Chinese Studies
2012. Vol.1, No.3, 9-17
Published Online November 2012 in SciRes (http://www.SciRP.org/journal/chnstd) http://dx.doi.org/10.4236/chnstd.2012.13003
Theorizing Social Capital in Entrepreneurship—An Empirical
Study in the Pearl River Delta, China
Chiu-Yin Leung, Jiang Xu
Department of Geography and Resource Management, The Chine s e U n i v e rsity of Hong Kong,
Hong Kong, China
Received October 8th, 2012; revised Novem ber 10th, 2012; accepted November 20th, 2012
In this paper, a social capital framework is brought in to explore the dynamics of Chinese entrepreneur-
ship with respect to the social and institutional conditions in the post-reform China. Based on data col-
lected from field interviews, it analyzes how enterprise social capital impacts upon the Hong Kong affili-
ated manufacturing operations in the Pearl River Delta region. In regard to the “embeddedness-accessi-
bility-use” framework, it is suggested that some trivial difference in the configuration of “guanxi (關係)”
network could work specifically upon the divergent path of individual entrepreneurs during the early re-
form period of the Pearl River Delta. As China enters another stage of marketization, firms that have been
over-embedded and poorly-positioned in the network are now forcing their way out of the region. Alter-
natively, recent institutional development across the border has boosted the significance of nurturing en-
terprise social capital in the formal coordinating channels. The renewal in the stock of enterprise social
capital is crucial in reconfiguring the network dynamics and entrepreneurial action to influence the future
trajectory of industrial development in the Pearl River Delta.
Keywords: Social Capital; Guanxi; Chinese Entrepreneurship
Introduction
The enquiries into the dynamics of entrepreneurship have
long been a central task in economic geography. Departed from
the rational or other somewhat “under-socialized” approaches,
the social capital thesis emphasizes the embedding role of so-
cial relations in shaping economic process. In this paper, a so-
cial capital framework is brought in to explore the dynamics of
Chinese entrepreneurship with respect to social and institutional
changes in the reform period. It is argued that the re-configura-
tion in the form and function of social network as embedded in
the industrial context has led to tremendous shift in the opera-
tion logic of Chinese entrepreneurs in the post-WTO era.
Drawing from the ethnographic interviews of several Hong
Kong entrepreneurs who engage in manufacturing activities in
the Pearl River Delta (PRD), this paper studies the coupling of
socio-institutional advancement and entrepreneurial action in
the early reform and lately-restructuring periods respectively.
The organization of this paper is as follows. Following this
introduction, Section 2 reviews the conception of social capital
and discusses its applicability in the context of Chinese entre-
preneurship. An analytical framework is then put forth as an
attempt to conceptualize the network dynamics in the captioned
context in broad terms. Following that, Section 3 offers a few
empirical cases for illustrating the significance of such dynam-
ics on individual firms. Finally, the paper critically evaluates
the potential of appropriating social capital perspective in
studying Chinese entrepreneurship.
Situating the Study of Social Capital in Chinese
Entrepreneurship
The notion of social capital arises as a critical component in
modern society where its accumulation could boost economic
prosperity and its suffering might derive ineffective governance.
It is initially theorized by Bourdieu (1986: p. 249) as intangible
asset of investment strategies “aimed at establishing or repro-
ducing social relationships that are directly usable in the short
or long term”. The scholarship is subsequently radiated across
multiple disciplines, notably the fields of ethnic entrepreneur-
ship and comparative institutionalism, in addressing the role of
social relations for economic development at both the micro
and macro level (Woolcock, 1998). Shortly put, social capital
comprises a bunch of social assets that could affect certain
economic actions and developmental outcome, which includes
community network, cultural norm and practice, state-society
relations, and institutional capacity (Taylor & Leonard, 2002 ).
In the study of entrepreneurship, social capital is often per-
ceived as the socially-embedded business networks that are
accessible to and utilized by individual firms. Drawing on the
embeddedness framework, a vast of literature has suggested the
role of social network in channelizing inter-firm transactions
and acquiring extra-firm resources in different situations (Tay-
lor & Leonard, 2002). In particular, social capital forms simul-
taneously as glue for network structure and functions as lubri-
cate in network utilization, exemplifying its nature as both the
medium and message of social relations (Chen, 2000). Taking a
similar strand of view, the notion of “guanxi (關係)” is also
widely articulated as an invaluable asset of network building
and exploitation in achieving success in the transitional econ-
omy (Hsing, 1996; Yang, 2002). Despite its magnitude and
functions could vary by contexts, the importance of social net-
works to individual entrepreneurs is almost acknowledged as a
universal rule of law (Woolcock, 1998).
Inevitably, the microscopic view of social capital outlined

C.-Y. LEUNG, J. XU
above receives considerable challenges by opponent critics. The
prominent charge comes from the plausible ambiguities in con-
ceptualizing the form and function of social network, which
sinks the notion into a tautology or logical circularity that the
stock of the resource itself is only fixed in accordance to its
eventual outcome arbitrarily (Lin, 2001). Likewise in the dis-
course of guanxi in Chinese entrepreneurship, there is an ob-
session of depreciating the significance of guanxi with its rele-
vant change in stock neglected (e.g., please see Guthrie, 1998).
Another accusation lies on the ground that social capital is not
without its limit, and might even generate negative return at
times. The debate on over-embeddedness is then brought to the
scene, which suggests that too much closely-knitted ties and
obligations within a preexisting community accumulated over
time could lead to devastating effects and inhibit sustained
growth (Woolcock, 1998). Alternatively, it is also noted that the
utopia of social networks beneficial to all is found nowhere in
real world, where players in the disadvantaged position of net-
work could be subject to persistent exploitation (Taylor &
Leonard, 2002). Adding the dimensions of evolution and com-
petition in social networks, these thoughts address the signifi-
cance of social capital as a collective asset in scarcity. In sum,
the missing link between the theorized significance of social
network and its empirical application is inadequately discussed
as a knowledge gap in the literature.
