Political Embeddedness in China

This chapter attempts to explain under which circumstances political embeddedness (PE) leads to the emergence of sustainable markets. The question is of more than academic interest: after all, if PE does result in functioning markets, then we can expect it to become entrenched in the institutional architecture of the business system of China. The analytical tool 'imported' into the concept of PE is Market Design, the findings of which allow us to specify criteria for the development of functioning markets. Using these criteria, three cases are analysed. The first case is the wellknown example of Township and Village Enterprises (TVEs), in which the political embeddedness of TVEs resulted in the emergence of a competitive sustainable market. The second case takes the public utility sector as an example in which PE resulted in ill-functioning markets because private investment could not be mobilized. The third case, which takes Enterprise Bankruptcy Law (EBL) as its example, deals with the question of whether attempting to embed firms within the law is actually a move away from PE, or whether PE and the law supplement each other. The example of the insolvency law (EBL) is also used to enquire whether a 'marketplace' for legal services such as court-mediated arbitration and litigation is emerging, and whether it can be expected to function within PE. The findings suggest that PE contributes to the development of functioning markets only in certain conditions: when the use of informal norms aligns the interests of all parties involved, and when decision-making rights are uncontested, and when there is equivalence between the spatial dimension of the market and the spatial dimension of political embeddedness.

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