Hindered by Informal Property Relations: A Case Study of Developmental Strategies in Rural Industrialization in China

Reflecting on Developmental State Theory

From the statist theoretical perspective, the state or government can play a vital role in the sustained development of industry. This is particularly important for late-developing countries where society may not have enough resources to initiate industrial production. In such cases, the state can act as a “binding agent” by bringing together all essential elements—especially capital—for enterprises to thrive (Gerschenkron, 1962: 20; Hirschman, 1958: 6). Furthermore, the state can provide economic subsidies to enterprises that actively pursue development, such as by investing in technological upgrading or in risky “sunrise” sectors (Chibber, 2003: 7; Evans, 1995: 80; Johnson, 1982: 28). Enterprises that fail to maintain such efforts will lose government support, reflecting the inherently disciplinary nature of this strategy (Amsden, 1989: 14, 1992; Kim, 1997: 13). Additionally, the state also promotes technological upgrading through other means, such as attracting advanced enterprises from outside to promote technological diffusion or directly introducing technology companies to provide technological assistance.

To successfully create and implement the strategies above, essential institutional elements are required. These elements of state capacity have been conceptualized as “embedded autonomy.” This concept highlights the importance of the state not only in approximating the Weberian bureaucracy but also in being embedded within various ties that bind it to society, thereby establishing institutional channels for the continual negotiation of economic information and policies (Evans, 1995: 12). Moreover, studies have demonstrated that the effectiveness of strategies produced under such conditions is fundamentally determined by the response of entrepreneurs themselves. Theoretically, the supportive elements within developmental strategies usually take effect based on the development activities that entrepreneurs have undertaken or are undertaking, and entrepreneurs truly need the support provided by these strategies only when they have already engaged in or are currently undertaking such development activities.

Furthermore, entrepreneurs’ development activities are directly shaped by their willingness to respond to competitive pressures in the market, whether domestic or international (Chibber, 2005). For example, in his study of Indian industrialization, Vivek Chibber (2003) found that capitalists who had already occupied the domestic market through earlier entry and protectionist policies, such as import substitution, were more likely to prioritize their private interests and resist engaging in development activities, showing little interest in accepting the industrial policy discipline. In contrast, Korean capitalists, facing intense international market competition, proactively sought to invest in development activities. Therefore, they were more receptive to state guidance, viewing it as a means to enhance their production capabilities and directly contributing to the effective implementation of developmental strategies.

Previously, China could not be regarded as a fully developmental state because of its economic characteristics (Hung, 2016: 156; Lee, 2014). For instance, it did not systematically allocate credit to the private sector, which instead relied on informal finance for expansion (Tsai, 2004). However, in recent years, it has become increasingly difficult to deny that the Chinese government is adopting more developmental policies to promote industrial transformation, catch up with more developed countries, and build itself as a developmental state (Fang and Hung, 2019; Lei, 2022). The theoretical shift toward emphasizing the response of entrepreneurs under market competition pressure has gained further evidence in this context. For example, research on Dongguan, a city in the Pearl River Delta, has demonstrated that manufacturing enterprises are highly willing to invest in technological upgrading to remain competitive in the international market. The development activities they have undertaken provide a crucial condition for the successful implementation of local developmental strategies (Sharif and Huang, 2019). However, successful cases like Dongguan are rare in other regions of China. Although the essential institutional conditions conducive to implementing developmental strategies have been established, and market competition has also become very intense, thereby significantly reducing enterprises’ revenues, many local governments still face the problem of the failure of these strategies to take effect.

Undoubtedly, the experiences of Korea and Dongguan imply that, in addition to the expected willingness to engage in development activities under competition, a precondition for such activities is that enterprises must first accumulate the necessary capital for investment. But most rural enterprises are unable to invest in any development activities, mainly because of their lack of basic capital. This means that the existing developmental strategies will inevitably fail to take effect. However, in many regions, even among enterprises below designated size, relatively profitable enterprises still exist, and they have the potential to invest in technological upgrading and other development activities. Thus, according to existing theory, when the institutional conditions of embedded autonomy, market competition pressure, and the investment capacity of enterprises are all present, these enterprises should invest in some essential development activities, thus becoming the target group for which existing developmental strategies are intended to exert their supportive effects and promote further development. Yet why does this expected outcome not occur in reality?

