Institutional Entrepreneurship in the Informal Economy: China's Shan‐Zhai Mobile Phones

• DOI: http://doi.org/10.1002/sej.1174
• Author: Shih‐Chang Hung,Chuan‐Kai Lee
• Published date: 01 March 2014
• Date: 01 March 2014

INSTITUTIONAL ENTREPRENEURSHIP IN THE

INFORMAL ECONOMY: CHINA’S SHAN-ZHAI

MOBILE PHONES

CHUAN-KAI LEE* and SHIH-CHANG HUNG

Institute of Technology Management, National Tsing Hua University, Taiwan

During the last decade, Chinese shan-zhai mobile phones have steadily and deliberately

evolved from an informal economy to a formal one. Wedraw on institutional entrepreneurship

to study this evolution, focusing in particular on how informal Chinese entrepreneurs pursued

change and the transition to a formal economy. We emphasize three strategies—framing,

aggregating, and bridging—Chinese entrepreneurs employed to mobilize support, garner

resources, and increase their amount and level of legitimacy. We also discuss implications

for research on informal economies and institutional entrepreneurship. Copyright © 2014

Strategic Management Society.

INTRODUCTION

Informal economies are pervasive, creative, and sig-

nificant to national development and entrepreneur-

ship. According to Godfrey (2011) and Webb et al.

(2013, among others, informal economic activity

accounts for as much as 10 to 20 percent of annual

gross domestic product in developed countries and

as much as 50 to 60 percent in developing countries.

Informal economies are often integrally bound up

with, and complementary to, the formal economy,

and they provide rich entrepreneurial opportunities

to new ventures. Despite a growing body of empiri-

cal studies and cases about informal economies

globally, little research exists on the informal

economy in China, a nation where a strong and

bureaucratized state, coupled with a large and

rapidly growing formal economy, has encouraged

legions of informal entrepreneurs to seek opportuni-

ties outside of state-sanctioned markets. To address

that gap in the literature, this study explores how

China’s shan-zhai1mobile phone sector developed

during the period 1998 to 2008. Success among

shan-zhai phones ultimately popularized ‘shan-zhai’

methods of production for counterfeit, imitated, low-

cost, and do-it-yourself products in China and to ‘the

shan-zhai phenomena’ in general (Barboza, 2009;

Epstein, 2009).

Originally distributed within the stolen goods and

parallel imports markets, the shan-zhai mobile

phone sector began as a typical informal economy:

illegal and yet accepted by certain social groups

(Webb et al., 2009), especially those operating at the

bottom (or base) of the economic pyramid (BoP)

(London and Hart, 2011; Prahalad, 2005). Over the

last decade, this sector has evolved from being

scorned for its opportunism and inferiority to being

lauded as examples of entrepreneurship and innova-

tion. This happened in large part because shan-zhai

entrepreneurs actively contested the state’s ‘national

Keywords: informal economy; institutional entrepreneurship;

legitimacy-building strategies; Chinese mobile phones; case

study

*Correspondence to: Chuan-Kai Lee, Institute of Technology

Management, National Tsing Hua University, 101, Section 2,

Kuang-Fu Road, Hsinchu 30013, Taiwan. E-mail: cklee@

mx.nthu.edu.tw

1Shan-zhai—literally mountain (shan) fortress (zhai)—refers

to the gathering of grassroots antigovernment rebels into for-

tresses located in remote, mountainous areas. The name shan-

zhai in Chinese mobile phones has a double meaning: the first

denotes that illegal phones originated from rebel strongholds,

namely the informal economy; the second implies that rebels

gathered in numbers large enough to challenge the status quo.

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 8: 16–36 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1174

Copyright © 2014 Strategic Management Society

champion’ policy that restricted competition in the

mobile phone sector.2In October 2007, after years

of suppression, negotiation, and bargaining, the

Chinese state finally reached a compromise by aban-

doning its license control over mobile phones. This

regulatory change enhanced not only the legitimacy

of shan-zhai economic activities, but also their legal

standing. The phenomenon is striking. The Wall

Street Journal heralded shan-zhai as ‘the sincerest

form of rebellion in China’ (Canaves and Ye, 2009),

one that has spread with such vigor that, in the words

of a New Yorker columnist, ‘all of China is a knock-

off’ (Osnos, 2009). This remarkable evolution

prompted us to consider as our primary research

question how China’s shan-zhai mobile phone sector

developed, grew, and interacted with the state.

