I. Introduction

Since 1978, China has undergone a series of economic and social reforms that transformed China from a backward self-isolated socialist country into one of the world’s most dynamic emerging markets.  However, it was apparent to domestic and international observers as early as the late 1980s that rapid developments had its side effects.  Corruption[1] was rampant, and the underdeveloped legal system could no longer accommodate the growing economy.  These negative consequences of development seriously damaged China’s prospect for future growth and its reputation as a destination for foreign investment[2].  Facing local corrupt business culture and the lack of legal protection, multinational corporations (MNCs) voiced their concerns and grievances through domestic and international channels.  China’s accession into the World Trade Organization (WTO) also demanded changes within its legal infrastructure.  Throughout the 1990s, Chinese legislative bodies gradually introduced rules and regulations that decreased bureaucratic inefficiency, increased transparency, and strengthened legal traditions.

In my effort to explain the causes of China’s legal reforms in the 1990s that reduced corruption, I analyze the roles of external actors—MNCs and the WTO.  Due to globalization, MNCs and the WTO increased their influence in domestic issues in developing countries such as China.  The surge in foreign investments and the global economic integration produced impetus for legal institution reform in China.  The convergence of interests and expectation among the Chinese government, MNCs, and the WTO generated legal and regulatory changes that decreased the opportunity for corrupt practices such as bribery[3] and piracy.  In order to protect their investments, MNCs and foreign investors lobbied for Western styled legislations and practices, legislation-focused administrative system, and robust law enforcement.  They proliferated their home country norms[4] and expectations through business contact with local partners and government.  Also, they directly lobbied the host country government through trade consuls and embassies.  Lastly, they utilized the power of home country governments to urge legal reforms.  China’s decision to cooperate with MNCs was based on mutual interests.  Prioritizing economic growth, China deferred to investor pressure creating a more desirable investment environment.  At the same time, the WTO, as a multilateral institution, advocated market liberalization, promoted transparency and governance, and bolstered legal protection of property rights among its member nations.  In the lengthy accession documents, the WTO enumerated a list of legal institutional amendments needed to take place in China.  Perceiving the accession into the WTO as encouraging future foreign investments and further integrating into the world market, China became increasingly responsive to the WTO demands and instituted various domestic legal and law enforcement reforms. 

How did the strengthening of legal institution and law enforcement translate into less corruption?  At the root of bribery and corruption were the underdevelopment of law and the secondary role of law.  “Under the [Chinese Communist] Party’s (CCPs) absolute authority, the independence of the judiciary has been compromised; judges’ roles blurred, judicial corruption widespread, local cronyism flourished” and bureaucratic authorities unrestrained (Li, Yahong).  Combined with rapid economic development, the underdevelopment of the legal system contributed to the rampant corrupt practices. The strengthening of the legal institution, with market liberalizing reforms, restricted bureaucratic power, and forbade corruption and bribery from taking place.

However, global integration and foreign investment were not the only causes of legal institutional reforms in China.  One cannot discount the importance of domestic politics as motivations for regulatory changes.  One explanation suggested that economy overheating, inflation, and the income gap between coastal urban and inland rural populations at the end of 1980s generated social grievances from economically disenfranchised population.  “High profile cases…as well as numerous local cases [of corrupt practices] seemed to prove the claim that the reforms were only good for causing greater crime and corruption” (Kluver 73).  These disadvantaged protested vehemently against the wealth and privileges of a small number of economic elites and entrepreneurs who had access to bureaucratic power.  Facing unintended negative consequences of economic “opening” in the 1980s, the political conservative elders within the CCP, whose “political conservatism reflected in part the historically low status of merchants in Confucian culture, a view accentuated by Marxist-Leninist disdain for consumerism,” questioned the validity of economic reforms (Pearson 8).  The grievances from the economically disadvantaged and the doubts from within the CCP put significant strain on the legitimacy of the government.  To reinstate its legitimacy, the government attacked corruption and bribery by initiating numerous anti-corruption campaigns and legal restructuring in early 1990s (Gong 154).  As a part of the campaign, the government instituted tougher regulations against corruption and bribery to pacify popular grievances.