An Explanatory Framework Based on Informal Property Relations

Drawing on the Marxist economic perspective, I propose that informal property relations play a crucial role in preventing market competition from generating among entrepreneurs a willingness to invest in development activities, thereby making it difficult for developmental strategies to identify suitable collaborators and ultimately rendering them ineffective. This explanation directly contradicts the logic discussed above, which assumes that market competition naturally compels entrepreneurs to pursue development. In fact, one of the key preconditions for the explanatory power of the existing theory is precisely the presence of capitalist or formal property relations.

According to Robert Brenner’s (2007: 58) definition, property relations “specify the regular access of individuals and families to the means of production (land, labor, tools) and/or the social product per se.” In a capitalist economy, such relations usually help maintain the pressure of capital reproduction. As Ellen Wood (2017: 2) has pointed out, “capitalism differs from other social forms because producers depend on the market for access to the means of production.” Because production costs increase continuously, capitalists must maximize profits by enhancing productivity and competing successfully in the market, thereby securing access to the means of production (Wood, 2002). This naturally involves investing in development activities such as technological upgrading, specialization, market adaptation, and innovation, which constitute an essential basis for the implementation of developmental strategies. Moreover, in this process, capitalists may lack sufficient capital to allocate toward development activities. Their capacity to develop generally depends on external support, such as loans from banks that are usually established by the state.

Building on this understanding of capitalist property relations, however, it is necessary to further examine how market transactions involving the means of production unfold in practice. Market transactions considered in existing studies are not arbitrary; rather, they are generally governed by certain standards. These standards take into account not only direct economic factors, such as profit-maximizing considerations, but also additional concerns of the parties involved, such as the fair distribution of wealth. ³ Ultimately, they are usually institutionalized through power interactions among different actors and expressed in formal contracts, laws, or policy requirements applied within specific jurisdictions, whether at the township or national level. In this context, capitalist property relations can also be regarded as formal, maintaining production costs at a relatively stable level. In particular, as the demand for production factors increases, costs will continue to rise.

By contrast, in China’s rural industrialization, although rural entrepreneurs also need to purchase production factors from the market, they often acquire the necessary resources at prices significantly below the established transaction standards through various informal means. I define this pattern of acquiring the means of production as the core feature of informal property relations. To a certain extent, the formation of these relations precedes the large-scale implementation of developmental strategies, and their persistence imposes significant constraints on the willingness of rural entrepreneurs to develop.

Based on the concept of informal property relations, a reasonable inference can be made. Even in less developed regions, some enterprises, capitalizing on favorable market opportunities during the early periods and, in particular, the cost advantages derived from informal property relations, have been able to achieve higher profits than others every year. Theoretically, they are in a more favorable position to cooperate with developmental strategies. If entrepreneurs anticipate that production costs will rise significantly in the coming year, they will at least reduce nonproductive consumption of their profits, accumulate them, and invest in development activities in order to survive in the market competition. However, the actual presence of informal property relations has kept the mean cost of production very low. Without concerns over rising costs and the associated pressure to maintain production, even as market competition intensifies, entrepreneurs still lack the willingness to accumulate and invest their profits in development activities, instead allocating them toward simple production expansion or daily consumption. As a result, even those enterprises most likely to achieve development fail to implement the strategies needed to do so.

Social Construction of Informal Property Relations in Rural China

The above theoretical deduction serves as the basis of my explanatory framework. Now, I will further clarify the main dimensions of informal property relations prevalent in rural industries in China. The commodification of labor and land is undoubtedly a fundamental condition for industrialization (Lewis, 1955: 90; Schumpeter, 1949: 17). However, in the rural context, it is common for both labor employment relations and land-leasing arrangements to be informal. This has kept industrial production costs low for a long time. Additionally, although a significant number of environmental resources, besides land, have also been absorbed into the industrial production process (Polanyi, 1944: 73), rural entrepreneurs seldom bear the costs associated with environmental degradation.

More importantly, these informal property relations are not a natural occurrence but can only persist under specific power relations. Theoretically, the state’s coercive power, manifested in political-economic institutions, exerts the most direct influence on property rights transactions. However, in post-socialist China, economic growth forms the basis of the legitimacy of the Chinese Communist Party (Gruin, 2016; Hung, 2016: 176). To promote economic development, the higher-level government has made GDP growth the primary indicator for determining the promotion opportunities of local government leaders (Landry, Lü, and Duan, 2017; Whiting, 2001: 268). In this institutional situation, local government officials often tolerate the existence of informal property relations in order to drive industrial expansion (Huang, 2009, 2011; van der Kamp, Lorentzen, and Mattingly, 2017). Yet in many circumstances, the institutional space cannot fully explain the persistence of such relations. Although local officials have not strictly enforced formal regulations, these regulations have long existed. It remains a puzzle why the groups harmed by these informal relations have not appealed for fairer and more formal relations over such a long period. This requires a focus on the micro-social construction logic of informal property relations, particularly the power interactions between entrepreneurs and the owners of the means of production that are based on the interdependency of resources (Blau, 1964: 117).

