Shaomin Li 2008 NDSU 1

1976 in China…

Shaomin Li 2008 NDSU 2

Funeral service for Mao

Shaomin Li 2008 NDSU 3

My researchInternational political economy

The transition of communist societiesGovernance environment across countriesCorruption and trust

International businessFDIFirm performanceIT and IB

Shaomin Li 2008 NDSU 4

Shaomin Li 2008 NDSU 5

How can communism evolve into democracy and free market?

I

Mature democracy

Infant democracy

Non-democracy

Planned economy Free market

IV

II

III

Russia

ChinaN. Korea

Shaomin Li 2008 NDSU 6

+ =?

China’s Transition

Rampant violation of property rightRapid economic growth

A counterfeit of “Starbucks”

7

Rule-based vs. relation-based governance environment

How are business activities governed in different societies?

InformationThird-party verifiable vs. private information

EnforcementPublic enforcement vs. private enforcement.

A dichotomy between two modes of economic governance:

Relation-based Rule-based

8

Relation-based Governance Rule-based Governance

Laws tend to be opaque and unfair, enforcement particularistic

Laws tend to be transparent, fair, and enforcement universal

Relying on private and local information

Relying on public information

Implicit and non-verifiable agreements

Explicit and third-party verifiable agreements

Person-specific and non-transferable contracts

Public and transferable contracts

High entry and exit barriers Low entry and exit barriers

Requiring minimum social order Requiring well-developed legal infrastructure

Low fixed costs to set up the system High fixed costs to set up the system

High and increasing marginal costs to maintain

Low and decreasing marginal costs to maintain

Effective in small and emerging economies

Effective in large and advanced economies

9

Average transaction costs

Extent of marketTurning point

Relation-based

Rule-based

Relation-based governance will eventually destroy itself by facilitating market development

10

Governance Environment and FDI

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0.000 2.000 4.000 6.000 8.000

Governance Environment Index

FD

I/F

I (%

)

Rule-basedRelation-based

Shaomin Li 2008 NDSU 11

http://www.schev.edu/AdminFaculty/OFA/li.asp

In 2008, Virginia Governor Tim Kaine awarded me the “Outstanding Faculty Award” for “superior accomplishments in teaching, research, and public service.”