As driven by the state-society relations at macro level, the
notions of social capital and embeddedness could bring dialec-
tic implications in policy-making. The controversy over state
intervention is inherited from the divergence in development
ideology across political spectrum. As Woolcock (1998: pp.
156-158) identifies, the communitarians are faithful in the po-
wer of the authority as welfare state whereas the conservatives
strike for the dismantling of the state in empowering civic vir-
tue at the other end, sandwiching both the path-dependent ad-
vocates who claim the society’s indifference to government
action, and the liberal enthusiasts who mediate a sophisticated
“check-and-balance” in the state-society relations at a moderate
fashion. Just as entrepreneurial process is embodied in interac-
tion and transaction among the social networks, altogether they
are further restrained by a set of intangible rules and institu-
tional infrastructure in context. In empirical term, there show an
abundant case of which suggests that local economic growth
could be complemented by either way of the state-led initiatives
or deregulated governance regime (Guthrie, 1998). However,
the informal social networks and formal institutional infra-
structure could sometimes be conflictive as they move at the
opposite directions. In the context of developing economies, the
overreliance on privileged network resources (e.g. guanxi in
China’s economy) is often alleged as collusive and corruptive,
stumbling the built-up of legal-rational system in shape. Rather
than analyzing the inter-firm networks only, locating firms as
“networks within networks” could then associate the embed-
ding relationship between the organization of firms and the
industrial territory in a more holistic view.
The scholarship of social capital has its shallow root of em-
pirical reference in the developing economies of China. The
extant literature in Chinese entrepreneurship has conventionally
followed the tagline of guanxi, which praises the significance of
personal and informal social networks in the economic domain
in the early reform era (Yang, 2002). For instance, Leung (199 3)
emphasizes the role of personal contacts in manipulating
quasi-legal arrangements for efficient production and subcon-
tracting activities across the Hong Kong-PRD border. Never-
theless, the antecedent discourse of guanxi renders itself too
simplistic and ego-centric as a cultural mechanism playing at
the community level exclusively, which could fail to compro-
mise the state initiatives in marketization and institutionalize-
tion of late. In result, there shows a stern bottleneck for theo-
retical advancement in the study of Chinese entrepreneurship.
Inspired by the alternative view of Guthrie (1998: p. 255)
which takes guanxi as an institutionally-defined system, this
paper conceives the study of Chinese entrepreneurship shall
only proceed by transcending the guanxi discourse into a more
advanced framework that could negotiate with both social and
institutional changes.
Accordingly, this paper postulates guanxi as a variety of so-
cial capital in reconciling the complementary forces of social
network and institutional infrastructure in Chinese entrepre-
neurship. Conventionally speaking, the form and function of
social network is a core component of social capital, which
comprises the object of focus in this paper. The notion of social
capital is then conceptualized as an embedding mechanism
which negotiates the network dynamics between entrepreneurs
and the broader context. At aggregate term, it is the socially-
embedded resource contributed by both the community partici-
pants and state authority of a place. At the individual level, it
could be regarded as an accumulation of “investment in social
relations with expected returns” (Lin, 2001: p. 19). In this pa-
per, social capital is defined as a collective asset of state-society
relations variably appropriated to individual entrepreneurs for
purposive action. Adapting the “embeddedness-accessibility-
use” framework from N. Lin (2001), this paper attempts to
analyze the how the stock of social capital impacts upon the
Hong Kong entrepreneurs who operate manufacturing activities
in the PRD.
Research Framework
As constructed for an analytical framework, the notion of so-
cial capital captures three intersecting dimensions in em-
beddedness, accessibility, and use. In here, “embeddedness”
determines the influence of overall network resources and op-
portunities available in the social structure, which is condi-
tioned by both the community integration and state integrity
(Uzzi, 1997; Woolcock, 1998). Simply put, a backward society
under weak institutional infrastructure could foster repeated
exchanges among strong ties through informal channel in the
early reform China . Whilst the level of embeddedness could be
sensitive to state intervention, its influence upon individuals is
relatively macroscopic and chronic. At the micro level, “acces-
sibility” to social resources by individuals, according to N. Lin
(2001), is appropriated by one’s position in the hierarchical or
horizontal network structure. It is commonly postulated that
network typology and the corresponding position of entrepre-
neurs could in part influence their exposure and perception to
business opportunities and thus their relative competitiveness in
the community (Ardic hvili, Cardoso, & Ray, 2003; Uzzi, 1997),
in which Taylor and Leonard (2002) explicitly warn that pe-
riphery actors in an inclined network could easily be exploited
or marginalized by network hegemony. The “use” dimension in
this framework refers to action-oriented aspect which enables
entrepreneurs to acquire the embedded resources from their
network access (Lin, 2001). Altogether, the “embeddedness”
and “accessibility” concurrently define the form of social net-
10

C.-Y. LEUNG, J. XU
work and the resources opened to individual entrepreneurs,
while “use” or mobilization of these resources determines the
function of such social network, which is also hinted as the
returns to social capital.
The “embeddedness-accessibility-use” framework in this
paper could be tailored for clarifying two distinctive theoretical
misconceptions in the existing literature. On one hand, it con-
sciously separates the form and function of social network as
independent entities against any mistreat of confusion or asso-
ciation in conceptualizing their relationship. On the other, it
embodies the dimensions of social capital from an intermediate
perspective across state-society domains. The prevailing litera-
ture in studying entrepreneurial network often fail to delineate
the policy impact in general and upon individual actors, which
might distort the effectiveness of policy evaluation in result. In
response, the framework could enhance the responsiveness of
policy research by fully utilizing the information gathered from
a small sample in a more precise way. By delineating the ag-
gregated network structure and the individual position in re-
spective network, the framework enables thorough investiga-
tion upon the magnitude of independent events (e.g. policy
change) at individual and aggregate terms. Meanwhile, it also
shows the prospect to evaluate the respective role of social and
institutional changes in a compromised manner. After all, the
“embeddedness-accessibility -use” framework signifies a trial in
advancing the social capital thesis in both the theoretical and
empirical aspects.
