, the enterprises, under the state's general guidance, have the authority to make their own business and operational decisions according to market conditions. This includes issues such as investment decisions, retention of working capital, pricing of products and wage and bonus levels (Economic Daily, 25 August 1992). As a result, chief executives have become the legal representatives of their enterprises and assumed full responsibility for their operations. This situation has also presented challenges to enterprises with regard to managing their internal operations in a competitive market.

3. Economic Independence of Enterprises

In the previous planned economy China's enterprises were "little more than appendages of the state bureaucracies that administered them" (Harding, 1987:113). The government gave mandatory instructions for the enterprises to follow, and could also transfer an enterprise's resources or profits at will (called "pingdiao" in Chinese). "Pingdiao" promoted egalitarianism among the enterprises and also indicated that the enterprises had no autonomy over their own business. The enterprise's economic performance was not linked to its economic rewards. The enterprises making profits would not get any more benefits than the one suffering losses, because all profits were remitted to the state and any losses were subsidized by the state. This situation gave little incentive to enterprises to improve their performance because it totally deprived enterprises of any economic independence.

However, in a market-driven system, enterprises are supposed to be independent of government administrative interference. The Enterprise Law established the enterprises position as an independent legal economic entity. The Regulations further defined specific rights and duties of the enterprise. According to the Regulations, the enterprise is entitled to have "four autonomies": (1) to be responsible for its own business and operations; (2) to be responsible for its own profits or losses; (3) to be responsible for its own development and expansion; and (4) to be responsible for its legal compliance (Economic Daily, 25 August 1992). The critical point of these "four autonomies" is the enterprise's responsibility of its own profits or losses. This autonomy has not only eliminated the possibility of practicing egalitarianism or "pingdiao" at the state level but also enabled enterprises to establish their own strategic position. Harding (1987) notes that "autonomy for enterprises would mean little if the enterprises did not have greater financial resources at their disposal" (p.114). In a market economy, it is assumed that well-run and profitable enterprises needn't worry about "pingdiao" and poorly managed enterprises will not be subsidized. Instead, the latter may face bankruptcy or major restructuring.

4. Workforce Motivation

Previously, the enterprise was motivated by centrally administrative command rather than the pursuit of its own economic benefit (Chao, 1992). Managers would aim to meet production quotas under the state plan with little attention given to the product's quality, distribution or sales (Holton, 1985). It made little difference to the chief executives if the enterprise made profits or losses, because the position they held would not change. With a planned economy, losses made by an enterprise were due in large part to three factors. First, prices were fixed by the state rather than being adjusted by the market. A second factor was the role of government-policy. For example, the enterprise producing contraceptives would not make any profit because all its products were supplied free to the society to implement the government's family-planning policy. A third factor was poor management. Not only was the enterprise unable to influence fixed prices or government policy, the chief executive was not responsible for losses caused by poor management. It was quite common for the chief executive of an enterprise incurring heavy losses to be transferred to another enterprise in order to save face. This practice was referred to as an "iron position" (in Chinese, "iron" here means "fixed"), which means the leaders or managers would keep their positions regardless of their performance. The "iron position" was one of the three well-known "iron practices" in China resulting from the centrally planned economy and egalitarianism. The other two "iron practices" are the "iron rice bowl" which has been referred to earlier, and "iron wages" which will be discussed later.

For employees, motivation was assumed to be influenced by political and ideological work and spiritual encouragement, while meaningful tangible rewards were greatly limited (Martinko Yan, 1990). Although economic reform did bring the bonus system into enterprises in 1978, it soon became another form of egalitarianism because everybody in the group would get the same amount regardless of individual performance. In addition, as Nelson and Reeder (1985) have noted, it was difficult to motivate a workforce in China because the enterprise had no right to fire its employees and there was no link between pay and performance, do Rosario (1988, cited in Von Glinow and Teagarden, 1990) noted that "state-owned workers remain the least motivated and least competitive of Chinese workers" (p.84). In large part this was a result of the failure to link performance and rewards.