In China, the power imbalance underlying employment relations in factories along the southeastern coast has long been a focus in the field of sociology (Lee, 1998; Pun, 2005). Because of their greater power, capitalists often violate the transaction standards outlined in contracts with workers or maintain informal practices from the outset. However, in developed coastal regions, it has been found that the various informal networks within which immigrants are embedded constitute a critical factor in the formation of collective protests against employers’ unfair requirements (Chan, 2009; Chan and Ngai, 2009; Smith and Ngai, 2006). In contrast, although factory workers in other rural regions are generally locals, with more favorable conditions for organizing collective actions, their resistance to informal arrangements is, in fact, rare. Theoretically, this is likely because workers in these areas are more dependent on the economic resources provided by local entrepreneurs to meet their family’s consumption needs rather than just their own individual needs. Specifically, entrepreneurs may provide additional yet limited resources that workers come to depend on, such as cash supplements added to workers’ wages. This deepening dependency enables entrepreneurs to continuously exercise power over workers, constraining their behavior and shaping the terms of transactions. As a result, it becomes difficult for workers to resist informal transaction patterns, such as by reporting them to government authorities. Consequently, rural entrepreneurs are able to maintain workers at labor costs below the expected transaction standards.

Moreover, in rural China, village cadres usually wield significant decision-making authority over the leasing of collectively owned land (Cai, 2003; Chen Huirong, 2015). For example, during the initial period of foreign investment in southeastern coastal areas such as the Pearl River Delta, village cadres usually demanded high land rents, which raised production costs (Cheng, 2008). However, unlike foreign investors, Chinese rural entrepreneurs are usually individuals who live in the same village as the village cadres. This is because only villagers registered under the hukou 户口 system of a specific village can rent land collectively owned by that village. Consequently, entrepreneurs often possess other resources that village cadres need, such as support in village committee elections. This generally gives entrepreneurs the power to prevent village cadres from reclaiming land to which they have gained informal access, thereby disrupting the transaction standards initially set by the village cadres.

Furthermore, in rural China, villagers usually have a clear understanding of their rights to environmental elements such as water, air, and soil. Phrases like “the water in this village” 村里的水, “the air in this village” 村里的空气, and “the soil in this village” 村里的土 reflect a clear cognitive definition of property rights. Based on this understanding, factories would seemingly be required to pay sufficient compensation (e.g., pollution fees) to “purchase” villagers’ rights to these resources in order to maintain their polluting production patterns. However, the social relationships between villagers and rural entrepreneurs usually prevent this ideal formal transaction from being realized. In rural society, openly criticizing entrepreneurs from the same village community and demanding substantial economic compensation for pollution usually leads to the breakdown of personal relationships. This goes against rural moral norms that emphasize reciprocity (Hwang, 1987; Peng, 2004) and makes villagers worry that they may not be able to obtain help from the entrepreneur in the future. As a result, villagers usually refrain from making any claims. Consequently, compared with the standard compensation that some enterprises are required to pay for pollution, most rural entrepreneurs have saved significant production costs over the long term.

In short, informal property relations have been consistently sustained over time through specific power relations, even before the large-scale implementation of developmental strategies. This formation of informal property relations, in turn, further consolidates entrepreneurs’ economic power, reinforcing their control over future property rights transactions. However, in recent years, the government has recognized the need to formalize these property relations. Local government efforts are primarily reflected in the construction of industrial parks. Yet the coercive power of local governments is limited; they can only play a guiding role in mobilizing enterprises to relocate to these parks, resulting in limited effectiveness. At this stage, as a more powerful actor, the central government can enforce the formalization of these relations by employing stringent regulatory methods such as environmental governance, thereby posing a “to be or not to be” dilemma for rural entrepreneurs. Local officials may attempt to shield these informal relations from elimination by the central government, but they often quickly transition from being allies of entrepreneurs to stringent enforcers of policies under political pressure. This shift undoubtedly poses significant challenges to rural industries; however, as I will show, the local government ultimately finds a balance between the strong power of the central government and the preservation of informal property relations, thereby allowing stagnant industries to persist.

