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Pingying Zhang: Assistant professor in the Department of Management, University of North Florida, United States. She obtained her Ph.D. in corporate governance from BI Norwegian School of Management, Oslo, Norway. Her research interests include corporate governance, entrepreneurship and international joint ventures.

Jinsong Gao: Researcher in the area of entrepreneurship, innovation, strategy, and growth. Mr. Gao received his engineering education from Fudan University in Shanghai, China and MBA from BI Norwegian School of Management, Oslo, Norway. Mr. Gao is also an entrepreneur with several successful startups in several industries.

Exploring the Fit between Growth Strategy and Governance Structure in Chinese Entrepreneurial Firms



Corporate governance is an important aspect of a small firm's growth. We examine how the ownership structure and the board structure affect fast-growing Chinese entrepreneurial firms. In analyzing two paired firms cases between Chinese entrepreneurial and foreign-invested firms, we find that a disproportionate ownership structure in favor of the founder-manager fits hypercompetitive strategies of Chinese entrepreneurial firms in order to achieve rapid growth. We also find that these firms are likely to practice CEO duality to facilitate the chosen strategies.

The two authors contributed equally to the article.


Corporate governance has gradually become an important issue in understanding small and medium-sized enterprises (Gabrielsson & Huse, 2002; George, Wiklund & Zahra, 2005; Huse, 2000; Machold, Huse, Minichilli & Nordqvist, 2011). In this paper, we continue this line of research in a specific context: Chinese privately-owned small firms 1, also termed Chinese entrepreneurial firms as they are often privately owned. Research indicates that analyzing these entrepreneurial firms' strategies has become an important item on the research agenda, helping us to understand the integration of Chinese business with global economy. Our research question is: how does governance structure affect Chinese entrepreneurial firms' growth strategy?

We take the approach from structure to strategy as researchers have shown that governance structure can greatly affect business strategies (Daily, Dalton & Rajagopalan, 2003). For example, board leadership structure affects board strategy involvement in small firms (Machold, et al., 2011), and governance structure, such as ownership, influences debt financing strategy in privately-owned businesses in the U.S. (Schulze, Lubatkin & Kino, 2003), the CEO compensation strategy in family firms (Gomez-Mejia, Larraza-Kintana & Makri, 2003), the CEO selection strategy (Zajac, 1990), and the corporate R&D investment strategy (Baysinger, Kosnik, & Turk, 1991), which varies from American to Japanese culture (Lee & O'Neill, 2003). Most studies of ownership in the Chinese context still remain on a general level, which shows that the classifications of firm ownership-state-owned enterprises (SOE), privately-owned firms, and foreign-invested firms-are linked to distinctive types of business strategies (Peng, 2000; Peng, Tan & Tong, 2004; Tan, 2002).

«Strategic entrepreneurship is entrepreneurial action with a strategic orientation» (Hitt, Ireland, Camp, & Sexton, 2001: 480). The current literature, however, tells us little about how governance structure and selected strategies in Chinese entrepreneurial firms fit together to promote growth momentum resulting in a leading position in the market. We aim to bridge this knowledge gap by exploring the fit between growth strategy and governance structure of Chinese entrepreneurial firms (see Figure 1).

Figure 1 Exploring the Fit between Growth Strategy and Ownership Structure


The contributions we make here are twofold. First, we provide literature with some different observations of governance structure and growth behavior of entrepreneurial firms, where ownership structure and board structure facilitate hypercompetitive strategies (D'Aveni, 1994) to gain market growth momentum. In doing so, the study enriches the Prospector type of strategy with new features (Miles & Snow, 1978). Second, the study results help foreign companies to partially foresee competitive behaviors of their Chinese counterparts, assist venture capitalists in deciding whether to invest in entrepreneurial firms, and aid entrepreneurs in designing equity distribution and competitive strategy.

Two-paired firm cases and a statistical illumination were used in the study. The cases include Chinese entrepreneurial firms and their counterparts, represented by foreign-invested firms. They are Alibaba vs. eBay in the customer to customer (C2C) market, and Baidu vs. Google in the search engine (SE) industry. We collected all Chinese entrepreneurial firms in TMT that were listed on NASDAQ and the Hong Kong Stock Exchange by March 2007 for the statistical illumination. 2

In the following, we first present theoretical background concerning growth strategy and ownership structure. Then, we present the statistical illumination. Finally, we conclude the article with a discussion and suggestions for future research.