In a market economy, the enterprise's economic position is closely linked to its performance. The Regulations stipulate that the enterprise could maintain its after-tax profits to fund growth and reward productive employees. In addition, it has been realized by more and more managers that performance-reward contingencies must be included in the reward system. With increased autonomy and decision-making power, it is becoming possible for managers to select differential monetary rewards to motivate the workforce according to individual performance. While the Enterprise Law and the Regulations have given chief executives authority and autonomy to run their enterprises, Vice-Premier Zhu Rongji has stressed that chief executives will not retain their position if their enterprise suffers a loss (People's Daily, 1 July 1992). This was a clear attempt to use the market economy to abolish the "iron position". Managers could no longer avoid their responsibilities for poor management by being transferred to another enterprise. Zhong (1992) reports an example in one Chinese city where the "iron position" was abolished. The Mayor of the city of Xuzhou announced on behalf of the municipal government that if enterprises incurred losses due to poor management, chief executives could not be transferred and must improve the unfavorable situation within a specified period of time, otherwise, they would be demoted or removed from their positions. Within six months of this announcement, four enterprises which had been unprofitable had become profitable and the financial contribution of the city's industrial enterprises reversed from a 27 million yuan (US$ 4.7 million) loss to a 70 million yuan (US$ 12.3 million) profit.

Apart from emphasizing the link between performance and material rewards, a market economy also offers the employee (particularly professionals with special skills) another benefit - the opportunity to match their skills with their work. As a result of the old labor allocation system, a mismatch of skills and work was quite common in state-owned enterprises. People's skills were often wasted, greatly reducing initiative and creativity. In a market economy, in order to be competitive, enterprises have to improve the design and quality of their products, develop new products or new businesses and get the right people for the right job. This process gives new opportunities for employees to match their knowledge and skills with employment opportunities in a deregulated labor market.

5. Compensation Practices

The wage and benefit system used to be centrally planned and strictly controlled by the state and "was characterized by absolute egalitarianism" (Sha, 1987: 691). The most popular wage system in China was the national wage scales which were structured differently for blue- and white-collar employees (Wang, 1990). However, as Nelson and Reeder (1985) have noted, in a planned economy, there were minimal wage differentials among workers, technicians, and managers. Wages at each grade were fixed and the total payroll was determined by the overall number of employees. Employees routinely assumed that people assigned to the same work position should get the same pay regardless of variations in job content or performance (He & Shu, 1992). While the state specified the quota of total employment and associated payroll, enterprises were not allowed to go beyond the ceiling of the total amount and were required to send a copy of their total payroll to the People's Bank of China, thus placing enterprises under surveillance of the Bank (He & Shu, 1992). This fixed wage system was called the "iron wage system". When the "iron rice bowl" was in practice, employees did not need to worry about either losing their job or getting lower wages than their co-workers. As enterprises had no autonomy to vary the wage and benefit system, the hard-working employee would get the same pay as those idling away their time. The "iron wage system" essentially encouraged poor performance, which is why the iron wage system" together with the "iron rice bowl" and the "iron position" are generally cited as the three major reasons for low efficiency and low productivity in Chinese enterprises.

In late 1984, the Chinese government announced that it was planning to develop measures that would better link wages and bonuses with improved enterprise performance (Harding, 1987). Since 1985, a structured wage system has been introduced for white-collar employees in government organizations and universities. This wage system has four components: base pay, job related pay, pay given according to length of service; and bonuses. Industrial enterprises also began to link their payroll to enterprise performance with increased use of piece rates and a floating wage (base pay plus bonus). Nevertheless, the practice of wage and bonus reform still tended to distribute bonuses equally to all workers and managers in a given job grade, and wages were still not closely linked to performance (Nelson & Reeder, 1985; Tu & Jones, 1991).