Methodology
Drawing from the theoretical and empirical considerations
mentioned above, this paper intends to study the impacts of
network dynamics and the latest socio-institutional changes on
entrepreneurial action in the lately-restructuring PRD. Parti-
cularly, the study narrows its scope down to the Hong Kong
affiliated manufacturing operations in the region, whose iden-
tity and competitiveness have recently been challenged. Field
interviews were made with a dozen of Hong Kong entrepre-
neurs and also professionals from the associated institutions in
the field from 2010 to 2011. Interviews were conducted with
open-ended questions at every first encounter, whereas the
follow-up interviews and factory visits were arranged selec-
tively for more detailed information according to specific the-
matic interests. Furthermore, these first-hand data are also sup-
plemented by archival review of official documents and Indus-
try reports as a triangulated source of reference. Despite the
small sample size could provide only a lesser degree of gener-
alizability, the in-depth field methods are preferred in appropri-
ating the analytical framework of social capital as an empirical
case.
As for an extract of the research in a limited length, this pa-
per gives an investigation into two of the selected entrepreneurs
from the sample, Mr. Cheung and Mr. Yeung, for analysis by
the “embeddedness-accessibility-use” framework in the fol-
lowing section. These two cases are chosen for their typical but
outstanding experiences in entrepreneurship from the past to the
present, which could provide a prolific profile of network dy-
namics and entrepreneurial actions by life stage, particularly
after firm emergence and in the subsequent encounters upon
socio-institutional changes. The analysis starts with an over-
view of the entrepreneurial profile, in the illustration of how the
form and function of social network evolves with entrepreneur-
rial process throughout the period. A conceptual analysis of
social network, which depicts the entrepreneurs’ personal reach
and their respective relationship in diagrams of nodes and ties,
is conducted to help illustrate the state and impacts of social
capital for the Hong Kong entrepreneurs in the PRD. As gath-
ered from our interview, the actors involved in the everyday
entrepreneurial action are recorded as nodes; whereas the rela-
tionship and flow of exchange are represented by ties and ar-
rows in the network diagram. Particular intention is put on how
far the overall structure (embeddedness) and specific position
(accessibility) of one’s network could be realized into pur-
posive action (use) and thus for firm growth over time. The
analysis is then followed by a discussion over the impacts of
recent social and institutional changes in the midst of restruc-
turing process. Unless specified otherwise, all information pre-
sented below is gathered from our personal interviews.
Social Capital and Entrepreneurial Action in the
Ever-Changing PRD
To put forth the analytical framework of social capital in the
study of Chinese entrepreneurship, this paper focuses on the
ever-changing process of manufacturing activities in the PRD
as case study. As a world-leading manufacturing base today,
the nine prefectural cities in the PRD have experienced tre-
mendous economic growth since the commencement of reform
in 1978. In retrospect, the growth was associated with the proc-
ess of manufacturing transplantation from the overseas Chinese
diaspora. When the institutional infrastructure was still weak at
the early reform stage, the manufacturing activities were pre-
dominately supported by “a socially, rather than bureaucrati-
cally, mediated form of foreign investment used by small (and
some larger) Hong Kong investors” as reckoned by J. Smart
and A. Smart (1991: p. 169). In result, the rule of guanxi net-
works had boosted the growth of labor intensive manufacturing
activities in the PRD throughout the 1980s and early 1990s.
Whereas the retreat of state fostered the use of informal so-
cial relations (guanxi) in Chinese entrepreneurship in the early
reform stage, the development pattern of PRD has experienced
further dynamic changes in recent years. Accompanied by
China’s accession into the World Trade Organization (WTO) in
2001, the PRD has entered a new stage of marketization and
institutionalization. Concurrently, the central and provincial
governments have initiated the second wave of industrial re-
structuring nation-wide, in the hope of promoting a knowledge
based economy in the PRD. As explicated by “The Outline of
the Plan for the Reform and Development of the PRD 2008-
2020”, those labor intensive and low-end manufacturing active-
ties in the prosperous cities are pushed to transform and up-
grade themselves into a higher value-added one, otherwise in
less capable situation they should soon relocate away to other
remote regions (NDRC, 2009). Alternatively, there have been
swift socio-economic changes in the PRD after a sustained
growth for years. With respect to their respective development
paths and closer economic integration between them, the trans-
border relationship between the PRD and Hong Kong has also
changed at an escalated level after Hong Kong returned to
China’s rule in 1997. Altogether, these social and institutional
changes in the midst of restructuring process could affect the
dynamics of social capital in the region and pose a huge influ-
ence on the entrepreneurial action at individual level.

C.-Y. LEUNG, J. XU
The Cases
Mr. Cheung has just entered his retirement life after working
in mainland China as a factory boss for almost 30 years. His
paper box business with local cadres was first started in
Huizhou in 1982 and then relocated to Foshan in the 1990s. Mr.
Cheung went through many up-and-downs in his business ad-
venture, which peaked immediately after establishment but
suddenly tumbled afterward. As a joint venture practitioner, he
has accumulated so much skill and knowledge in guanxi prac-
tice from his observation and experience in mainland China.