Theoretical backgrounds and hypotheses

Chinese entrepreneurial firms have played a significant practical role in economic reform in China. The contribution of the private sector to the GDP soared from almost nothing in 1980 to 60% in 2005, and is expected to reach 75% by 2010. The number of entrepreneurial firms has dramatically increased from 10,000 in 1990 to 4.3 million in 2005, with an average annual growth rate of 20% over those 15 years. Entrepreneurial activities of small firms are considered to be one crucial factor in China's rapid economic growth (Kikeri, Nellis, & Shirley, 1992). In particular, entrepreneurial firms in TMT have shown outstanding growth and have thus attracted considerable attention from venture capitalists (VC) who have gained legal status in China since 1998. For example, entrepreneurial firms in TMT have received, on average, 70% of all VCs' investments in the last ten years. Moreover, the intensified competition has stimulated the capability development of Chinese entrepreneurial firms, so that they are able to compete with the world's leading brands (Tsui et al., 2006). Therefore, we choose to examine Chinese entrepreneurial firms in TMT.

Features of realized growth strategy of Chinese entrepreneurial firms

Business strategy deals with how firms gain competitive advantages in a selected industry (Quinn, Mintzberg, and Manes, 1988), and it is characterized as a realized strategy based on observed strategic patterns, either intended or emergent (Mintzberg, Ahlstrand & Lampel, 1998: 9-15). We specifically deal with the growth strategy of Chinese entrepreneurial firms from their start to their IPO. The choice of growth strategy helps to improve the operation of a startup in terms of revenue, the size of the firm and the market share (Robbins & DeCenzo, 2004). It raises the operational standard of the firm (Glueck, 1976). The outcome of such a strategy is a dominant market position (Buzzell & Gale, 1987; Kuhn, 1982). We measure growth in terms of market share and IPO in overseas stock exchange markets. IPO status reflects a substantially improved operation of a startup, and IPO in overseas stock exchange markets ensures the quality of the growth, given the immature financial market in mainland China.

Most recent empirical studies have provided us with a general picture of the strategy characteristics of Chinese entrepreneurial firms (Peng, 2000; Peng et al., 2004; Tan, 2001, 2002). These studies address strategies adopted by Chinese entrepreneurial firms such as the Prospector type of strategy according to the classification by Miles and Snow (1978). Prospector strategies are aggressive, focusing on a broad market domain, innovation and change. The organizational structure that breeds the Prospector type of strategy is mostly headed by young managers, who are more likely than others to develop daring strategies adapted to a changing environment. SOEs, in sharp contrast to Chinese entrepreneurial firms, prefer the Defender type of strategy, which is less aggressive, less innovative, and more focused on a developed market. Besides these two strategies, foreign-invested firms have been observed to adopt the Analyzer type of strategy with characteristics between Prospector and Defender. Chinese entrepreneurial firms are thus likely to adopt the Prospector type of strategy.

The Prospector type of strategy adopted by Chinese entrepreneurial firms is hypercompetitive in nature, and the speed of changes and rule-breaking are two keys in achieving competitive advantage (D'Aveni, 1994; Ilinitch, Lewin & D'Aveni, 1998b). Hypercompetitive strategies are more than strategies of cost and quality, timing and know-how, and strongholds and deep pockets; they are strategies with a focus on «the speed and aggressiveness of the interactions of these» (D'Aveni, 1994: 2).

Speed refers to the efficiency of strategy implementation. The potential value of a strategy decreases if the speed fails to catch up with the fast-changing environment. Speed reflects dynamic capabilities, one decisive factor of gaining competitive edge in a highly volatile and dynamic environment like TMT (Eisenhardt & Martin, 2000). The speed of executing strategy is even regarded as a specific performance measurement of a firm in a technology-driven market (Imai, Ikujiro & Takeuchi, 1985). Speed is thus a survival factor for startups in TMT, and China is no exception. For example, the Chinese entrepreneurial firm Tencent started Instant Message (IM) service in 1998 as an alternative to Microsoft's Windows Live Messenger (MSN). Tencent adopted a free policy to increase its market share for the IM service, and as a result, it acquired 200 million users between 1999 and 2001; however, even they could not provide enough salary for the firm's 18 employees. By June 2007, Tencent's market share in China had grown to 79.1%, while Microsoft's MNS was down to 13.4%. Speed also refers to the adaptation of strategy. Hurray, another Chinese entrepreneurial firm, had continuously changed its market positioning strategy within the telecommunication industry. It shifted from a network software provider to a Short Message Service (SMS) operator, to a wireless game designer, and to a wireless music provider from 2002 to 2005-the year Hurray issued an IPO on NASDAQ.