The logic outlined above explains why the existing strategies cannot effectively promote the development of more rural industrial enterprises. Figure 1 (with dashed arrows indicating “ineffectiveness”) illustrates this logic more directly. The next section provides an overview of the case and data collection methods.

OPEN IN VIEWER

Figure 1.

The causes of rural industrial stagnation and the ineffectiveness of existing developmental strategies.

Informal Employment Relations

From the 1990s to the 2000s, as a large number of people left the agricultural sector, rural entrepreneurs were able to easily hire workers at low wages. In the early 2000s, the annual per capita income of rural residents in Yu Township was only a few thousand yuan. With industrialization, rural workers’ wages have gradually risen. However, their actual earnings have remained significantly lower than those of workers in urban areas. For instance, based on data from interviews conducted in Yu Township, the average monthly income of workers in 2018 was approximately 3,000 to 4,000 yuan. In comparison, the average monthly wage for employees in urban nonprivate manufacturing units within the same prefecture was around 5,600 yuan. But in Yu Township, wages also vary by industry and type of work. For example, in upstream foundries supplying castings to machinery manufacturers, workers are paid on a piece-rate basis, with most earning between 7,000 and 8,000 yuan per month.

How should the wage levels of workers in Yu Township be understood? According to official data from the province where this township is located, as recently as 2018 the monthly minimum wage for workers was set at only 1,730 yuan. From a Marxist perspective, this represents the monetary amount necessary to sustain the reproduction of labor power each month, corresponding to the value of the goods required for subsistence. In contrast, according to the actual situation of the local labor market in 2018, wages have risen well above the cost threshold Marx would have set. To a large extent, this is because competition among entrepreneurs for skilled workers has led to continuous wage growth. Eventually, this wage level becomes institutionalized in labor contracts, forming the transaction standard. ⁸

However, unlike the competitive fragmentation observed among employers in the market for skilled workers, entrepreneurs in Yu Township still share collective class interests that allow them to violate the established standards. As a base, they possess power in the Marxian sense because they control most means of production. Workers typically face significant challenges in migrating elsewhere, and, unlike young workers in the Pearl River Delta, most are married. With elderly parents and children to support, their family-based consumption needs undoubtedly increase the survival pressure they face and heighten their dependence on entrepreneurs. As a result, entrepreneurs successfully engage in collective actions that deviate from the established transaction standards, including unilaterally extending working hours and maintaining harsh working conditions, providing little or no compensation for these conditions. This is even worse in foundries, where the high-temperature environment causes serious harm to workers’ health. Furthermore, many entrepreneurs attempt to keep employment informal from the outset, without signing any contracts. While workers are aware that these practices are unreasonable, their primary concern is survival rather than contesting the informal employment relations. This aligns with the “subsistence ethic” logic described by James Scott (1976: 6), which makes informal employment relations remarkably persistent.

Beyond the low wages, entrepreneurs’ informal access to labor is further evidenced by their near-total lack of contributions to workers’ social insurance. In China’s current social insurance system, which includes medical care, pension, work injury, maternity, and unemployment insurance, pension insurance is undoubtedly the most important as it directly involves the payment of retirement benefits to workers. The payment for insurance is jointly borne by workers and employers. For example, under the social security policy for Yu Township’s industries in 2018, the monthly minimum contribution base 缴费基数下限 for employees’ pension insurance was set at 60 percent of the province’s average monthly wage in the previous year, amounting to about 3,400 yuan. Most rural private enterprises opted for this minimum base, with workers each contributing the government-mandated 8 percent of the base (roughly 270 yuan), which was deducted from the workers’ wages, and enterprises contributing an additional government-mandated 18 percent of the base (roughly 610 yuan) per worker. The total monthly pension insurance contribution for one worker was therefore about 880 yuan. Consequently, workers become eligible to receive a certain monthly insurance payout upon retirement, provided their total contribution period reaches at least fifteen years.

For a long time, especially before the 2010s, despite the implementation of social security policies, these policies remained unfamiliar to many rural people accustomed to an agricultural society without such institutions. Even when some workers were aware of these policies, employers, who held absolute resource advantages, determined the arrangements and often refused to make social insurance contributions. Workers had little choice but to accept this. Moreover, in order to promote economic expansion, local governments generally did not strictly enforce the policies. Since the 2010s, however, these circumstances have changed, as local governments have begun to enforce the social insurance system more strictly. With state coercive power on their side, even if workers initially complied with the entrepreneurs’ refusal to pay social insurance, they now had the option of reporting the violation to government agencies while on the job. As a result, employers could no longer rely solely on the threat of non-hiring to avoid paying insurance. This strategy did not eliminate the possibility of being penalized by the government and therefore became increasingly risky.

