Dual order systems and SMEs' growth: three longitudinal cases from China

Purpose – The aim of this paper is to examine how the co‐evolution of two order systems‐ guanxi networks and legal system, i.e. a dual order system‐has shaped the growth of China's SMEs. From an institutional perspective, one proposition suggested has been that building guanxi networks can facilitate the growth of China's SMEs when institutions change in unpredictable ways. Another proposition claims legal institutions become guarantors of the growth of China's SMEs as a result of competition in increasingly market‐oriented environment. Design/methodology/approach – Over a nine‐year period (1998‐2006), this study conducts in‐depth interviews with 18 top managers of three Chinese SMEs in Wenzhou, a city located in south of China. To identify potential research subjects, SMEs that had been operating for a period of at least five years and privately‐owned were chosen. Since institution evolution is characterized with a longitudinal nature, the authors gathered data from three different time periods in order to capture the richness of the phenomenon. Findings – Dual order mechanisms consisting of guanxi networks (informal institutions) and codified laws (formal institutions) are both relevant in the growth of SMEs: guanxi networks are more significant at earlier stages of growth whereas legal systems are more influential in later stages. This argument is supported with data collected from three longitudinal case studies of SMEs in China. Research limitations/implications – Data were obtained from three companies in Wenzhou of China, thus findings might not be generalizable across the country. Originality/value – Three longitudinal case studies are unique. According to Pettigrew, longitudinal methods may be the only way to uncover processes of institutional change. The paper investigates the role of dual order system consisting of guanxi and legal systems in the growth of China's SMEs. The research not only contributes to the guanxi literature but also enables managers and investors to better understand the guanxi practice and role of legal systems in the growth of SMEs.