Rule-breaking refers to nonconformity of strategies embodying surprises in business model design, reflecting innovations in visions, capabilities and tactics (D'Aveni, 1994). The business model design is defined as «the design of an organization's boundary-spanning transactions» (Zott & Amit, 2007). Innovation in a business model implies that firms radically change the way they organize and engage in economic exchanges, both within and across firm and industry boundaries (Mendelson, 2000). Firms shifting the rules of competition are less predictable than those sticking to strategies derived from well-established business models (D'Aveni, 1994). The change of business model is particularly appealing for entrepreneurial firms (Daft & Lewin, 1993; Foss, 2002), as the performance of the business model relies highly on organizational boundary-spanning arrangements (Hite & Hesterly, 2001). Entrepreneurial firms often have to adapt the existing designs of the organization to the changing environment (MacGrath & MacMillan, 2000). Such firms try to «find fundamentally new ways of doing business that will disrupt an industry's existing competitive rules, leading to the development of new business models» (Hitt et al., 2001). The disruptive nature of new business models exists in a wide range of industries, where well-accepted standards in the identified market are deliberately abandoned, and new rules of the game are established for new and old customers (Christensen & Raynore, 2003); the execution of these strategies is often kept secret (Chen & Hambrick, 1995). For example, Shanda implemented an E-sale channel strategy-breaking the traditional value chain where value is created and transferred from game developers to wholesalers and further to retailers-to directly integrate the owners of Internet Bar (retailers) with online game developers. Shanda became the market leader within half a year after the implementation. Rule-breaking also refers to the nonconformity of strategies, even if they follow a well-established business model. For instance, Ctrip, the travel agent, was the first mover to apply the most advanced Enterprise Resource Planning (ERP) system and call center to assist the travel booking process. Without breaking the well-established business model, Ctrip successfully integrated ERP and the call center with its business, and gained the market leader position within two years in China.

We argue that Chinese entrepreneurial firms in TMT are likely to adopt hypercompetitive strategies in order to grow for three reasons. First, the lack of industry history in China easily produces hypercompetitive behavior. Researchers have documented that a short period of industry development would force firms to behave proactively in order to grow (Perkings, 1994; Tan, 2002). Most Chinese entrepreneurial firms in TMT were established in the late 1990s; the market was underdeveloped, and a successful business model had not yet been found. For example, when Short Message Service (SMS) was introduced to China in 2002, regulations had yet to be established. Chinese entrepreneurial firms like KongZhong, LinkTone and Hurray took advantage of the nascent market by implementing strategies such as allowing advertising agents to advertise their products on mobile phones without clearly asking permission from users. All three firms were listed on NASDAQ between 2004 and 2005, with significant revenue generated from SMS. Regulation amendments came into effect later, in 2005.

Second, the lack of institutionalization with highly articulated mechanisms contributes to radical changes (Greenwood & Hinnings, 1996). In other words, rule-breaking strategies are more likely to occur in firms with little path dependency experience (DiMaggio & Powell, 1983; Pfeffer, 1982). Entrepreneurial firms are relatively less constrained by path dependencies and firm inertia than well-established firms (Stinchcombe, 1965). Consequently, Chinese entrepreneurial firms are more likely to develop rule-breaking strategies that are «disruptive» than foreign-invested firms.

Third, hypercompetition is created by the mindset of players in the industry rather than the quantity of players (D'Aveni, 1994). The perception of the presence of well-equipped foreign-invested firms could force Chinese startups to behave proactively in order to survive. Foreign-invested firms are usually well-established firms and are associated with rich experiences with innovations (Burt, 1987). They are strong enough to afford sustainable innovations (Christensen & Raynore, 2003; Haveman, 1993). Viewing the entrance of foreign-invested firms in the market could force smaller Chinese startups to seek radical changes to break the rules of competition. For example, after observing investment by large foreign corporations like Nokia in advanced technology, local Chinese mobile makers shifted the rule of strategy by focusing on how the mobile phone looks rather than how it works. In this way, local mobile makers captured mass users from the countryside and mid-small cities, and surpassed international mobile providers within a few years in the Chinese market.

To sum up, Chinese entrepreneurial firms are eager to practice hypercompetitive strategies, and this gives

Proposition 1: In Chinese entrepreneurial firms, hypercompetitive strategies are associated with rapid growth.

Ownership structure of Chinese entrepreneurial firms

The ownership structure affects strategic orientation (Blodgett, 1991; Fama & Jensen, 1983; Golden & Zajac, 2001) and strategic control (Fama & Jensen, 1983). Researchers found that ownership structure can function as a control mechanism for critical decision-making (Blodgett, 1991; Daily et al., 2003; Fama & Jensen, 1983). The control of hypercompetitive strategies is required in the process of strategy implementation (Ilinitch et al., 1998b). The ownership structure in the entrepreneurial team is especially worthy of notice, given that most critical decision-making takes place within the team. The entrepreneurial team is composed of the founder-manager (also the CEO of the firm), other co-founders, and key employees, usually with options.