Another internal explanation focuses on the ideological root of the legal reforms.  The introduction of private entrepreneurship and private enterprises created a legitimacy crisis for the communist government.  Income inequality, retardation of rural development, and the schism between Marxist-Leninism ideology and market economy generated identity issues for the CCP.  Further exacerbating the problem, the government officials often abused their authority for personal enrichment.  “Serve the people”, the ideal Maoist model for communist officialdom, eroded away.  Power and privilege seemed to concentrate in the hands of well-connected families of the upper level officials.  The children of bureaucratic elites, having access to governmental power and resources, took advantage of their privileges for material benefits.  There was an increasing trend towards political/economic oligarchy (Kluver 73).  Egalitarianism, the pillar of socialism, crumpled.  This legitimacy crisis had reached its climax on Tiananmen Square in 1989.  Thousands of laborers and farmers came into Beijing demonstrating against bureaucratic corruption and inequality.  Even though corruption was not the major cause of the demonstrating in 1989, the communist party nevertheless saw corruption as a threat to its political legitimacy (Kluver 134-139).  Attempting to save its claim to power and its ruling party status, the CCP took a harsh stand towards bribery and corruption, and simultaneously re-instituted propaganda for egalitarianism and Maoist ideology.

The two explanations above suggested the anti-corruption measures would take the forms of temporary, shallow, and reactive political campaigns revitalizing the authority and legitimacy of the CCP.  However, the fact that the anti-corruption reforms in the 1990s were profound institutional and legislative amendments seems to cast doubts on the previous two claims.  In addition, the timing of these legal reforms, coinciding with the surge of foreign investments and the accession preparation into the WTO, suggested a causal link between external factors and legal changes.  The relationship between China’s dependence on global capitals and legal institution reforms that combated corrupt practices warrants further study and research.  For my research, I used legal reviews and journals, scholarly publications on the WTO, MNCs and institutional developments, published research on legal institutions in China, and ethics and transparency commentaries by international observers and businessmen in China.  This analysis is divided into several sections.  In the following section, I discuss the history of Chinese economic “opening” and the role of foreign investment during the rapid economic development of the 1980s.  By elaborating on economic development and corruption in the 1980s, I intend to provide historical perspective on legal reforms.  In Section III, I define the globalization and interdependency, discuss the relevance of Neoliberal theoretical framework, and lay down the foundation for understanding the relationship among MNCs and the WTO, and China’s legal institution.  Section IV and V are devoted to analyzing how MNCs and WTO supported legal institutional developments that increased transparency, restricted bureaucratic power, and strengthened monitoring and enforcement mechanisms.  These ultimately reduced the opportunities for corruption.  In addition, I utilize the theoretical framework developed in Section III to explain how globalization and interdependency produced linkage of issues and convergence of interests, which caused China to be highly susceptible to Western styled legal reforms.  Finally, the concluding remarks establish that external actors, such as MNCs and the WTO, played an integral role in combating corruption.

II. China’s Economic Development and its “Side effects”: A Historical Perspective

Before examining the relationship between external actors and legal institutional reforms in the 1990s, one needs to understand the history of foreign investment and its relationship with market development in the preceding decades.  Before the 1970s, China’s economy was closed to foreigners.  With the Chinese economy in turmoil, Mao Zedong’s successor Deng Xiaoping implemented reforms in 1978 utilizing foreign capital as an engine for economic and industrial development.  These reforms instituted five Special Economic Zones (SEZs) in designated Southern coastal areas in the 1980s.  Private enterprises, including foreign invested ones, and state-owned enterprises (SOE) co-existed in these zones (Shen 99).  The most important attraction for foreign investment was the incentives provided by the government.  Large foreign investment ventures engaging in advanced technology or science-related activities in the state-specified priority industries enjoyed 15% tax rate, much lower than the 30% levied on other firms.  In addition to tax incentive, the government also supplied short-term loans, favorable exchange rates, and certain duty exemptions on imports (Shen 101-103).  Throughout the 1980s, market economy and government incentives extended from costal areas westward to inland areas.  The establishment of Open Cities (OCs) spread market economy into larger areas of China. 