Nevertheless, rural entrepreneurs have found ways to avoid paying pension insurance for most workers. My fieldwork indicates that entrepreneurs typically offer workers an extra two to three hundred yuan per month if they forego social insurance payments. Although this additional salary is less than what social insurance would cost the enterprise, it directly supports workers’ immediate economic needs. In this way, entrepreneurs create new resources on which workers become dependent, thereby consolidating their power and shaping workers’ acceptance of these illegal practices. Consequently, this produces an implicit agreement between entrepreneurs and workers, facilitating the evasion of local labor department inspections. For example, the owner of Shuosheng Machinery Enterprise informed me that he reported only twenty workers as enrolled in pension insurance to the local labor department during inspections, even though there were actually forty workers in his factory. Moreover, the remaining uninsured workers did not attempt to report the entrepreneur’s illegal conduct.

In such circumstances, the workers who resist such arrangements usually face significant pressure from the entrepreneur’s social network, which reinforces the latter’s dominant status in employment relations. During fieldwork, I learned about a notable incident: A female worker, dismissed by a grinding wheel factory, sued the factory for not paying her pension insurance, and the court ultimately ruled that the factory should pay her a significant amount of compensation. However, this was seen as significant news by locals because people rarely pursue their interests through institutional channels such as courts. Adopting such a method means offending the social network formed by local entrepreneurs. As a result, workers may find it hard to secure employment with other entrepreneurs who also prefer to maintain informal property relations. Considering their livelihoods, the best choice for workers remains reaching a compromise with the entrepreneurs.

Informal Land-Leasing Relations

Land ownership in China exhibits a dualistic structure: land in urban districts is under state ownership, while land in rural and peri-urban areas is predominantly owned by rural collectives. The majority of rural collective land has been distributed to villagers for agricultural activities (referred to as cultivated land) and for building houses (known as homesteads). According to the Land Administration Law of the People’s Republic of China 中华人民共和国土地管理法 revised in 1998 (Article 43), construction land for industrial enterprises is generally required to be state-owned land. Therefore, for rural land to be used for industrial purposes, it must first be converted into state-owned land by the local government through a land acquisition and compensation process, and then its use rights can be transferred to enterprises through the auction system. The auction price is usually much higher than the compensation awarded to villagers for relinquishing their cultivated land. Therefore, paying the auction price requires entrepreneurs to have a significant amount of money, making it difficult for them to obtain such construction land for rural factories.

However, aside from the mainstream land-use policies, another system exists that allows a portion of collectively owned rural land to be utilized for industrial development. This land is termed “collective construction land for commercial use” 集体经营性建设用地. Originally intended to bolster the growth of collective TVEs in rural areas, this type of land was made legally available for lease to private entrepreneurs by village collective organizations after numerous collective enterprises closed in the late 1990s. Additionally, in the early 2000s, rural individuals could, with the assistance of village cadres, undergo legal procedures to directly convert existing cultivated land into this type of land, provided it complied with the land-use projects set by the local government. However, since the late 2000s, because of the significant revenue that rural land can generate for local governments through the auction system, it has become nearly impossible for entrepreneurs to acquire the right to use more rural land through this method. As a result, while the majority of rural entrepreneurs are using this type of land, its total area has remained nearly unchanged since then. Nonetheless, rural entrepreneurs have significantly reduced costs through the informal use of this land.

In the early 2000s, most rural areas of Yu Township remained desolate, and the rent for such collectively owned land was extremely low. Some rental contracts were also signed for extended periods, lasting ten years or more. Entrepreneurs could therefore pay the rent in a lump sum, thereby mitigating potential rent increases resulting from economic development and reducing production costs. More commonly, however, many entrepreneurs gradually managed to avoid paying rent altogether, even when formal contracts were in place. Theoretically, in Yu Township, as the number of people seeking to rent land increases, village cadres, the actual controllers of limited land rights, possess the power to establish transaction standards, including the area of land to be rented, the rent amount, and the payment schedule. If entrepreneurs fail to fulfill their contractual obligations, village cadres also have the authority to reclaim the land.