A market economy requires that wages be closely linked with the economic efficiency of an enterprise and employee performance. The Regulations stipulate that instead of using fixed national wage scales, an enterprise's total wage cost should be related to its economic performance. An enterprise could increase its total payroll as long as this increase was funded from increased profitability (Economic Daily, 25 August 1992). In his Report to the Seventh National People's Congress in March 1992, Premier Li Peng stressed the importance of wage system reform:

To take further steps to eliminate egalitarianism, we should improve the method whereby the total payroll of an enterprise is linked to its economic performance. We should also reform the system of income distribution within enterprises, introducing chiefly the form under which employees' wages are determined by the level of skill demanded by their jobs (Li. 1992: 8).

This new wage system is aimed at breaking the old "iron wage system" among the enterprises. It has enabled enterprises to distribute wages and bonuses according to profitability. Enterprises are now also able to determine their own wage standard and the way to distribute a bonus so as to match compensation to the contribution made by an individual.

The Impact of Economic Reform on HRM

With the official acceptance of a market economy and the subsequent implementation of the Enterprise Law and the Regulations, enterprises are in the process of breaking the three traditional "iron" management practices - the "iron rice bowl", the "iron wage system" and the "iron position". State-owned enterprises are now able to establish their economic independence and have the autonomy to manage the enterprise according to their own strategies. This requires that they compete on an equal basis with privately ("Laoban") and township ("Laoxiang") - owned enterprises as well as foreign joint ventures ("Laowai").

However, because of the difference of ownership, these "Laoban", "Laoxiang" and "Laowai" enterprises started their operations with widely varying HRM practices. Usually these three kinds of enterprises have human resource planning and their recruitment and selection is conducted on the basis of such planning. This leads to less overstaffing and fewer matching or placement problems. These enterprises have recognized the importance of attracting and maintaining key employees by offering better conditions (e.g. more autonomy, higher salaries and more generous benefits) than those available in state-owned enterprises. They have also stressed the connection between individual performance and compensation rather than egalitarianism. In short, modern HR practices are being implemented in these enterprises with a clear effect upon the efficiency and profitability of these enterprises.

In contrast, state-owned enterprises have always emphasized personnel administration rather than the management of human resources. A highly centralized planning approach which covered resource allocation, employee compensation, and product distribution deprived enterprises of the autonomy to manage their own human resources. State-owned enterprises used to be regarded by employees as a good place to work because of job security, relatively high salaries and social welfare benefits. However, in a market economy state-owned enterprises have become less attractive to employees due to the continuance of planned economy personnel practices such as fixed salaries, equally distributed bonuses and mismatching of work and skills. More and more skilled workers and professionals such as managers and engineers have resigned from their secure positions in state owned enterprises and accepted positions in private and township enterprises or foreign joint ventures. For example, in Beijing, during the first six months of 1992, 75% of employees who changed jobs were moving from state-owned enterprises (Economic Daily, 11 August 1992). Therefore, the issue of how to attract, retain and develop employees in competition with other enterprises has become a critical issue for many state-owned enterprises.

Tichy (1983) has pointed out that organizations which try to stay or become competitive and avoid their own demise will be driven by economic performance and productivity. Many researchers have identified the significant role of HRM in achieving these two motivating forces. Fulmer (1990) observes there is a growing recognition that HRM can play an important role in the development and implementation of a company's effective strategic plans. Pieper (1990) and Schuler (1989) also note that there is an increasing awareness that HRM is part of management and a strategic factor strongly influencing the economic success of enterprises. Schuler, Dowling, Smart and Huher (1992) argue that the objective of HRM is to attract, retain and develop employees in order to achieve an organization's goals, that is, to increase productivity, to improve the quality of working life and to meet the legal requirements for its competitiveness and development. Obviously, in order to deal with the challenges brought about by the shift into a market economy, especially the critical issues encountered by state-owned enterprises, such as low productivity and high labor outflow, modern HRM practices are urgently needed to help enterprises improve their performance and increase productivity. A market economy has emphasized the importance of HRM and has encouraged enterprises to develop and implement strategies with regard to human resource planning; recruitment and selection; performance appraisal; compensation; and training and development. These five broad areas of HRM are examined in the next section of the paper.