As illustrated in Figure 1, Mr. Cheung spanned through his
friend in Hong Kong to enter the business field in PRD. The
local cadres in Huizhou as his first partnering agent helped him
in mediating the necessary production factors, including land
and labor, against institutional barriers. However, the replace-
ment in political leadership cut off the access to all these re-
sources. Then Mr. Cheung relied on the intermediate connec-
tions in bureaucracy in establishing his next two factories in
Foshan in the same way. Inter-firm business connections had
persistently been found from both sides of the border which
support stable growth in routine operation. Although the tight-
ening of pollution standards had forced their way out, Mr.
Cheung and his long-serving assistant was able to shut down
the business smoothly with the help of the cadre in Foshan.
Meanwhile, Mr. Yeung is now one of the industry leaders
with his reputed enterprise in the printing sector. As early in
1971, he originated his first printing factory in Hong Kong and
only moved to mainland China since 1995. Despite of the per-
sistent adversity in the beginning, his business in Dongguan
grew steadily and even expanded with new branches beyond the
Pearl River Delta in recent y ears. Mr. Yeung has been a chro- ni c
innovator and missionary in the industry even after stepping
down from major managerial role in his own firm now.
Figure 1.
Egocentric network of Mr . Cheung.
The case of Mr. Yeung pictures an alternative path of enter-
prise development as shown in Figure 2. Shortly after gradua-
tion, Mr. Yeung did not join his father who ran a small elec-
tronics business in their hometown in Fujian. Instead he worked
as a clerk in a printing firm which he later acquired. In 1991, he
was approached by a township cadre to invest into a joint ven-
ture in the Pearl River Delta but the proposal fell down at the
end. Two years later, Mr. Yeung resumed the plan and estab-
lished a Processing Trade factory in Shenzhen formally under
the name of a township and village enterprise in the locality.
However, he found the factory could not handle the quota re-
ceived from his overseas customers. Introduced by his col-
leagues in a banquet, Mr. Yeung was aided by another local
leader to register a Wholly-owned Foreign Enterprise for full-
scale production in Dongguan in 1995. In recent years, Mr.
Yeung stretched the reach of business into his hometown in
Fujian through a group visit with the industry association be-
fore conveying all of the authority to his children.
Embeddedness
Embeddedness refers to the typology of overall network and
thereby the resources available in the social structure, which
could be identified by the presence of other actors and opportu-
nities derived from the broader business environment where the
entrepreneurs are connected within. In the network diagram of
Mr. Cheung (Figure 1 above), it is convenient to figure out the
indispensable node of local cadres both as the intermediaries to
introduce new acquaintances (the bold lines) for the Hong
Kong entrepreneurs, and as the mediators to smooth everyday
operation of the firm (the arrow towards “Cheung”) through
their bureaucratic affiliations (dotted lines) in the local firm-
environment nexus. It is noted that the establishment process
Figure 2.
Egocentric network of Mr. Yeung.
12

C.-Y. LEUNG, J. XU
and organization structure of Mr. Cheung’s enterprise was un-
der the omnipresent influence of the local authority in mainland
at that time. They dictated the site and construction of the fac-
tory. Their sugar business firm was the designated source sup-
plier in priority, while they also helped bridging Mr. Cheung to
some downstream customers maintained with gift connection in
the domestic market. In the registration procedures, the invest-
ing cadres sheltered the enterprise from red tape by various
bureaucratic departments. They had also been powerful in set-
tling resource and institutional constraints for daily entrepre-
neurial processes. When asked about the key aspects to the
business environment in the 1980s, Mr. Cheung recalled the
resource constraints in the underdeveloped China. The locality
in Huizhou suffered from the shortage of raw materials and
infrastructure. With the referral from his cadre-partners, he
often rang the responsible bureaucrats up for the grant of extra
electricity in frequent cases of power cut. Transportation was
difficult with undulating roads and inadequate vehicles. When
ordinary carriers were unavailable, he had to borrow military
trucks in the purpose of logistics. Workers were also hired at an
illegitimate basis as sheltered by the local bureaucracy. It was
reported that many of these transactions and business processes
were not governed by formal contract or open market. Instead,
they were more often acquired at the expense of gift payment,
and endured by the use of informal personal guanxi.
The grey area and loophole in the business field had created
much room for flexible implementation of policy which was
subsequently filled with the rent-seeking behavior by local
cadres. Being the official resource allocator, the bureaucratic
coalition was so powerful that could monopolize local economy
in almost every aspect without any other check in balance. Two
major implications could then be drawn from here. In the first
place, it cost Mr. Cheung and other entrepreneurs much time
and efforts in negotiating and cultivating informal guanxi with
their bureaucratic affiliates (the arrow towards “local cadre-
partners”), which could justify the simple internal structure of
these small family enterprises and underline their limits in
management practice and innovation capacities. Secondly, it is
noted that many transborder enterprises like Mr. Cheung’s were
over-embedded by specific informal social ties around a few
cadre-affiliates but not the others, which made the industrial
linkage and market coverage in the loca lity particularly na rrow
and fragile. Sometimes Mr. Cheung called for help from the
mainland officials directly. At many other times, Mr. Cheung
was benefited from the network reach of his cadre-partners
without getting know the real person-in-charge directly, in
which the structural holes between Mr. Cheung and other actors
(e.g. Labor authority), that could only brokered by the cadres
without extra assurance, are shown in the open network of Fig-
ure 1. An open and imbalanced network structure predomi-
nantly inclined towards local cadres might then be consolidated
and reinforced in a path-dependent manner, which will be fur-
ther discussed later.