However, in practice, renting collective land in a village requires entrepreneurs to be registered under that village’s hukou system. This gives them the qualification to elect village cadres and provides them with resources that the cadres depend on, making it difficult for the latter to effectively supervise the implementation of land-leasing contracts. For example, the director of Yin Village mentioned that it was challenging to collect rent consistently after leasing land to villagers, who usually viewed past rent payments as equivalent to permanently purchasing the land.

Village cadres also find it difficult to reclaim land through stringent methods. Strictly demanding the rental money may lead to conflicts, posing a threat to the evaluation of village cadres who are responsible for protecting villagers’ interests and thus affecting their positions in subsequent collective elections. Moreover, anticipating potential benefits from entrepreneurs with whom they have close personal ties, village cadres often voluntarily relinquish their power to require entrepreneurs to fulfill contracts or otherwise reclaim the land. Local entrepreneurs also confirmed this informal interaction pattern in the land rental process. One factory owner in Yin Village related that, despite renting collective land, his close personal ties with the village director led the latter to explicitly state that, as long as he maintained a leadership position in Yin Village, the factory owner could continue using the land for free. ⁹

Additionally, according to the law, all rural entrepreneurs are required to pay a land-use tax. This constitutes another part of their cost expenditure and can be regarded as the initial formalization by the local government of informal land transactions. However, according to interviews, there is a widespread discrepancy between the land area taxed and the actual area specified in the leasing contracts. Typically, local entrepreneurs only need to report the area their factory buildings actually occupy to the local tax department and pay a fixed amount of tax over the long term, without being taxed for the remaining land used for storing raw materials or other purposes. For instance, the owner of Guanhui Machinery Factory leased five mu 亩 of land in a village for 2,500 yuan per mu and paid a lump-sum, ten-year rent totaling 125,000 yuan. However, for tax purposes, he declared and paid tax only on the three mu of land that contained buildings, not on the remaining two mu used solely for storage. For local tax officials, compelling rural entrepreneurs to pay the full land-use tax is challenging because these informal practices have become so widely accepted among them. Attempting to change this situation would likely provoke significant resentment from rural entrepreneurs and require a considerable amount of effort in communication. In other words, the deep social embeddedness of the land-use pattern has left the local tax department too weak to transform this situation.

Informal Use of Environmental Resources

The third cost that local factories save on is the environmental cost. According to the interviews, for manufacturing enterprises such as those producing machinery like speed reducers or pumps, the sources of pollution involve metal chips produced during the processing and assembly of parts, as well as harmful emissions caused by the use of chemical varnish on the machinery’s surface. For a long time, metal chips have been randomly deposited on the ground, and harmful emissions have been released into the atmosphere indiscriminately. Additionally, the presence of numerous casting and parts-processing factories that supply machinery manufacturers with essential parts has resulted in more severe environmental pollution. Especially before the mid-2010s, all casting factories relied on coal to melt steel for casting, generating a great deal of air pollution. However, despite the increasing severity of these pollution issues, few villagers have taken steps to protect their living environment. This contrasts with Karl Polanyi’s prediction that a social protection movement would be invoked to resist the harmful impacts of capitalist economy, which commodifies environmental elements such as soil, water, and air and destroys them (Polanyi, 1944: 150).

The former director of the county economic development bureau told me that the Yu Township government had previously focused on promoting rapid GDP growth and was less strict in enforcing environmental policies. This institutional logic, prioritizing economic growth above all else, undoubtedly exacerbated environmental pollution. However, it does not explain why rural residents, those directly affected by environmental pollution, still choose to turn a blind eye to it. As discussed in the theoretical section, villagers’ cognitive definition of property rights to environmental resources requires that enterprises compensate for their use. By transforming them into polluted air, polluted water, and polluted soil, entrepreneurs are, in fact, using what are originally natural environmental factors as production inputs, much like labor or land. More importantly, when villagers are the original owners of these environmental resources, and when entrepreneurs urgently need them, villagers should in theory hold a dominant position in such transactions and should help to establish the transaction standard.

In reality, however, formal transactions rarely materialize. This is not simply because some villagers fail to recognize the value of their rights to these resources, but more fundamentally because their demands on entrepreneurs are constrained by the entrepreneurs’ power that is derived from control over other resources. Villagers hope to receive assistance from entrepreneurs in the future. Although such assistance is not guaranteed, their dependence on the possibility of receiving it leads them to relinquish the power to establish formal transaction standards. In informal transactions, entrepreneurs are often able to use environmental resources at extremely low prices.