Conflicts of interests between the founder-manager and the rest of the team members arise in the decision-making process because of opportunistic behavior (Fama & Jensen, 1983; Williamson, 1979). Various views on hypercompetitive strategies that are typically inconsistent with common sense also arise. Conflict of interest even accelerates when individuals comprehend the strategies differently. And yet, effective strategies in a highly volatile environment, such as TMT, depend on the effective and efficient implementation of these strategies (Eisenhardt & Martin, 2000; Ilinitch, Lewin & D'Aveni, 1998a), and quick responses are crucial to the firm's survival (D'Aveni, 1994; Richardson, 1998). Studies suggest that ownership control of a firm can reduce the occurrence of conflicts of interest, and hence hasten the decision-making process (Eisenhardt, 1989). The founder-manager therefore seeks to gain ownership control to secure the decision-making power necessary to respond to internal conflicts and external volatility (Schulze et al., 2003). As a result, a high level of ownership concentration in the hands of a founder-manager can enhance his/her decision-making power, enabling effective and efficient responses, which can even be considered a core competence of the firm (Prahalad & Hamel, 1990), and signals a strong unit of command in a turbulent environment.

A powerful leader equipped with a high level of ownership concentration could fit well with the cultural environment. This type of ownership structure is a means to leverage the social capital of the founder-manager (Bourdieu, 1983; Coleman, 1988; Lin, 2001), who can optimally utilize his/her connections within and between social networks, so that the productivity of individuals and groups increases (Putnam, 2000). China is a hierarchical society with a tradition of «rule by man» that is influenced by Confucianism, as opposed to the western tradition of «rule by law» (Jacobs, Gao & Herbig, 1995). «Rule by man» has resonated with the centralized monarchy for 2000 years in China, and has formed the basis of business leadership practice. In such a culture, top decision-makers should never be questioned. It inevitably requires the establishment of certain mechanisms that optimally guarantee order and loyalty. In the Chinese cultural context, when leadership is backed up by the dominant ownership structure, social capital is better equipped to meet an unstable environment. A recent paper (Aldrich & Kim, 2008) also gives theoretical support to the idea that founders from hierarchical social networks should work within a highly centralized structure. This gives

Proposition 2: In Chinese entrepreneurial firms, founder-managers disproportionately obtain more equity than other entrepreneurial team members to facilitate the implementation of hypercompetitive strategies.

The boards of directors function as another governance mechanism in addition to the ownership structure. Setting up boards of directors is one important criterion for Chinese entrepreneurial firms that plan to issue IPO in an overseas stock market. The boards of Chinese entrepreneurial firms in general include founders, top executives, angel investors, strategy advisors, and VCs. As the decision-making apex of the firm (Fama & Jensen, 1983), the board has the legal authority to examine, scrutinize, rectify and control strategies proposed by the executive team led by the founder-manager (Johnson, Daily & Ellstrand, 1996; Zahra & Pearce, 1989). In other words, the board has the veto power to block strategies proposed by the founder-manager. When the board is evaluating hypercompetitive strategies, it may disapprove of such strategies because of the destructive nature of rule-breaking, which can impair the firm's social image.

The establishment of the board can threaten the power of founder-managers, who traditionally enjoy ultimate authority. Founder-managers thereby have incentives to balance the board's supervision, and CEO duality is one approach (Hermalin & Weisbach, 2003). CEO duality refers to the situation where the CEO also serves as the board chair. This structure has a desired benefit: it signals a strong unit of command, which is a preferred structure when entrepreneurial firms face a volatile external environment (Boyd, 1995; Finkelstein & D'Aveni, 1994). To sum up, the CEO duality structure not only strengthens the decision-making power of the founder-managers to implement hypercompetitive strategies, but also helps to reduce external volatility when implementing selected strategies. This gives

Proposition 3: In Chinese entrepreneurial firms, CEO duality can facilitate the implementation of hypercompetitive strategies.

Cases and statistical illumination

Case method consists of a study of events evolving over time, and its richly narrative style of analysis offers a more accurate account of the evolution of events than statistical analysis; however, its generalizability is rather limited. We apply a synthetic strategy to overcome this weakness. Specifically, we take the narrative strategy (Langley, 1999) to construct the detail of two-paired cases from raw data, and then we combine our narrative strategy with a simple statistical illumination, which is a synthetic strategy to generate convincing relationships by assessing more than five cases (Langley, 1999). Synthetic strategy provides modest accuracy and better prediction than using questionnaires, according to Langley.