With such incentives in place, the growth of foreign investment was astonishing during the 1980s.  In 1984, total foreign investment in China was $2.7 billion; only 12.5% of which was foreign direct investment (FDI)[5].  By 1989, the annual foreign investment was $10.1 billion, within which 33.7% was FDI (Ma 122).  Japan and the US, two of the strongest economies in the world at the time, provided 12.9% and 12.1% respectively on average between the years 1984 to 1989 (Grub and Lin 82).  Throughout the 1980s, China continued to provide investment opportunities for foreign investors, especially MNCs from developed countries that controlled advanced technology and management techniques.  The portion of investment from MNCs increased steadily during the 1980s and 1990s.  By the end of the 1990s, it was estimated that 80 of the 100 largest MNCs invested in China (Luo, Yadong 20). 

However, this did not mean that market economy was achieved in China’s coastal cities.  Foreign investment remained one of the most highly regulated sector.  For example, due to the need for advanced technology and long-term capital, tax incentives were given to attract state-of-the-art technology only.  “Administrative authorities of different levels have enacted or issued more than three hundred laws decrees, regulations, and guidelines concerning foreign economic relations” (Shen 103).  These regulations were tentative and often contradictory.  They created a regulatory labyrinth that was so difficult to navigate many investors avoided China altogether.  Because of bureaucratic interference, it was not unusual for a foreign joint venture in Shanghai to get necessary approvals from 33 different local and provincial governmental departments (Woetzel 118). 

In spite of strict government control, the inflow of foreign investment instigated an unprecedented economic boom.  After two decades of economic reforms, China’s gross domestic product (GDP) in 1999 was 6.73 times its GDP in 1978, and ranked 7^th in the world[6].  The fast GDP growth rate was more astonishing.   The official growth rate in 1989 was 9.9%, faster than any major developed country in the world (The National Bureau of Statistics of China).  MNCs have been playing a prominent role in China’s rapid economic development, promoting export, facilitating technological progress, and improving management and marketing techniques (Li and Li 204).  Since 1978, economic and social reforms transformed China from a self-isolating socialist country into one of the world’s largest markets. 

It was apparent that rapid economic development had its side effects.  The contradiction between socialist ideology and capitalist market created social problems, such as ideological confusion. Foreign capitalists were no longer publicized as the “capitalist infiltrators”.  Government rhetoric even encouraged foreign investment and private business ventures by praising their efforts on economic development.  The infusion of “foreign capitalism” into China eroded the old “communist morals.”  Private entrepreneurs were no longer looked down upon.  Money, material wealth, and Western style of living captured the fascination of increasingly large portion of society.  The CCP’s altruistic rhetoric of “serving the people” could not regulate the behavior of party cadres any more. The communist ethics condemning material wealth and Western life style lost its credibility and appeal.  Even thought corruption existed in the CCP before 1978, the level was kept low by economic underdevelopment, centralized party control, and ideological propaganda.  With the increase of societal wealth and the erosion of ideology, many cadres, no longer satisfied by their low salary, exchanged bureaucratic power for personal gain. 

Combining with ideological confusion, the lack of legal control provided ample opportunities for bureaucratic corruption.  Because of socialist legacy in China, the flawed and inefficient legal system was unable to restrain bureaucratic behaviors.  The government often violated legal contracts and seized private properties in order to take control of the “means of production”.  Due to these constant violations of legal principles, an independent legal system could not develop.  The concentration of power within the bureaucracy and the CCP forbade the creation of proper checks-and-balances provided by an independent legal system.  The lack of legal tradition under decades of socialism retarded the legal development, but the reintroduction of capitalist market needed an infrastructure that safeguards valid contracts and promotes legal proceeding as the preferred method of conflict resolution.  An independent legal system that could monitor the action of both the bureaucracy and the private entrepreneurs became increasingly important.  As the economy grew in the 1980s, “the supervisory and legal system, which was already flawed, can barely catch up with the pace of economic growth and social changes.  The lack of independent judiciary and inadequate monitoring mechanisms has allowed corruption to spread” (Zhang 137).    In some cases, corruption became how the bureaucratic machine worked in the contradictory socialist/market environment.  In these cases, the inefficiencies of the mammoth socialist bureaucratic machine were solved in the bribery market, where bribes became the price of governmental services. 