The case of water pollution in Shang Village provides an excellent illustration of this logic. In the western part of the village lies a mountainous area. Initially, with the tacit approval of the village cadres, several villagers occupied this area and began mining stone. Later, after large quantities of stone had been extracted and many deep pits had formed, a chemical factory began paying these villagers some money and dumped chemical waste there. However, as the pollution became increasingly apparent, other villagers organized collective actions to block the trucks transporting the waste. They asserted that the mountain area belonged to the entire village community and demanded that the factory pay fees on their terms; otherwise, it would not be allowed to continue dumping. The factory eventually agreed to make the payments. By contrast, although many people in the same village also built factories and discharged pollutants directly into the air or river, it was rare for villagers to openly criticize them. Even when villagers sometimes requested compensation based on mutual recognition of property ownership, the amount these factories paid them remained far below the compensation standard paid by the chemical factory.

No One Qualifies for Financial Subsidies

The experiences of many developmental states have proven that providing necessary economic incentives to enterprises with good performance is one of the most effective measures to promote industrial development. For the industries in Yu Township, the government at various levels had formulated such policies even before the 2000s, and most of these policies were still active during the period of my fieldwork. The amounts of these incentives are quite substantial. For instance, according to a document issued by the prefectural government in 2017 to promote the technological upgrading of industry, for investment projects with a scale of over 5 million yuan that meet the designated criteria for technological transformation, the local government will provide a subsidy equal to 10 percent of the equipment expenditure. As another example, according to a provincial document published in 2019, if an enterprise qualifies as a high-tech enterprise 高新技术企业, it can enjoy a 15 percent reduction in income tax and a 50 percent reduction in land-use tax. ¹⁰ Governments at different levels will also provide a reward subsidy of 100,000 yuan to those that meet the conditions.

Securing subsidies undoubtedly enhances the competitiveness of enterprises, enabling them to fully transition out of the category of small and medium enterprises. In turn, the government bases its decision to continue providing such subsidies on whether the enterprises maintain their investment efforts, thereby exercising disciplinary power to encourage sustained development. However, to secure the subsidies in the first place, the enterprises must already have invested significantly in development activities. For example, to qualify as high-tech enterprises, eight requirements must be fulfilled, including possessing ownership of intellectual property rights in core technologies and ensuring that the proportion of personnel engaged in research and development (R&D) activities is no less than 10 percent of the total number of employees and that income from high-tech products accounts for at least 60 percent of the total revenue. All these requirements necessitate substantial investments.

Most small and medium enterprises in Yu Township naturally lack the capacity to invest. Yet even those enterprises that have earned substantial profits, such as Sun’s factory, have refrained from investing in development activities because of the influence of informal property relations. Therefore, none of them either need or meet the requirements of the subsidy strategy, and its effectiveness is highly limited. Ultimately, the enterprises that qualify as high-tech enterprises and receive financial support are predominantly just a few above designated size. Most of those were transformed from original local SOEs or large collective TVEs, and their development paths thus differ fundamentally from those of the majority of rural enterprises independently established by local residents. In fact, the main difference between them and other enterprises is that their property relations are usually more formal. Moreover, since all the small and medium enterprises are either unable or reluctant to develop, they cannot contribute more to the fiscal revenue of the local government. Consequently, the local government has been burdened with a significantly high level of debt, as mentioned by Li, who was in charge of the county economic development bureau. This situation has left enterprises that meet the criteria unable to receive timely funding allocations.

After the mid-2010s, the central government enacted an increasing number of policies tailored to small and medium enterprises, and local governments developed corresponding policies. However, even though the requirements for these policies are less stringent than others, such as those for qualifying as a high-tech enterprise, local governments still find it difficult to elicit proactive responses from entrepreneurs. The main reason is still that those enterprises with the greatest potential to develop have abandoned investment.

As a result, it is not the local enterprises but rather some more technologically advanced companies from outside that have benefited from such policies. For instance, during the application process for a technological innovation project for small and medium enterprises initiated by the prefectural government in 2018, not a single enterprise from the local rural industries received a recommendation from the Yu Township government. In the final list of recommended applications, one was a subsidiary of a formerly state-owned enterprise originally located in an urban area, while the other two were small enterprises that had just been attracted from outside. They all possessed independent R&D capability, which is crucial for the application. In short, local industries have been totally excluded from the subsidy strategy.