We selected Alibaba vs. eBay in the C2C market and Baidu vs. Google in the SE industry as two-paired firm cases. 3 Alibaba and Baidu are representative entrepreneurial firms that had gained the two highest amounts of market capital in the Chinese TMT sector by December 2007, worth 19 billion USD and 14 billion USD respectively. eBay and Google are well-established multinational companies and keen to enter the Chinese market. By the end of 2007, eBay held market capital amounting to 40 billion USD, and Google 200 billion USD. Data were collected during the period between 2003 and 2006 for the C2C market, and between 2002 and 2006 for the SE industry. These were crucial growth phases for the Chinese players.

Alibaba vs. eBay

The founder-manager Jack Ma, together with 17 other entrepreneurial team members, started Alibaba in the business to business (B2B) market in 1999. Alibaba entered the C2C market in 2003. 4 In the same year eBay Inc. entered the Chinese market by buying out the local firm EachNet, which had 90% of the market share. The market position between Alibaba and eBay in the Chinese C2C market had shifted significantly between 2003 and 2006 (see Figure 2). By 2006, Alibaba's trading revenue in the C2C market reached about 2.5 billion USD, and it had 30 million registered customers. Alibaba issued its IPO on the Hong Kong Stock Exchange in November 2007.

Figure 2 The change of market position in the Chinese C2C Market


Resources: iResearch, Analysys

When Alibaba started, it announced a non-fee strategy for the first three years to attract C2C customers. This strategy diverged from a well-established industrial tradition in which customers had to pay firms like eBay for using the C2C trading platform. The founder and former CEO of eBay operations in China once commented that the non-fee strategy should not be practiced because it blocked the development of feasibility of the business model in the C2C market. eBay's strategy focused on the quality of service and advanced users, and this strategy led to a «walled garden» safeguarded by various fees borne by customers. As a late mover and a challenger, Alibaba's strategy, on the other hand, was to address less advanced and price-sensitive users, which resulted in more rapid growth in an «open garden» by implementing the non-fee strategy.

Meanwhile, Alibaba's strategy was quickly carried out in secrecy. For example, the majority of Alibaba's employees were not even aware of the existence of their new C2C portal until it had been in public use for two months. Within those two months, Alibaba had successfully developed a C2C trading platform with good enough technology to kick off its competition with eBay. After that, Alibaba intensified its marketing campaign against eBay, focusing on its non-fee service feature. With its non-fee policy and efficient marketing, Alibaba's market share had grown from zero to about 80% within three years.

Figure 3 Pattern of ownership structure in the entrepreneurial team of Alibaba


Figure 3 presents the ownership structure of the entrepreneurial team of Alibaba from 2003 to 2006. 5 The peak reflects founder-manager Jack Ma's disproportionately high equity holding in relation to his other 17 team members, which is about 12 times higher than that of the individual team members on average. It is also interesting to note that during the same period, Jack Ma was both the CEO and the board chair. After the IPO in November 2007, Jack Ma retained the position of board chair and David Wei was chosen as the new CEO of Alibaba.

Baidu vs. Google

The competition between Baidu and Google in the Chinese SE market can be traced back to 2001. The founder-manager, Robin Li, and Yong Xu started Baidu in 1999, while Google Inc. started business operations in China in 2001. 6 Like the market positions held by Alibaba and eBay in China, those of Baidu and Google in the Chinese SE market had shifted substantially in terms of consumer usage from 2002 to 2006 (see Figure 4). Baidu issued an IPO on NASDAQ in 2005.

Figure 4 The change of market position in the Chinese SE industry


Sources: iResearch, Analysys

Starting in 2001, Baidu managed to transfer the exiting business model, which had generated more than 50% of the total revenue, from providing the SE service to internet portals like Sina and Sohu, to serving SE users directly with the brand Baidu. The transferred model allowed various companies to pay for their ranking placement in SE users' search results, without explicitly explaining this to the SE users. This was strictly contrary to accepted practice at that time, mostly established by Google, which was to generate an order of search results based on the frequency of searches, and thus was likely to be more relevant for SE users. For example, if restaurant A is searched more often than restaurant B, A, in principle, will be listed before B when a related key-word search is performed. However, according to the new business strategy of Baidu, it is the price that the restaurants pay that will determine the order of the search result. That is, if restaurant B pays a higher advertising fee to Baidu than A, B will appear in front of A in the search list, provided that the search frequency is similar for A and B. The fee-seeking strategy was initially opposed by some of Baidu's team members and board members; nevertheless, founder-manager Robin Li managed to implement the strategy. Kai Fu Lee, Google's CEO in 2005, publicly denounced Baidu's fee-seeking strategy several times, declaring that Google would never practice such a strategy, even making an ethical issue of it. Yet this rule-breaking strategy generated about 80% of Baidu's annual revenues from 2003 to 2005.