As illustrated in Figure 2, the network diagram of Mr. Ye-
ung also reflects the significance of personal access with local
bureaucracy for many entrepreneurial processes. Local cadres
at the township and village level had been actively inviting
overseas Chinese manufacturers for business ventures, and the
case of Mr. Yeung finds no exception, as his first venture was
also approached by the local cadres, featuring a “passive
search” process of business opportunity discovery in an acci-
dental manner (Ardichvili et al., 2003). Meanwhile, the case of
Mr. Yeung also demonstrates how the entrepreneurial action of
Hong Kong investors could be limited or discriminated by the
institutional system at the other side of the border. As derived
from the different venturing models of his two firms, their or-
ganization structure and operation flexibility were confined in
various ways. The processing trade factory was formally owned
by the mainland township corporation and its cadre-affiliate
was the board of directors in effect. But Mr. Yeung was in
practice the in-charge for all the inputs and process manage-
ment of the factory, an entity which he might also bear the re-
sponsibility in circumstances. Although the “sanlaiyibu (三來
一補)” establishments were granted preferential tax and cus-
toms payments and other procedural treatments, they suffered
from the risk of incomplete property rights and quasi-formal
regulation in comparison to his Wholly-owned Foreign Enter-
prise. For the Wholly-owned Foreign Enterprise, Mr. Yeung
was the sole owner-and-manager and most of the key positions
in the factory were also the appointees of his. Its major source
suppliers and downstream customers, however, were all from
overseas market maintained with repeated transactions and
offers, as the equal-status participation of foreign enterprises in
domestic economy was explicitly confined by the protectionist
regulatory regime which prohibited local market entry. Seem-
ingly it could be an all-or-nothing scenario for Mr. Yeung—
either fully embedded into the social network inclined to local
cadres with the sanlaiyibu operation, or entirely disconnected
from the network of local economy with the export-oriented
foreign enterprise.
Observing from a long-range perspective, however, a slightly
different form of network embeddedness could be identified.
Mr. Yeung did not solely count on the local bureaucracy for the
convenience in regulation and resource supply in his operation.
Alternatively, he had been networking in an extensive pool of
business acquaintances for vast overseas market and other op-
portunities. The Industrial chamber is one of the major channels
to acquire latest market information and production technology
through arm-length ties. It does not imply the closely embedded
ties were totally abandoned, as he is currently consolidating the
familial business with the help of his family members. He sim-
ply did not stick with all of the preexisted bonding ties, but kept
actively and directly in touch with key acquaintances like the
head figures in the Bureau of Press who take charge of censor-
ship and publishing. Such strategy of network diversification
spearheading the growth of the firm since late 1990s verifies
the scholarly emphasis on both embedded ties and arm-length
ties in achieving success (Uzzi, 1997).
As concomitantly emphasized by various scholars, govern-
ment cadres and their affiliates at the grassroots level had been
the very monopoly governing almost all aspects of local eco-
nomic activities ranging from labor relation to custodial ar-
rangement (Yang, 2002). With a lack of trust in institution due
to partial reform, guanxi networks were often built, after re-
peated plays of reciprocal exchange and socialization, among
individual persons across the border which smoothed the ven-
turing and operation processes in the transition economy. In
this regard, it could be seen that entrepreneurial networks in the
PRD were deeply embedded in a hierarchical structure centered
on local cadres, which offered quasi-legal opportunities for
economic gains.
Accessibility
Accessibility could be better interpreted as the specific net-

C.-Y. LEUNG, J. XU
work position of entrepreneurs acquired in the social structure
network, which indicates the relevant opportunities accessible
by the individuals for purposive action accordingly. The pair of
cases by Mr. Cheung and Mr. Yeung could well illustrate how
network position matters in guanxi relationship and for entre-
preneurial action. Mr. Cheung, as an enthusiast in socialization,
was very progressive in attending banquets and sending gift. He
thought it was the indispensable way to make up his foreign
identity and be accepted by the local officials. When Mr.
Cheung and the representatives from a locality in Huizhou met
at the very first few contacts, they exchanged gifts of tobacco
and alcohol and took turns in paying the entertainment to show
their esteem and friendliness for each other accumulatively.
Such early process of gift exchange matched with the guanxi
building model which aimed at nurturing mutually beneficial
relationship in long term (Yang, 2002). The state of reciprocity
persisted until the agreement over a joint venture formation that
turned their preexisted piecemeal transactions into a legitimate
organization.
The mutually reciprocal relationship at start was however
soon dispatched by a parasitic exploitation under power ine-
quality after the venture in Huizhou formed. Instead of an equal
partnership, however, the joint venture bound Mr. Cheung to
work for his cadre-partners as a subordinated agent in the net-
work (represented by the imbalanced weight of lines in Figure
1). Whereas Mr. Cheung attained a smaller company share
irrespective to his actual investment, the previous scene of re-
ciprocal gift exchange also disappeared and was replaced by
constant payment to the cadre-affiliates as “entertainment al-
lowance” in the firm’s expenditure account. Mr. Cheung failed
to resist his cadre-partners and they aggressively colluded in
various rent-seeking moves, which included tax evasion, par-
ticipation in black market, and smuggling. Although he profited
from such embedded tie with far greater income than his pre-
vious occupation, he should have attained it with the enterprise
if he could allocate the resource in optimizing firm’s operation
instead of pouring them all-in for socialization. The monthly
expenditure in “entertainment allowance” was up to six digits,
an amount quintuple to his salary and bonus. The efforts in
maintaining guanxi with the cadre-affiliates were so intensive
and costly that inhibited any further attempts to diversify his
network reach and identify new business opportunities. Yet Mr.
Cheung could not live without the parasites as they were row-
ing in the same boat. When his cadre-partners were forced out
of the local office in Huizhou and the first venture had to close
down without alternative support (indicated by the cross in
Figure 1), Mr. Cheung could only count on the tie as brokerage
for new factory ventures in Foshan (the dotted node in Figure
1). Accordingly, another embedded tie was built with the local
cadres which Mr. Cheung claimed he “really good friends there
after a period of time”, the “reciprocation-exploitation” cycle
repeated until the ventures were blown off by a new current of
policy regulation in recent years. By wearing down the prospect
of upgrading and opting for immediate benefit, it was the dis-
advantaged position of Mr. Cheung, over-embedded in the
asymmetric structure, which later spoiled the ventures eventu-
ally.