Furthermore, market reforms and decentralization exacerbated the corruption problem.  Increasing numbers of decisions concerning tax collection, economic policies, and industrial development were made locally.  The redistribution of power from high-level central party office to the local level eroded the central government’s control on cadre behaviors.  Decentralization generated more opportunities and authority for local officials to “rent-seek” by granting favors, contracts, and preferential treatments to businesses in exchange for personal benefits.  The market reforms in the 1980s created an immature market.  Within this immature market was a loose network of party-state functionaries engaged in diverse businesses.  “Whoever wants to enter this market must be able to first enter this network.  Party officials often emerge as patrons, while others attempt to cultivate relations with these officials in order to pursue their business interests” (Zhang 134).  With the opportunities and the means, corruption was rampant according to studies conducted in the late 1980s.  According to People’s Daily, China’s most authoritative government newspaper, 250,000 or 360,000 firms founded in 1987 were engaged in illicit speculation and corrupt practices.  Among all corruption practices, bribery was perceived as the most common.  Of all the articles between July 1988 and June 1990 reporting major corruption practices in the People’s Daily, 47% of them were related to bribery (Gong 128).  The prevalence of corruption, especially bribery, created impetus for legal reforms in the beginning of the 1990s. 

III. Globalization and Interdependence from a Neoliberal Perspective

            In the 1990s, economic growth and further development in China demonstrated the deepening of globalization.  Foreign investors brought a large amount of capital to invest in China.  At the same time, the government implemented market-oriented economic and legal reforms that had a significant impact on corrupt practices and bribery in China.  Many academics suggested political theories that explain the relationship between foreign investment and reforms.  This paper focuses on the Neoliberal Theory of Interdependence to establish that global regimes and actors play a vital role in domestic legal and institutional changes. 

            In an era of globalization[7], states increase their interconnectedness through increasing contacts, economic activities, and communications.  In such a world, states affect each other and depend on each other to accomplish their goals and aspirations.  “Interdependence in world politics refers to situations characterized by reciprocal effects among countries or among actors in different countries.  These effects often result from international transactions—flows of money goods, people, and messages across international boundaries” (Keohane and Nye 7).  Globalization creates a social space where interdependence is intensified: through transnational networks international actors and political institutions interplay and collide in the process of advancing their agendas (Zurn 244).   This “interconnectedness” in globalization also creates complex problems that unilateral measures are insufficient in solving.  In order to avoid failure and counter-reaction, “states…become increasingly willing to sacrifice some of their freedom of action in order to constrain, and to make more predictable, others’ actions toward themselves” (Keohane and Nye 260).  Therefore, international institutions or regimes, “networks of rules, norms, and procedures that regularize behavior and control its effects,” are born to govern complex multilateral relationships (Keohane and Nye 17).  According to these theorists, within international institutions or regimes, the actors’ expectations converge in a given issue-area:

These international regimes alter actors’ behaviors through several feedback mechanisms.  First, because regimes create costs and opportunities that are otherwise not there, they lead actors to re-calculate their methods even as their goals stay constant.  In other words, regimes can alter actors’ calculations as to how to maximize their pre-determined interests.  Second, regimes tend to increase the flows of information, understanding and interdependence among actors.  In this process, actors may re-conceptualize their interest altogether.  Third, once a regime is established, it gains a life of its own.  As such an international regime can become a source of power to which actors can appeal (Wang Hongying 5).   

The power of the UN, the extension of WTO memberships, and the increase of political leverage of the IMF provide evidence for the increase in the prominence of formal international regimes.       

Where regimes are concerned, actors and their expectations are important.  Who are the actors whose expectations are converged by international regimes?  Domestic interest groups, NGOs such as MNCs, economic organizations such as the WTO, and states themselves are all participants in this complex world system.  MNCs and the WTO have gained prominence in international regimes.  “As the scope of governments’ domestic activities has broadened, and as corporations, banks, and trade unions have made decisions that transcend national boundaries, the domestic policies of different countries impinge on one another more and more…blurring the line between domestic and foreign policy and increasing the number of issues relevant to foreign policies” (Keohane and Nye 22). 