1. Human Resource Planning

Schuler and MacMillan (1984) point out that companies are increasingly being forced to link human resource planning with strategic business planning, so that "the companies that most systematically plan with their human resources in mind will be most likely to gain a competitive advantage by having 'the right people at the right place at the right time' to produce quality products efficiently" (p.247). This view accurately reflects the present situation of "Laoban" (private), "Laoxiang" (township) and "Laowai" (foreign) enterprises which have taken the lead in planning the human resources required by their operations. These enterprises must put profitability as their priority because they are not subsidized for their losses as state-owned enterprises used to be. In order to reduce costs and he more price-competitive, they have to be efficient.

Human resource planning was not possible in state-owned enterprises until the official acceptance of a market economy. Since the economic reform started in 1978, the Chinese government has stated that enterprises should have the autonomy to hire and fire employees. However, the central government's policies in practice or its interference often prevent enterprises from implementing their human resource planning. For example, a shoe-polish company in Tianjin recently complained about such government administrative interference (Economic Daily, 10 January 1993). In October 1990 this company started to use human resource planning to match employees and jobs. After reallocating jobs, the company had a surplus of employees and decided not to recruit new staff. However, without consultation, in 1991 and 1992, the government assigned 36 graduates to this company. What was even worse was that some of these graduates had degrees in fields such as farm irrigation and environment protection. The company could not find jobs to match their skills, but was required to accept these new employees.

2. Recruitment and Selection

In the past, recruitment and selection was outside the control of state-owned enterprises. Control was exercised by the government through two important processes. The first was the government's unified job assignment and labor allocation, which deprived enterprises of the autonomy to recruit and select any of their employees, whether professionals or workers. The second was the distinction made among employees. In China, employees were divided into two categories: laborers and cadres (i.e. workers and managers). As Casati (1991) noted, these labels, based on the level of completed education and job assignment, were difficult to change and lasted a lifetime. University graduates assigned by the government all became cadres while technical school graduates could be laborers or cadres depending on the work assigned to them. Generally, laborers could not be selected to do a cadre's work unless they got special permission from a higher level government institution, which usually was very difficult. Similarly, once individuals became cadres, they secured their "iron positions".

Selection criteria used to give emphasis to political factors rather than to technical, organizational and interpersonal skills, especially when choosing cadres. Individual interest, preference and specialization were rarely considered and the assignment might entail life-long employment. Employees were told "to work wherever the Party assigned you" and "to make individual choice according to the Party's need". Thus, under a planned economy, enterprises and individuals had limited choice with regard to the employment process.

A market economy has given enterprises the right of recruitment and selection by abolishing the traditional job assignment and labor allocation process, and diminishing the demarcation between laborers and cadres. While the Enterprise Law gave this autonomy to enterprises, the Regulations further defined that the time, conditions, method and quota of recruitment and selection would be totally decided by the enterprise. The selection of either laborers or cadres must be "open, equal, competitive and fair", and applicants must be chosen on an equal basis regardless of their background or connections. Testing has become a popular method to select workers while performance appraisal data and panel interviews have been used for the selection of cadres. Meanwhile, employees have gained the right to select an organization.

The new economic system has also altered the criteria for selection of employees. For example, the manager's ability to be proactive rather than reactive to market competition, the ability to pinpoint market opportunities, to solicit financing and to match competition from foreign ventures are important criteria in selecting managers likely to succeed in a market economy (Borgonjon & Vanhonacker, 1992).