The case of Mr. Yeung demonstrates an alternative way of
how network position evolved over time and its implications to
entrepreneurial action. As mentioned, Mr. Yeung still regards
personal access with the bureaucracy important but he seldom
drowned within any specific embedded ties. He always showed
up in banquets and events hosted by colleagues in the industry
and greeted almost every cadre with gifts directly. In setting up
the Processing Trade factory as a pioneer attempt, Mr. Yeung
promised the local cadres to contribute a processing fee at pre-
mium in order to skip the registration procedures. From this
onward, he kept a longer distance for these ties and rejected
many of the incoming offers that were all tempting in retrospect
—neither undertaking the guaranteed domestic orders by means
joint venture, nor involving himself in the underground transac-
tions of printing machinery. It is admitted that the unwilling-
ness to speculate with the embedded guanxi ties led to the many
inconvenient treatments received in return, which explained the
obstructed growth of Mr. Yeung’s factories in the first few
years.
In line with the strategy of diversifying network aforemen-
tioned, meanwhile, Mr. Yeung did reciprocate in all different
accounts of guanxi ties (represented by the more balanced
weight of lines in Figure 2). At times of festival every year, he
had been sending gifts to key acquaintances, including the head
figures in the Bureau of Press, to solidify the continual support
from these embedding ties. At the same time, he did not attempt
to exploit premium value from these actors for any further in-
termediary assistance. In result, most useful ties have been
connected to Mr. Yeung directly without the problem of struc-
tural hole and thus any over-reliance on specific brokers. On
the other hand, although Mr. Yeung was neither involved in
domestic market transaction nor any colluding moves for the
transfer of benefits in the local economy directly, he still bene-
fited the whole community in two major aspects—infrastruc-
ture improvement and technology transfer. These actions did
not help consolidated any specific ties within the network, but
definitely strengthened his own reputation in the locality. In
reward, his influence in the industry chamber and all those
arm’s length bargains rose significantly in later years. Accord-
ingly, the tradition of reciprocity here did not evolve into forms
of exploitation that beset Mr. Cheung in the preceding case. Mr.
Yeung did not lose his fairly proximate position in the network
and was seldom stumbled by specific guanxi ties in accessing
extra-firm resources.
Use
Finer analysis suggests several implications to the function
of social capital in Chinese entrepreneurship. Based on the
empirical findings gathered from the above cases, it could be
concluded that having a good guanxi network, especially with
the local bureaucracy, was crucial in achieving greater entre-
preneurial success in the early-reforming PRD, which was al-
ready suggested elsewhere in the preexisting literature (Chen,
2000). This study, however, further spots that the enterprise
development in long-term and the embedding relationship with-
in firm-environment nexus could not be merely explained by
the stock of social network or the level of embeddedness. The
rifts in the utilization of structural embeddedness and network
position as said, therefore, constituted the ultimate crux of con-
verting the accessible social resources into purposive action for
individual benefits.
Originated as a relational asset in the society, the theoretical
construction of social capital in entrepreneurship could only be
tenable if it is genuinely captured by an individual entrepre-
neurrial unit through the mediation of value in the networks. In
this regard, the conduct of gift exchange in the Chinese busi-
14

C.-Y. LEUNG, J. XU
ness context is conceptualized as the intricate basis in achieving
mutual trust beyond immediate material benefits (Hsing, 1996;
Smart, 1993). However, evaluating the accumulation of trust by
equating it to the stock in social capital or embedding ties is far
too simplistic away from the practical world. Just as the gifts
and favor invested in the interaction have often been unrecip-
rocated, the apparent guanxi networks and trust nurtured as part
of social capital are not always readily convertible into real
benefits for individual entrepreneurs. To make it clear and pre-
cise, it is worthwhile to recall that “social capital can never be
more than potentiality: once cashed in, it becomes something
else (e.g., economic capital)” (Smart, 1993: p. 396). The answer
key to the variance in competitiveness and performance among
enterprises is, thus, a matter of efficaciousness in utilizing
guanxi and conveying social capital rather than the accumula-
tion of the stock solely. Derived from a different set of network
structure and position, entrepreneurs could have different types
of function and use value for their social capital. As illustrated
in the above cases, the enterprises of Mr. Yeung have slow but
solid long-term development as he manipulated social relations
into the establishing of reputation as symbolic capital for fur-
ther growth of the firm, whereas Mr. Cheung could capture
immediate but exhaustive revenue despite of his enthusiasm in
building guanxi.
As shown in above, Mr. Cheung in this study could only
capture a slice of immediate but occasional revenue in the
cadre-driven coalition, which was disproportional to his persis-
tent investment in the guanxi ties. At the beginning, it was true
that the cadres were able to shelter Mr. Cheung from the unau-
thorized act for black money apart from facilitating supply
against resource constraints. One example is the illegitimate
premium profited from the dual track currency system until
1994. As the official exchange value of “Renminbi (人民幣)”
was set unrealistically lower than the market price, the differen-
tials were captured by local cadres and the sheltered enterprises
through black market transactions stealthily. Experience told
that profit of the enterprise was more often acquired from the
exclusive preferential treatment external to concrete factory
process. The immediate revenue at individual level cashed-in
from the cadre-entrepreneur coalition could also be regarded as
an economic capital otherwise. Whereas the underneath incen-
tive scheme facilitating the cooperative efforts was seemingly
reinforced after successful trials repeatedly, they further pushed
many of the entrepreneurs to re-invest and even raise the stake
in these embedded ties instead of developing weak ties. As
proven in the case, the cost of socialization for them paradoxi-
cally increased over time, despite of the deeper relationship as
expected and the diminishing margin of rent-seeking profits
from collusion and cooperative efforts. Again, power relation
and entrepreneurial position in the network structure is of a
critical importance in the process of opportunity conversion and
profit re-appropriation among the agents. As argued by Taylor
and Leonard (2002), agents at a disadvantaged position in the
social structure could be exploited as the “labor” working for
social capital and thus resistless in reverting but reinforcing the
status quo. In the coupling of the cadre-entrepreneurial network,
Mr. Cheung showed the inability to convert the stock of guanxi
into favorable functions for their own firms.