One group of actors, MNCs, utilizes numerous means to advance their interests. They invest large amounts of capital and advanced technology as incentives to promote their agendas.  These MNCs and investors are capable of supplying the stimulus necessary to develop the economies of underdeveloped countries.  MNCs exploit the economic goals of host countries and extract favorable concessions from them.  In Malaysia, the government provided foreign investors with tax holidays and tariff exemptions as an effort to attract foreign investment and respond to investors’ concerns about investment risk.  In some instances, MNCs directly lobby governments to promote “trade and investment policies that will enhance the profitability of their business activities” (Kegley and Wittkopf 233).  The US automotive industry is a perfect example of MNC lobbying.  The industry pressured the US government to retaliate against Japan, who protected its automotive industry.  The result was a memorandum of understanding between Japan and the US removing trade barriers bilaterally.  “Multinationals can act collectively to exercise considerable influence over government choices” (Stopford and Strange 216).  In more extreme circumstances, MNCs even prevent the election of certain political leaders and plot for the overthrow of heads of governments who are hostile to their interests.  For example, in the 1970s, International Telephone and Telegraph (ITT) sought to prevent the election of a Marxist President in Chile in order to protect its investment in that country. 

The political clout of MNCs often translates into institutional legal changes.  Prior to the 1990s, MNCs pointed out to European governments the cost of having a non-unified Europe (Stopford and Strange 216).  These MNCs, backed by the home governments, also exert power in host countries (Todaro).  Through representative and legislative bodies in home and host countries, they played a central role in shaping bilateral tax treaties, environmental standards, and a wide variety of other issues by facilitating negotiations and agreements.  These bilateral treaties and regulations eventually became the legal basis for a unified European Union (EU).  In this way, MNCs utilized their political clout in both home and host countries to bring about agreements and legal changes.  Their self-interested goals and agendas make states more vulnerable to external pressure. 

            Another group of principal actors in international regimes is the sovereign states.  The major objectives of the states are to strengthen their countries politically, economically, and militarily.  At the same time, they also wish to maintain as much political sovereignty as possible.   The force of globalization and economic interdependence makes maintaining total political autonomy problematic.  Empirically, “economic integration will increase demands for the harmonization of national policies…in order to overcome the disadvantage of political segmentation and maximize the gain from economic exchange” (Zurn 240).  Such economic gain does have its costs.  It can only be enjoyed at the expense of giving up a certain amount of national independence and autonomy (Cooper 4).  These sovereign states are given three potential alternatives when facing the pressure of globalization (Cooper 262).  One option is to tenaciously resist the force of globalization and economic integration.  Another option is to accommodate economic integration while trying to preserve as much as political autonomy as possible.  The last option is to passively accept the integration and the consequential loss of national autonomy. 

A country’s reaction to globalization and interdependence depend on the structural cost and potential benefit to the country.  The decision process revolves around the cost/benefit analysis.  “Interdependent relationships will always involve costs, since interdependence restricts autonomous; but it is impossible to specify a priori whether the benefits of a relationship will exceed the costs.  This will depend on the values of the actors as well as on the nature of the relationship” (Keohane and Nye 8).  This implies every country that decides to enter the interdependent global system has greater potential benefit than the potential costs.  National governments take external actors’ interests into consideration if and only if economic gains are of priority or the costs of cooperating are small.  As Susan Strange observed, “the declining authority of state is reflected in a growing diffusion of authority to other institutions and associations” (Strange 4).  The existence of MNCs and international regimes, and the integration of capital markets create multiple channels, where external pressures can affect domestic politics of a sovereign nation.  In an increasingly interdependent global system, governments have to take into consideration the effects a given strategy has on external actors.  Thus, the existence of multiple channel-contacts limits and constrains government policies.  Governments now must calculate the aggregate outcome of interdependent strategies and their likely implications in politicization and agenda control (Keohane and Nye 29). 