3. Performance Appraisal

Since the economic reform in 1978, performance appraisal has been gradually developed and more and more widely used in enterprises. Although this varies greatly between enterprises, the main principles are fairly clear, that China is to break the "iron rice bowl" and uphold the principle advocated by the government, namely "to each according to his work" (Laaksonen, 1988). However, this principle is difficult to put into practice because of a number of obstacles. The first obstacle is the traditional rigid wage system: state-owned enterprises still cannot offer better bonuses than non-state enterprises to reward good performance. A second obstacle is the enduring influence of the "iron rice bowl." While cash incentives are theoretically possible, in reality they are egalitarian-based rather than equity-based (Von Glinow & Teagarden, 1988). A third obstacle is the Chinese concept of "face" or the avoidance of conflict or confrontation (Von Glinow & Teagarden, 1990; Holton, 1990). Tan (1987, cited in Von Glinow & Teagarden, 1990) notes that,

"as unpleasant confrontation upsets relationship, Chinese avoid passing harsh judgment or criticism. Thus the Western open performance appraisal system seldom reflects the real situation. Extreme evaluation is avoided and central tendency becomes a convenient means for the evaluator to overcome the judgment problem (p.88)."

Holton (1990) also points out that in China, "criticism of performance on the job must be handled in a very delicate way, with criticism disguised as suggestions for improvement, for example" (p. 125).

In Western organizations, the purposes of performance appraisal are generally twofold: evaluation and development (Schuler, et al. 1992). The aim of the former is to establish the relative worth of each individual's contribution and encourage good performance. The latter aims to improve communication between managers and employees, and to assist employees develop their skills and improve their performance. A market economy has made it possible for China's enterprises to work towards these aims as they have autonomy to link performance with compensation and to conduct other HRM activities which are closely related to performance appraisal, such as job analysis, selection, remuneration and training. However, performance appraisal has not established its position in China's enterprises. In many cases it has not been conducted on a systematic basis, which has not only reduced the accuracy and significance of performance appraisal, but has also caused a slow-down in the reform of compensation systems. For example, as Chew (1990) has noted,

"The Ministry of Personnel is ambivalent about a performance bonus. Although under the 1985 reform the bonus was intended to reward the deserving, with the amount varying according to merit, in practice it has been paid at a uniform rate to virtually all employees. The Ministry is aware that a true performance bonus strengthens the link between work and pay. However, until the present difficulty of assessing performance accurately can be solved, it is wise to defer the implementation of a performance bonus (p.781)."

4. Compensation

The system of compensation including wages and bonuses has been listed as one of three major and urgent system reforms in enterprises - the other two are the system of traditional labor and personnel administration and the system of social insurance (People's Daily, 8 May 1993). Enterprises now start to have some autonomy to determine their wage scales and payment system, but this is still at the experimental stage. The implications of this autonomy have not been fully explored.

It was reported in the Economic Daily (18 May 1993) that a state-owned enterprise, Dalian Freezer Manufacturing Company, changed the fixed wage scales to a piece rate plus a floating salary. The adoption of a piece rate resulted in a flexible wage scale from 70 yuan to 800 yuan according to work completed. However, the quality of products was stable and production was increased by 30%. The floating salary was decided by the supervisor according to performance, with the amount varying from 20 yuan to more than 100 yuan per month. This floating salary was also called the "unpredicted wage", because it was unpredicted by both the individual and other employees until pay day. However, it is not clear in this example if the floating or "unpredicted" salary was decided by the supervisor or the line manager on an objective basis. In addition, it may need considering whether the piece rate system contains an innate potential for exploitation or negligence of quality and safety issues.

According to Chinese statistics, the average annual income of the employee in state-owned enterprises was lower than that of "Laowai" (foreign) and "Laoxiang" (township) enterprises. In 1991, the average annual income per head in state-owned enterprises was 1,400 yuan lower than that in "Laowai" enterprises. This phenomenon was caused in part by wage control by the state. Unlike non-state enterprises, state-owned enterprises were unable to increase their total wage bill. This restricted the ability of enterprises making good profits to offer more attractive wage packages. The relatively low average salary among state-owned enterprises is considered to be one of the main reasons for high absenteeism and turnover as well as low productivity. For example, a recent survey found that annual average absenteeism in state-owned enterprises was 34% higher than that in "Laoxiang" (township) enterprises (Economic Daily, 24 March 1993).