In contrast, the enterprises of Mr. Yeung have a more solid
and prosperous long-term development with his better utiliza-
tion of network. Despite his lack of devotion in liaising strong
ties with the privileged class in mainland, Mr. Yeung could still
mobilize and turn the diversified encounters of socialization
into foreseeable opportunities for establishing the reputation of
his firms. In such case, the premium to the socialization upon
the initial guanxi base is articulated in the slowly-accumulated
stock of interpersonal guanxi but also the emergence of organi-
zation-based ties and, more importantly, the firm-specific repu-
tation established, which is a function or return converted in the
form of symbolic capital. Symbolic capital, or the “resources
that are generalized as the attribution to individuals” as sug-
gested by Smart (1993: p. 393), is differentiated from guanxi
which necessarily depends on particular dyadic ties and rela-
tionships. Such symbolic capital, once internalized, is built as
the trustworthiness and goodwill of the firm exclusively, which
in turn helped avoiding the cost and potential trouble incurred
with bureaucratic red tape, and offered new opportunities for
the endogenous growth of the firm. As in the words of N. Lin
(2001), the giver of the favor was gratified by the reputation as
a social return.
The Latest Institutional Changes in the
Post-WTO Pearl River Delta
Whereas the above “embeddedness-accessibility-use” frame-
work suggests how the trivial difference in the configuration of
social network could work specifically upon the divergent path
of entrepreneurship in the early reform period of the PRD, such
impacts could become even more significant to the individual
firms and aggregated development as time goes by. As China
now enters another stage of marketization, the decentralized
local economic autonomy has been gradually by a better-exe-
cuted regulatory regime with highly standardized requirement.
Stiff embeddedness or too much guanxi bonding might, how-
ever, restrain the old-fashioned enterprises from optimizing
operation as introduced above, thus hindering the state’s inten-
tion towards techno-economic restructuring. Given their highly-
polluting and labor-intensive characters in manufacturing proc-
ess, and the incomprehensive linkages with local industries
(except with the key cadre-partners) in community embedding,
some entrepreneurs like Mr. Cheung could become so vulner-
able and isolated when the advantageous institutional environ-
ment was gradually unleashed by changes in policy direction
from the central government as summarized in Table 1 below.
As a matter of fact, C. Yang (2010), in a resembling scenario,
argues the lock-in effect arose in the locality as a phenomenon
of “institutional inertia” due to compiling entanglement. This
study agrees with the statement and further proposes the fol-
lowing implications.
The institutional turn, together with the shift in techno-eco-
nomic production paradigm, did pose unprecedented challenges
to the survival of many transborder enterprises which are small
to medium in size (SMEs). Sheltered from ineffective market
and institutional governance, these resource-deficient firms
were operated under an old incentive scheme mediated by in-
formal guanxi networks which often favored short-term specu-
lation and rent-seeking behavior. Though efficient in practicing
mass production and promoting local economic growth, the
competitiveness of these firms were often built at the expense
of labor exploitation and bureaucratic corruption. It is undeni-
able that the phenomenon of “institutional inertia” has ob-
structed the state’s latest policy to remove the processing trade
industry out of the PRD. The transborder enterprises could not
be easily transformed or relocated under the tradition of protec-

C.-Y. LEUNG, J. XU
Table 1.
Key changes in institutional environment in the 21st century.
Date Key Event
2001 China’s accession into the World Trade Organization
Relaxed controls on operation of Foreign-funded
enterprises
2003 Opening up the foreign trade sector
2004 Implementation of <Closer Economic Partnership
Arrangement >
2005 Reform & appreciation of Renminbi exchange rate
2007 Tightened restrictions on products for Processing Trade
2008 Commencement of < Labor Contract Law>
Union of corporate income tax system on domestic and
foreign enterprises
Proclamation of <The Outline of the Plan for the Re for m
and Development of the Pearl River Delta 2008-20 20>
Global Financial Tsunami a nd economic recession
2010 Proclamation of <The Framework Agreement on Hong
Kong and Guangdong Cooperation>
tionism and entangled guanxi relations in the localities. The
problem of incapability in innovation and expansion were also
commonly found among the respondents in this study. Taking
Mr. Yeung as an example, when the overseas exporting market
become stagnant, he has thus been consciously breaking into
local market but found inferior to the domestic competitors in
terms of local marketing coverage and even financial founda-
tion. As production cost has been increasing along with wage
inflation and appreciation of Renminbi, many SMEs living on
the margin have no choice but to terminate operation. Latest
report from the Hong Kong Trade Development Council shows
that a quarter of the Hong Kong-invested manufacturing firms
interviewed in 2007 are currently considering close-down in
counteracting the prolonged loss. The representative of Hong
Kong Productivity Council also suggests in an interview that
over one-third of the Hong Kong-invested SMEs in the PRD
are currently forced to retract or idle in withstanding the hard-
ship.