Figure 5 Pattern of ownership structure in the entrepreneurial team of Baidu


We presented the ownership structure of Baidu's entrepreneurial team after Xu's departure in Figure 5. 7 Founder-manager Robin Li's ownership level is noticeably higher than that of the other members. Except for Xu's departure, the change in the team's ownership pattern was minor from 2002 to 2005. Robin Li owned disproportionately more equity than the other entrepreneurial team members until its IPO in 2005. During the same period, Robin Li was both the board chair and the CEO. The CEO duality remained after Baidu's IPO on NASDAQ in 2005.

To sum up, both Alibaba and Baidu practiced hypercompetitive strategies during their rapid growth period. Within a few years, both Alibaba and Baidu became the market leaders in their respective industries. The two-paired firm cases also show that both founder-managers of Alibaba and Baidu acquired disproportionately more equity than other members in their entrepreneurial teams, and both founder-managers served in the board chair position prior to their IPOs.

Statistical illumination

There were 27 Chinese entrepreneurial firms in TMT listed in overseas stock exchange markets by March 2007. Twenty-two firms-21 firms were listed on NASDAQ and one on the Hong Kong Stock Exchange-were used after removing subsidiary and cross-holding companies from the total of 27 firms. Our information sources include SEC filings, annual reports, industrial annual reports and information from a government agency. We collected data about the key growth strategies, the ownership structure of the entrepreneurial team and the board structure before IPOs from the 22 firms.

In Table 1 of the Appendix, we present the summary of growth strategies identified in the 22 entrepreneurial firms. On the whole, all 22 firms have efficiently applied hypercompetitive strategies that focus on speed and rule-breaking. As a result of these strategies, these firms have acquired the leading market positions in their corresponding industries.

Figure 6 The founder-manager's equity of the firm in the entrepreneurial team


Figure 7 CEO duality status


Note: 2: the CEO serves the board chair; 1: the CEO serves the board director.

We present the ownership structure and the board structure in Figures 6 and 7. In Figure 6, 17 founder-managers obtained over 60% equity, which was disproportionately higher than that held by other members of the entrepreneurial team on average. In the remaining five firms, founder-managers hold a similar level of equity as do other co-founders (Ctrip, UTstarcom, LinkTone, KongZhong, and Asia), where their equity shares are between 3.6% and 36%. The data suggest that founder-managers of most Chinese entrepreneurial firms in TMT obtained disproportionately more equity than other team members. In Figure 7, CEO duality exists in 16 of the 22 firms. In the remaining six firms, the CEO joined the board without chairing it. It is interesting to note that in 51job and Action Semiconductor, independent board chairs were chosen within six months before their IPO. We can infer that CEO duality may have existed during the rapid growth period prior to the IPOs of these two firms. To summarize, CEO duality is prevalent in Chinese entrepreneurial firms.

Conclusion and discussion

Corporate governance structure affects firm growth. Using Chinese entrepreneurial firms in the TMT industry, we examined how the ownership structure and board structure affect firm growth. Our data show that Chinese entrepreneurial firms are likely to implement hypercompetitive strategies during their start-up period. Their founder-managers hold disproportionately more equity than their team members, and they adopt CEO duality. The ownership structure and board structure enhance the founder-manager's authority in decision-making, mitigating the obstacles in implementing hypercompetitive strategies.

In this study, we have focused on entrepreneurial firms that successfully issued their IPOs in overseas stock markets. We have also checked less successful entrepreneurial firms. It seems that the less fortunate entrepreneurial firms lacked the proposed governance structure, and as a result, could not achieve rapid enough growth to issue IPOs in overseas or even domestic Chinese stock markets. Specifically, the founder-managers of these firms hold similar equity shares to those of their team members, and did not serve as board chairs in their firms. For example, in a comment on his previous failed ventures before his remarkable success in Alibaba, Jack Ma attributed his failures to the ownership structure, saying, «.I've learnt that I only need followers, not partners, in a startup..» 8

Extending the fit

The study shows a fit between one specific growth strategy-hypercompetitive strategies-and the governance feature. Other attributes may also influence small firms' growth strategies. For example, governance structural features, such as structural leadership, have a promising future (Machold, et al., 2011).