Conflict due to mismanagement of compensation has recently been reported in China, particularly in foreign joint ventures. For example, stag in the Beijing McDonald's Restaurant complained they had not been paid as much as promised at recruitment (Economic Daily, 24 March 1993). In a Canon Inc. Compact-Camera Factory in Guangdong, a three-day strike occurred in March 1993 where 300 workers demanded a 30% to 50% wage increase. The strike was settled by offering raises of 7.8% to 13.6% depending on seniority (Barnathan & Engardio, 1993). These examples indicate that while relatively low salaries were one of the reasons for increased employee turnover in state-owned enterprises, the expectation of high salaries in non-state enterprises was one of the main attraction for prospective recruits. The demand for better compensation also demonstrates another aspect of the market economy with regard to the supply and demand of labor and price. Under a market economy, employees start to have bargaining power for their own benefits.

5. Training and Development

Employee training and development in Western countries generally includes "any attempt to improve current or future employee performance by increasing, through learning, an employee's ability to perform, usually by increasing his or her skills and knowledge" (Schuler et al., 1992: 329). Given the low efficiency and low productivity in China's enterprises, especially state-owned ones, together with the relatively poor educational background of Chinese employees, plus mismatch of employee skill and job requirements, the need for training and development in China is clear (Geringer & Frayne, 1990). According to statistics from the Fourth National Census conducted in 1990, university graduates and undergraduates constituted only 1.42% of the total population, those with senior secondary education made up of 8.03%, junior secondary education 23.3% and primary school 37%. A total of 15.88% of people over 15 years old were illiterate or semi-literate. Lu and Chen (1990) note that in China, only about 10% of the population have tertiary level education, while in the USA it is 54.1% and in Norway, 86.9%. Tan (1992) notes that laborers in the urban and township areas had received primary or junior secondary education while those in the rural areas only had primary education or were semi-literate or illiterate. Only 30% to 40% of newly recruited workers of the urban or township enterprises had vocational or technical training. It is estimated that by the year 2000, about 200 million members of the rural labor force will need new employment opportunities (Du, 1988). From these figures it is clear that there is a large gap between present educational and skill standards and the requirements of modern industry and technology.

The lack of suitably trained technical and professional personnel is even more striking (Pan & Li, 1990). A recent survey in Anhui Province showed that three-quarters of the large and medium-sized enterprises had no chief finance manager and two-thirds had no chief accountant (Economic Daily, 25 April 1993). Holton (1990) notes that a major problem found by foreign joint venture companies in China is the shortage of well-educated people. This pattern was confirmed in a recent study by Tan (1992). This study showed that the technical skills and qualities of employees in China were well below the demands of modern industry and technology, and stressed the necessity and significance of training and development in enterprises.

Since 1984, China has implemented a nationwide program of vocational retraining in all state-owned and collective enterprises (Wang, 1990). Training courses at the secondary or vocational technical level have been offered to employees along with on-the job training (Lu & Chen, 1990). In addition to technical training courses, management training has been given an unprecedented emphasis (Wang, 1987: Wang, 1990). However, Warner (1993) notes that in China, "training remains narrowly defined, in contrast to the Western HRM notion of planning for long-term staff development" (p. 46). While enterprises are emphasizing the importance of increasing the technical competence of the existing workforce, they should also give attention to the career development of their employees. The high labor mobility out of state-owned enterprises is to some extent related to employee dissatisfaction with training and development in these enterprises. While a market economy has given enterprises more autonomy and decision-making power, some enterprises with "far-sighted" strategies have established scholarships or invested research and development funds in universities. This has not only helped the enterprises to develop their production but has also increased their ability to recruit the talented people they need (People's Daily, 9 May 1993).

Implications for HRM Practices in China

The transition from a planned economy to a market economy has given enterprises the opportunity to manage their own business, which has profound implications for HRM practice. Major implications have been identified as the following.