To address this question, we draw on the concept

of institutional entrepreneurship (Battilana, Leca,

and Boxenbaum, 2009; Hardy and Maguire, 2008),

which emphasizes the importance of skillful and

effortful agency by institutional entrepreneurs who

leverage resources for achieving institutional change

and innovation. Institutional entrepreneurship’s

account of embedded agency and change process

resonates with the challenges faced by informal

entrepreneurs aspiring to reach beyond their institu-

tional boundaries and act in concert with the formal

institutions of the state. We consider Chinese shan-

zhai entrepreneurs to be institutional entrepreneurs

who proactively sought to enhance their legitimacy

to generate momentum for regulatory change. As

argued by Deephouse and Suchman (2008: 62),

‘legitimacy can appear continuous . . . (and) vary in

its certainty and security’ (emphasis in original). As

informal entrepreneurs become more firmly legiti-

mate and become legitimate to more audiences, a

state can eventually agree to confer legality or ‘regu-

latory legitimacy’ (Deephouse and Suchman, 2008;

Scott, 2001). From this point, the transition from

informal economy to formal economy, although not

yet complete, progresses rapidly enough so as to

seem inevitable.

Our analysis of the Chinese shan-zhai sector

uses qualitative procedures and emphasizes the

strategizing activities of institutional entrepreneur-

ship (Lawrence and Suddaby, 2006; Vaara and

Whittington, 2012). We examine in detail what

nascent Chinese entrepreneurs, manufacturers, and

vendors actually said and did during their interac-

tions with government policy, their mobilization of

collective actions, and their exploitation of outside

resources and technologies. Our examination em-

phasizes three kinds of strategic action—framing,

aggregating, and bridging—and discusses how

Chinese vendors used these strategies to bring about

innovation and institutional change. Each of the

strategies operates on a different logic, yet each

allows institutional entrepreneurs to pursue change

and innovation effectively. Framing offers explana-

tions and justifications that appeal to the public;

aggregating offers collective actions to draw

support; and bridging offers alternative rules and

practices with potentially novel applications.

The article proceeds as follows: first, we discuss

the nature of informal economies and briefly review

the literature on institutional entrepreneurship,

focusing in particular on the range of strategies avail-

able to informal entrepreneurs intent on decriminal-

izing or legalizing their activities. Second, we

explain our methodology and introduce our case.

Third, we outline the strategies of framing, aggregat-

ing, and bridging by which Chinese shan-zhai

mobile phone entrepreneurs managed their transition

to the formal economy. We conclude by discussing

the implications of our study for research on infor-

mal economies and institutional entrepreneurship.

THEORETICAL ORIENTATION

Informal economy

The informal economy refers to ‘the set of illegal yet

legitimate (to some large groups) activities through

which actors recognize and exploit opportunities’

(Webb et al., 2009: 492). Activities are considered

legal if they are defined and governed by formal

institutions, including laws and regulations. Informal

economy activities are illegal because they take

place outside of formal institutions, but they can

be legitimate to the extent that their products,

methods, and practices are accepted by certain social

groups, including, for example, immigrants, low-

income people, ethnic neighborhoods, and religious

2The most important state regulation was the ordinance

‘Certain Opinions Concerning Accelerating the Development

of the Mobile Telecommunication Industry’(also called Docu-

ment No. 5), released by the State Council on January 1, 1999.

This ordinance aimed to ‘put mobile phone production in the

state-guided plan’by controlling the licenses for production, the

import of equipment, components, and parts, and the export of

final products. The key to shan-zhai’s contestation was to

remove this regulation (and its associated policies) and thereby

create a level playing field in the mobile phone sector.

China’s Shan-Zhai Mobile Phones 17

Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J.,8: 16–36 (2014)

DOI: 10.1002/sej