The convergence of interests often begins in apolitical areas where the cost of losing sovereignty is small.  It is common to see the increase in interdependence start in economic areas where cooperating with external actors can bring potential benefits without directly affecting national security and the distribution of political power.  Because “international collaboration depend on the congruence of interest as much as on changes in consensual knowledge” (Haas 198), communication of interests and goals becomes increasingly important.  MNCs and international regimes are efficient in communicating goals and promote understanding between countries.  The multilateral nature of these institutions and actors facilitate the flow of knowledge and the sharing of information.  MNCs and international regimes in essence create stable communication channels among states. 

With these communication channels in place, it is difficult to restrict the effects of interdependence to only a country’s economy.  Oftentimes, external actors practice “tactical linkage” and link issues by introducing into the agenda of multilateral negotiations items that are not closely connected to further their own agendas (Haas 198).  “The credibility of a tactical linkage depends on the linkee’s perception of the linker’s ability and willingness to withhold collaboration if the linkage is refused” (Haas 199).  With the cost of not collaborating being higher than the cost of collaborating, the linkee is willing to negotiate a “package-deal” and allow external actors to influence other domestic issue areas.  In issue areas where actors collaborate, the interests of actors converge over time.  With multi-channel communications, “tactical linkage,” and “spillover of issues”, a great array of issues is linked and “politicized” internationally.  In this way, convergence spreads from economic issues to other domestic issues. 

Interdependence and convergence of economic interests spill over into issue areas such as legal and domestic issues, which range from accounting standards and transparency to banking regulations and legal institutions that are “formerly regarded as the prerogative of national governments” (Keohane and Nye 246).  With multi-issue collaboration and convergence, international norms and rules, both economic and political, often are codified into domestic laws and institutions.  As quoted in Cortell and Davis, much of US trade rules have been developed under the evolving tenets of GATT/WTO rules (Cortell and Davis 453).  Strang and Chang demonstrated that Sweden’s Unemployment Insurance Act 1973 followed the tenets of International Labor Office’s Social Securities Convention 1952 (Strang and Chang 242-243).  Article XXIV of the German Constitution on collective security of the European community is another example of international rules and norms being codified into countries’ domestic laws and legal institutions (Cortell and Davis 454).  The numerous communication channels and the “interconnectedness” encourage “issue linkage,” which impact domestic issue areas.  Collaboration in domestic areas eventually leads to the incorporation and embodiment of regime norms and rules into domestic legal institution.  The international actors and “spillover of issues” sponsor legal and institutional convergence in host countries over time.  

IV.  MNCs: An Influential Factor in China’s Legal Reform

In the 1990s, foreign firms and investors continued to increase their commitment to the Chinese market.  Perceiving China as one of the most important strategic markets in the world, they rushed into China to pursue profits and high returns on investments.  On the other hand, the Chinese government perceived foreign investment as crucial to economic growth and global integration of China.  Eager to attract foreign capital, it became increasingly susceptible to foreign pressure.  During this period, China imported foreign norms, improved a progressively legal based administration, and developed more robust law enforcement. 

To encourage legal development following the Western model, MNCs and foreign investors lobbied the Chinese government through quasi-government organizations, trade councils in China, and their home countries’ governments to impose the threat of economic sanctions.  The Chinese government, perceiving economic development as a priority, became susceptible to foreign lobbies and pressures.  It relinquished part of its total autonomy in domestic policy to pursue economic gains.  As a result, China responded to MNCs’ demands by adopting legal reforms to cut down “Red Tapes” and decrease administrative opaqueness.  However, many MNCs realized that laws without adequate enforcement were useless.  New legislation would not be respected or enforced by the Chinese if they only benefited foreign MNCs.  Taking a long-term view on strengthening Chinese legal culture, MNCs have been slowly changing the expectations of their domestic partners and competitors by encouraging the growth of domestic industry.  Through the above measures, MNCs converged Chinese and foreign interests and strengthened legal infrastructure and law enforcement.  In turn, the strengthening of legal infrastructure decreased the opportunity for corruption.

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