1. Interorganizational Mobility

Interorganizational mobility has become popular only in recent years. Before it was as difficult to get into a state-owned enterprise as to get out. This mobility was first restricted by the nature, namely different ownerships, of an enterprise. An employee from a collectively (such as township) or privately owned enterprise could not be transferred to a state-owned one. Although the reverse was possible, the employee had to give up the "iron rice bowl", including a secure job, a salary usually higher than the same position in enterprises with other ownerships, and significant benefits such as accommodation and a pension. Secondly, an applicant asking for a transfer had to get permission from both the enterprise and senior government administrative authorities. The whole transferring procedure could be very frustrating and time-consuming, yet could also be greatly simplified if an employee had connections in the right place (He & Shu, 1992). Overall, this situation resulted in a very low labor mobility in China before the economic reform (Warner, 1993).

A market economy has forced enterprises into competition regardless of their ownership. The attractiveness of an enterprise, as discussed before, is no longer its ownership or a secure job, but rather some other factors, such as better economic rewards, a match between one's skill and job or a better opportunity for self-development. More and more people have left state-owned "Laoxiang" or "Laowai" enterprises. For example, enterprises and have transferred to "Laoban in 1992 the Beijing Talents Exchanging Service Center helped 4000 professionals transfer to other organizations, Some 75% of them left state-owned enterprises while only 2-3% were transferred into state enterprises. As a senior fellow at the Institute of Economics in Beijing has noted, "in the 90's, labor mobility and unemployment will be China's biggest problems" (Barnathan & Engardio, 1993: 5). Booming labor mobility has quickly developed into a big issue in the 1990s for state-owned enterprises. They are suffering the simultaneous problems of overstaffing and a shortage of skilled people. A survey of 444 professionals revealed that their average effective working time in public enterprises was less than 2 hours out of an official 8 hours a day (Economic Daily, 25 February 1993). This underutilization of education and training was one of the reasons for a high interorganizational mobility. It also reflected drawbacks of an employee allocation system under the planned economy. This high labor mobility implies an urgent need to have effective HRM practices so as to avoid such a waste of human resources, and to attract and retain new employees.

2. Retrench or Rearrange Surplus Employees

It was reported that in a state-owned enterprise, Shenyang Medical Instrument Factory, 300 of its 2,400 workers had no jobs hut they stayed on the payroll, which contributed to the factory loss of about $5 million in the past two years (Barnathan & Engardio, 1993). According to statistics, the effective working time in China's industrial enterprises was only 40% - 60% of the total working time (Tu & Wang, 1990). This explains why a large state-owned enterprise, China National Non-ferrous Metals Industry Corp. will cut one-third of its workforce - that is, slash 330,000 jobs (Australian Financial Review, 13 July 1993). This underemployment was one of the characteristics of a planned economy. With the transition from a planned economy to a market economy, enterprises have to deal with this serious problem of underemployment in order to survive or to be competitive. Therefore HRM in China is now facing the task of how to retrench or rearrange surplus employees.

Constrained by traditional practices such as "iron rice bowl", together with social responsibility and legal requirements, state-owned enterprises became mini-societies and had to be responsible for their employees once they were employed. As a result, it is difficult for enterprises to fire employees, let alone retrench them. For instance, it is reported that the director of a state owned enterprise tried to dismiss three workers who were recently released from prison for a crime they committed. However, under the pressure of the Public Security Bureau and the Neighborhood Committee, the director had to take these three workers back. The reason is that the enterprise is obliged to maintain social security and political stability rather than foisting ill-behaved workers onto society (People's Daily, 19 December 1992).

However, redeploying surplus employees has been proved to he an acceptable and practical way for enterprises to deal with their oversized workforce. Redeployment includes training surplus employees and setting up a retrained workforce pool, establishing subsidiary companies to supply varieties of services to both enterprises and society, and developing new products or projects. China's Wuhan Iron and Steel Complex has decided to cut 70,000 employees from its 120,000 workforce, who will be redeployed (People's Daily, 8 May 1993). With HRM practices, the redeployment of excess workers can he done in a way that maintains workforce morale. This is particularly important as employees need help in accepting such radical changes after being used to the "iron rice bowl". Retraining and redeployment require that the human resource department work in conjunction with other departments, such as accounting and finance, research and development, and the training center of an enterprise.