In addition to governance features, there are several other approaches to examining the antecedents of growth strategy. Disruptive product innovation is one approach that is associated with hypercompetitive strategies (Christensen, 1997; Christensen & Raynore, 2003). For instance, in the competition between Alibaba and eBay, Alibaba's product-a non-fee C2C trading platform-is a disruptive innovation for eBay. Alibaba's product initially targeted customers who had a typically low or moderate demand for quality and were price-sensitive; they were the low-end users. eBay invested mainly in a quality-focused C2C trading platform for professional users, and opposed the non-fee policy, which would disrupt their revenue stream. We can identify a similar situation in the case of Baidu and Google. Baidu's fee-focused ranking service attracted mostly small and medium-sized firms that had not been served by traditional SE before. Through Baidu's service, however, SE users' attention to these firms increased. Google regarded the fee-focused strategy as contradicting the firm's longstanding policy, which prioritizes the search relevance for SE users over revenue generated by fees. Disruptive innovation and hypercompetitive strategies, in the view of Chinese entrepreneurial firms, share one essential feature: breaking rules established by existing market leaders.

The business model can also enhance the implementation of hypercompetitive strategies. Studies show that novelty-centered business models matter more to the performance of entrepreneurial firms than do efficiency-centered business models (Zott & Amit, 2007). The novelty-centered business models, coupled with product market strategies, emphasize differentiation and cost leadership (Zott & Amit, 2008), and enhance performance of entrepreneurial firms. Our data indicate that hypercompetitive strategies have, to a certain degree, been combined with novelty-centered business models to achieve more rapid growth. Focus Media, for instance, started business by putting LCD displays beside elevators, broadcasting advertisements for only a «focused» group in business buildings. This novel business model was not in line with the traditional concept of «mass» media. In addition to becoming the market leader, Focus Media has stimulated the development of related businesses in China, such as «Golf Media» and «Train Media,» where «focus media» has become the name in the media industry. We infer that the novelty-centered business model is likely to be linked to hypercompetitive strategies as well.

A good fit

Business strategy is used to achieve sustainable competitive advantage (Porter, 1985). However, hypercompetitive strategies mostly generate short-term advantages (D'Aveni, 1994). Firms are supposed to grow «in muscle and not in fat» when they choose a strategy (Drucker, 1979). The question then arises as to whether Chinese entrepreneurial firms can sustain competitive advantages after their rapid growth. For example, Alibaba has announced that it will begin to charge fees from its users in the near future. Whether Alibaba will then be able to keep its competitive advantage remains to be seen. Researchers advocate developing core competence in order to help build competitive advantage in the long run (Prahalad & Hamel, 1990). This may provide a direction for Chinese entrepreneurial firms while they still enjoy the benefit of hypercompetitive strategies.

Practicing disproportionate ownership structure to facilitate rapid growth has its costs. Disproportionate equity holding can create governance problems for small shareholders, whose interests can be expropriated by large shareholders, which is one problem observed in an emerging economy (Chang, 2003). Though research suggest that the establishment of boards of directors could protect small shareholders' interests, the benefits might be difficult to realize when a board is tightly controlled by the founder-manager.

Another potential problem related to hypercompetitive strategies is their effect on corporate social responsibility (CSR). CSR calls for the responsible citizenship (Maak & Pless, 2006) of an entrepreneurial firm. Responsible citizenship considers not only shareholders, but also those stakeholders who affect or are affected by the firm (Freeman, 1984). Hypercompetitive strategies that violate well-accepted practices internationally may slow down the development of a responsible business society in China.

Future Research

There are some limitations in this study. First, the study focuses on the TMT industry. Although firms in TMT have attracted the most attention from venture capitalists and therefore also from entrepreneurs, future studies should include entrepreneurial firms from other industries as well. For example, we could include the pharmaceutical industry, where recent deregulations have accelerated competition and growth. Second, our paper focuses on the Chinese market, and future study could explore the relationship between corporate governance structure and rapid growth strategies of entrepreneurial firms in other markets, thus developing a more generalizable framework. Third, in the statistical illumination, information about ownership structure was collected at one point in time before the IPOs, so it does not analyze a dynamic development between growth strategy and ownership structure over time, and longitudinal studies are thereby encouraged for future research. Fourth, researchers have recently drawn attention to the effect of entrepreneurs' strategic networks on entrepreneurial processes such as team formation (Stuart & Sorenson, 2008), an understanding of which could shed light on the impact of strategic networks on the fit between corporate governance structure and rapid growth strategy. Fifth, examining entrepreneurial processes by identifying capabilities such as organizational heuristics (Bingham, Eisenhardt & Furr, 2008) may offer additional explanations to the formation of the strategy. Sixth, exploring strategies that entrepreneurial firms adopt to sustain their competitive advantages, which have initially been obtained by hypercompetitive strategies, requires further research. Last, but not least, our study has not taken into consideration government influence in TMT, which could have affected entrepreneurial performance, though with diminishing effects as China becomes more integrated into world trade.