Separation from Advanced Enterprises

There is no doubt that attracting investment from outside serves as a primary driver of China’s local economic development (Huang, 2011). Its impact is multifaceted. For example, when local enterprises cooperate with advanced enterprises in the same industrial field, they can integrate their products into the higher value-added commodity chains by leveraging the brand reputation or market status of the industrial leaders (Gereffi, 1994). Moreover, external investment in local areas is likely to generate technology spillovers, thereby driving the technological upgrading of local industry (Liu, 2008; Merlevede, Schoors, and Spatareanu, 2013). However, while the majority of rural factories in Yu Township lack capital and have naturally failed to adopt this strategy, even enterprises with potential investment capacity show little interest in upgrading their technologies. This lack of engagement in development activities renders them incapable of assimilating advanced technological knowledge, thereby limiting their ability to collaborate with advanced producers attracted from outside and ultimately causing them to miss better development opportunities.

According to tax records, the leading taxpayer among industrial enterprises in Yu Township is a foreign-invested firm called GD, specializing in high-level speed reducers. Unlike other local enterprises, it received independent investment by German capital in the late 1990s. In its early expansion stages, GD frequently engaged with local factories, assimilating local technical talent and utilizing raw materials and machinery parts from the area. However, as GD developed, it gradually distanced itself from the local industrial chain. Interviewees primarily attributed this to GD’s ongoing efforts to improve product quality and remain competitive in the international market, while the products of local enterprises fell short of its standards. Even worse, some local factories attempted to imitate GD’s products using their own backward technology and to compete with it, disrupting market order and prompting GD to proactively terminate its cooperation with them. In other words, while it initially appeared feasible for local industries to integrate into higher-value-added commodity chains, the slow pace of technological investment, influenced by informal property relations within local industries, has widened the productivity gap between them and GD, making GD’s promotion of local industries impossible; rather, their informal operations have even driven away such supportive forces.

Certainly, after the mid-2010s, the local government has become more diligent in striving to attract sophisticated enterprises from other regions to invest locally. However, as the majority of enterprises drawn from outside have completed their initial capital accumulation and productivity improvements, the aforementioned problem has not diminished but rather has been exacerbated. A typical case is BJ Elevator Company, a subsidiary of a British-invested elevator firm operating in Hangzhou. Throughout its investment process starting in 2017, the Yu Township government extended numerous preferential incentives, including tax concessions, specialized fund assistance, facilitation of state-owned industrial land-use procedures, advantageous land-use pricing, and the free use of factory workshops in the local intelligent manufacturing industrial park. However, according to BJ’s investor, although he chose to invest in Yu Township, his intention was merely to source certified machinery parts from several large enterprises in the periurban area, but not to collaborate with the local small and medium enterprises. In his view, local factories were unable to meet the company’s requirements for product quality, which are crucial for maintaining brand reputation and securing market position. Therefore, the potential for cooperation between the newly introduced external capital and local manufacturing factories was precluded from the outset.

No Interest in New Technologies Provided

Apart from directly attracting advanced enterprises from outside, the local government of Yu Township also actively introduces companies focusing on technological R&D to assist local enterprises in technological upgrading. However, this strategy has not been very effective. Sun, who is in charge of the local intelligent manufacturing industrial park, openly admitted that most local manufacturing enterprises cannot afford the R&D services provided by these companies. Nevertheless, the most serious issue is that even enterprises with the capacity to invest show little interest in raising their technological level. This limits their need for technological assistance and also prevents external technologies from finding suitable adopters. This situation has even led outside companies to cease offering advanced technologies. For instance, the Yu Township government invited Shenyang First Machine Tool Company, renowned for its high-end lathes capable of fabricating intricate components for machinery such as speed reducers, to establish its operations in the intelligent manufacturing industrial park. As a result of this engagement, the company installed a considerable array of its machinery in the park for leasing to local machining factories. However, it turned out that all of the equipment was antiquated. Sun explained that when representatives from Shenyang First Machine Tool Company visited the area for an investigation, they found that the production capabilities of local enterprises were significantly lagging. With most local machining enterprises unable to afford the costs of high-end machinery, the company chose to install outdated lathes that met the local production demand instead.

In summary, developmental strategies resembling those that have propelled sustained economic growth in China’s developed regions have failed to promote rural industrial development effectively in Yu Township. To address this developmental dilemma, formalizing property relations is undoubtedly the most direct option. Doing so would allow market competition to resume its proper function: not only eliminating backward small enterprises but also compelling profitable ones to actively seek new paths for development. However, as will be shown below, such measures have also proven to be far from effective.