As a matter of fact, Mr. Cheung is in this prototype whose
factories failed to adapt the latest current of state regulations in
pollution and employment. If there has ever been an accumula-
tion of social capital in Mr. Cheung’s case, the stock was never
converted into his own possession but left in the embedded ties
or dyads exogenous to the firm, although the lucky bet on the
right trustee to some extent still helped him out of the trouble
until the end. More importantly, the over-reliance on local bu-
reaucracy, voluntary or involuntarily, have detached them from
the experience and logic of normative exchange with other
actors in a direct way that would have promoted other potential
relationships and coordinated adaptation in the locality (Uzzi,
1997). Many of these ethnically-linked transborder firms could
not be regarded as having truly embedded in the arena until
autonomous participation in the domestic market or local in-
dustrial chain is achieved.
Nevertheless, Mr. Cheung complained official support was
far from adequate. With a foreign personal identity regardless
of their venturing forms, these transborder entrepreneurs were
discriminated in applying equity loan for financial assistance in
mainland. The Hong Kong Economic and Trade Office in
Guangdong, which is meant to be the main official body in
dealing with transborder economic issues, seldom intervened in
genuine economic affairs (except the personal security of citi-
zens) until some pilot efforts recently. Records showed a slight
chance for the majority of them to upgrade or relocate success-
fully in short term, and more and more are opting into liquida-
tion when the global economy went down and the production
cost rose simultaneously (FHKI, 2010). The resulting decline in
productivity of these individual enterprises could even encum-
ber the overall competitiveness of those industrial regions
where foreign investment from Hong Kong and other ethnic
Chinese dominated a major share.
The rise of institutional regulation, which contributed to the
close-down of those poorly-equipped factories like the one in
the case study of Mr. Cheung above, should give some glimpse
of hope in converting the situation. The tightening decree from
the central state towards institutional standardization since
China’s entry into WTO has squeezed the room for flexible
interpretation and thus the potential benefits of informal social
exchange. Although the local cadres still preserved limited right
in relaxed implementation, the institution regime has gained the
momentum in leading the economy in a bright direction with
less uncertainty. In other words, the situation of over-em-
beddedness in the PRD localities have been on the verge of
change, if not collapse, by the re-entry and intervention efforts
of the central and provincial governments from top-down.
Meanwhile, further implications could be derived from the
case of Mr. Yeung about the impacts of institutional changes in
recent years. Since China’s entry into WTO, there have been
extensive institutional moves in reregulating the printing Indus-
try which aim to standardize the monitoring mechanism and
heighten the requirements in pollution control and labor welfare.
The processes of censoring and custody were integrated among
various government departments, which now favor those re-
puted and qualified enterprises. Restrictions on the processing
trade activities and the use of highly-polluting materials have
been tightened to drive out the weaker firms. Apart from insti-
tutional advancement by the mainland government, there have
also been pilot attempts for transborder coordination. Collabo-
rating efforts were established by the municipal governments in
the PRD to facilitate upgrading, transformation and relocation
for the transborder enterprises. The “Cleaner Production Part-
nership Program” was jointly launched by the environmental
authorities in Guangdong and Hong Kong in April 2008 to
promote voluntary practice in lowering pollution. Mr. Yeung is
one of the early participants having benefited from the subsidi-
ary assistance and but also contributed as the modeling plants
of the scheme for future reference.
Such a series of efforts expose the importance of enterprises
in utilizing their social capital accumulated earlier. The adap-
tion and readjustment made were positive as indicated in the
case of Mr. Yeung, who utilized his network position to access
the new institutional support. Meanwhile, Mr. Yeung expressed
that many of his colleagues had a huge setback when they re-
ceived the new order to forbid the use of specific printing mate-
rials immediately, and it was after direct negotiation between
the industry representative and the Bureau of Press which the
policy was temporarily suspended and a severe loss was
avoided. Communication with and accessibility to formal insti-
16

C.-Y. LEUNG, J. XU
tutions, thus, became an indispensable channel to follow if not
advance the market and policy trend nowadays. Whereas those
who have been in a better network position continue to thrive,
some others were stumbled by the “institutional inertia” they
had depended on, and thus failed to survive the threats subse-
quently.
All in all, the configuration of social capital in Chinese en-
trepreneurship is ever changing at an escalated level. Firms that
have been over-embedded and poorly-positioned in the infor-
mal guanxi networks are now forcing their way out of the ad-
vanced region in the PRD accordingly. Alternatively, recent
institutional breakthrough across the border has boosted the
significance of converting earlier entrepreneurial attention
about guanxi networks into formal coordinating channels in fu-
ture. It further promotes the profitability for individuals to nur-
ture enterprise social capital in the institutional arena and thus
the re-building of embeddedness in the region. From a different
perspective, it could be regarded as an institution-led initiative
of market elimination according to the network position of
enterprises, accompanied with a painstaking process of recy-
cling in the stock of enterprise social capital. Wise coordinating
efforts, by government authorities and associated organizations
on both sides of the border, are required to smooth the trans-
formation process and rule out the adversity of hollowing-out in
the region.
Conclusion
This paper acknowledges that social capital had been an in-
valuable source of collective asset in Chinese entrepreneurship.
Interview results from a pair of detailed cases in two Hong
Kong entrepreneurs operating in the PRD provide an evidence
of association between network dynamics and entrepreneurial
action as illustrated by the “embeddedness-accessibility-use”.
Finer analysis shows long-term reputation building and imme-
diate rent-seeking behavior could be two distinctive functions
of enterprise social capital. Meanwhile, the paper also investi-
gates the impacts of recent socio-institutional changes upon the
Hong Kong entrepreneurs. It is argued that a more formal and
institution-led regime is being nurtured as a new source of
competitiveness in the region. The renewal in the stock of en-
terprise social capital could then be crucial in reconfiguring the
network dynamics and entrepreneurial action, and projecting
future trajectory of industrial development in the PRD. This
paper recalls the notion of social capital as a promising but
underdeveloped approach in theorizing the new economic ge-
ographies in the transitional period of China.
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