Aside from those weaknesses, this study has improved our understanding of the corporate governance influence on rapid growth strategy. We believe that an understanding of the fit between corporate governance structure and growth strategy can enrich research on entrepreneurial firms' growth behavior in a highly volatile environment.

Appendix - table 1 Growth Strategies of 22 Chinese Entrepreneurial Firms in TMT
Company nameIPO dateIndustry (Market)Key growth strategies*Degree **Market position***
Tencent 2004 Instant Message Service (a) Rule-breaking: free policy and internet dating center (b) Speed: 200 million users within two years 10 1
Focus Media 2005 Life-style Media (a) Rule-breaking: a new market created as «focus media». (b) Speed - within three years, 75 cities, 5000 supermarkets, and 100,000 outdoor spots 10 1
Net Ease 2000 Internet Portal Speed: the first Firebird BBS on China net (1996), the first free web-based email service (1998), the most well-known website (1999) 10 1
Sina 2000 Internet Portal (a) Rule-breaking: RichWin in fact largely used for software pirate copy (b) Speed: the first mover in providing such software 10 1
Shanda 2004 On-line Game (a) Rule-breaking: e-Sale system and Call-Center 24/7 service (b) Speed: within two years, the number of users from zero to 75 million 10 1
Ctrip 2003 On-line Travel Agency (a) Rule-breaking: advanced ERP and call-center, one-stop shopping (b) Speed: 7 million members within three years 9 1
Sohu 2000 Internet Portal Speed: the first commercial portal in China, the first internet advertisement agent in China 9 top3
The9 limited 2004 On-line Game Speed: the first successful virtual online community 8 2
51job 2005 On-line Job Hunting Service (a) Rule-breaking: HR-department-centered business model; (b) Speed: the first nation-wide job-hunting online agent in China within 2 years 9 1
KongZhong 2004 Wireless Service Provider Speed: the market position changing from SMS to multimedia message service (MMS); the first mover in mobile WAP service 7 top3
eLong 2004 On-line Travel Agency Speed: its marketing positioning strategy changing from a diversified business, to city life community, to hotel booking, and to hotel and flight ticket booking in four years 9 2
Hurray 2005 Wireless Service Provider Speed: its marketing positioning strategy changing from a network software provider to SMS provider, to a wireless game provider, and to a wireless music provider in three years 9 top3
China Finance 2004 On-line Financial Service Rule-breaking: «free advertisement» marketing strategy 8 1
Linktone 2004 Wireless Service Provider Speed: similar to KongZhong. 9 top3
Semiconductor 2004 IC Foundry Speed: localized service with low cost 5 3
Utstarcom 2000 Mobile (PHS) Design House (a) Rule-breaking: PHS for low-end market; (b) Speed: the leading position within two years 7 1
Action 2005 IC Design House Speed: localized service with low cost products (MP3 Driver) 7 1
China Techfaith 2005 Mobile Phone Design House Speed: localized design with focus on how it looks rather than how it works 9 1
Asia 2000 Internet Network Service Speed: localized service with low cost products 7 1
Qiao Xing 1999 Mobile Phone Design House Speed: localized service with low cost products 9 top3
Vimicro 2005 IC Design House (a) Rule-breaking: DSP centered total solution with localization; (b) Speed: quick response in design-in service 7 top3
ninetowns 2004 B2B & B2G Speed: localized service with low cost products 8 top3
* The growth strategy is identified in terms of its method of achieving the firm's market position. Under «speed,» we show the policy and the result of implementing hypercompetitive strategies. ** We measure the degree of hypercompetitiveness by evaluating the features of speed and rule-breaking in strategies using existing market leaders, typically foreign-invested firms, as the benchmark. *** This refers to the market position immediately prior to the IPO.


  • 1: . «Chinese privately-owned firms» refers to those with more than 50% ownership controlled by individuals of Chinese origin, whose main business operations are carried out in mainland China.
  • 2: . TMT refers to technology, media, and telecommunication industries.
  • 3: . We use eBay Inc. and Google Inc.'s operation in China in comparison with Alibaba and Baidu's operation. The C2C stands for e-trading among consumers. The SE service helps users search for information on the internet.
  • 4: . Alibaba entered into the C2C market by launching a new internet portal, Taobao.
  • 5: .
  • 6: . The Chinese version of Google was introduced in 2001. However, its wholly-owned subsidiary, Google China, was officially registered in 2005. We chose the market entry time of Google into China as the starting point of our analysis.
  • 7: . Corporate Annual Report 2005,; Xu's share was about 25% and Robin Li's 75% when they started Baidu. Xu left the company in 2004.
  • 8: .
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