3. Legitimization of Some HRM Practices

The government has stressed the principle "to each according to his work" while the Enterprise Law and the Regulations have detailed ways to link performance to material rewards. In addition, more and more enterprises have adopted the Director Responsible System and signed contracts with the government. All these developments would appear to make it possible for directors to distribute wages and bonuses according to the level of an individual's contribution. However, without legitimization of the compensation practice, many directors find that, in reality, it is almost impossible for them to get the bonuses to which they are entitled. The director of a manufacturing factory complained that in his firm, a worker's bonus could be as high as 1000 yuan per month, yet he received only 50 yuan every month along with the other administrative staff. At the end of 1992, he was awarded 20,000 yuan according to the contract he signed with the government. However, he donated all this money to the factory's kindergarten under pressure from his colleagues (People's Daily, 19 December 1992). This example indicates that egalitarianism still has a strong influence in the workplace. While performance appraisal or performance-linked compensation has become more and more popular among line workers or those who work on the quantitative bases, it is not well implemented among administrative staff or those whose work is more qualitative, and an equal distribution of bonuses often results without regard for performance levels. Consequently, the legitimization of some HRM practices, such as the distribution of performance-based bonuses and the right to fire employees, will be significant in facilitating the improvement in productivity.

4. Interdependence of Other Reforms

Since the PRC was founded in 1949, the government has adopted a "three into one" system for the employee in the state-owned enterprises, that is, putting employment, salaries, and social welfare together. When employees joined an enterprise on a permanent basis, it implied that they were also guaranteed "from cradle to funeral" welfare and social security, such as accommodation, child care, medical care and a pension. This has not only put a huge financial burden on enterprises, but has also made it very difficult for enterprises to tire or retrench any employees, because once employees leave an enterprise, they will no longer be covered by social welfare, such as housing and medicare benefits. While HRM practices are needed to help improve productivity, increased productivity also depends on reforms in other fields, such as letting state-owned enterprises unload their heavy burden of social welfare as non-state enterprises have done, and converting the implicit unemployment or underemployment rate inside enterprises into an explicit unemployment rate in society. Effective HRM practices need support from those reforms.

Conclusion

A market economy has enabled China to expand its participation in the global economy. In order to facilitate such expansion, China has been pushing hard to be readmitted into the General Agreement on Tariffs and Trade (GATT). This effort, in turn, will accelerate market-oriented reform, as China needs to make its economy compatible with the GATT's market economy principles. It will also speed up the reform of state-owned enterprises, as they will be forced to compete with foreign-produced goods in international as well as domestic markets (Feinerman, 1992; Miller, 1993). Therefore, the issue of increasing the efficiency and productivity of enterprises in a market economy has some urgency for the Chinese government. At the same time, an understanding of China's past and present HRM practices will be of benefit not only to Chinese managers but also to Western managers who are currently operating or contemplating commencing operations in China in order to tap the largest and most abundant labor market in the world.

Endnotes

1. At the exchange rate of US$ 1 = 5.71 yuan (Chinese dollar).

2. "Renmin Ribao" in Chinese.

3. "Jinji Ribao" in Chinese.

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Biographical Sketch

Cherrie Jiuhua Zhu (MBA, Monash University) is a Lecturer in the Department of Management at Monash University. Previously she was a lecturer in a tertiary institute in Nanjing, China. She is currently a doctoral candidate at the University of Tasmania, working on the topic of HRM systems in China.

Peter J. Dowling (Ph.D, Flinders University of South Australia) is Foundation Professor of Management and Academic Dean of the Faculty of Commerce & Economics at the University of Tasmania. Previous teaching appointments include Monash University, the University of Melbourne, and Cornell University. His current research interests are the cross-national transferability of HRM practices and strategic HRM.