Institutional change and divergent economic resilience: Path development of two resource-depleted cities in China

Layering

Layering refers to an adding process of new institutions on top of or alongside existing ones (Streeck and Thelen, 2005). Change agents may come in two varieties: mutualistic symbionts and subversives (Mahoney and Thelen, 2010). Mutualistic symbionts are embedded in, benefit from and abide by the status quo in a system. They add new elements for preserving (or contributing to) the robustness of the existing institution (Van der Heijden, 2010). In this mode, agents primarily work for the structural stabilisation of a local economy (Martin, 2012). They may set new firm/industry-based arrangements for investing more capital, labour or infrastructures, expanding scales of production or giving incentives to the old system. This layering, named thickening, may lead to path persistence (protecting and sustaining an existing main economic activity and structure) and/or path extension (enhancing an existing industrial path by incremental innovations within existing predominant social and technological system) (Isaksen, 2015; Tödtling and Trippl, 2013). It is likely to occur where regions are organisationally thin and industrially specialised with limited agency, and/or where the institutional environment is rigidly structured by a higher-level power with little ambiguity (Van der Heijden, 2011; Zukauskaite et al., 2017).

Subversive-led layering, however, brings new institutions for shaping the ways in which the original institution functions (Thelen, 2003). Agents can, for instance, foster new industries by adding new industry-based arrangements or technologies into existing market institutions. The rise of on-site water recycling technologies in Beijing, China exemplifies how prevailing institutions are shifted by which agents tentatively apply new technologies in a niche market (Binz et al., 2016). This can be regarded as positive layering, which enables path creation and/or transplantation, indicating a higher degree of success in economic renewal than thickening (Figure 2). Positive layering may occur in regions where the established institutions are ambiguously or loosely defined. Besides, a certain degree of discretion/power of agents in institutional interpretation and enforcement is needed.

Conversion

Conversion involves the redeployment process of old institutions for new purposes (Streeck and Thelen, 2005). Change agents are opportunists who practice institutional ambiguities resourcefully (Mahoney and Thelen, 2010). They may ‘preserve institutional continuity and exploit whatever possibilities exist within the prevailing system to achieve their ends’ (Mahoney and Thelen, 2010: 26). Strambach and Halkier (2013) argue that in an overarching institutional setting, there remains leeway for agents to exploit creativity. New industries can be fostered without the need for breaking the system institution, but rather through cumulatively shifting the existing institutional environment through institutional change at the firm/industry/cluster level (Figure 1).

Conversion involves a time-needed process of social interaction. Change agents create new institutional arrangements for dialogue with existing conservative agents. This dialogue involves agency on knowledge exchange, learning, resource complementation and consensus building, such as by way of subjective and symbolic narratives on resilience (Goldstein et al., 2013). For example, Arbuthnott et al. (2010) stress the importance of social interaction between forestry and biorefinery actors in Örnsköldsvik, Sweden. They stress that such interaction has spurred new inter-industry contracts and shared strategies towards a recycling economy. In this sense, conversion is associated with the notion of ‘relatedness’, meaning that industrial agents with social entrepreneurship can facilitate structural change at the system level for regional diversification and transformative resilience (Boschma, 2015; Neffke et al., 2018). This conceptually echoes Grillitsch’s (2015) argument that dynamic interaction in different institutional layers of industries can potentially enable knowledge creation and structural dynamics, showing the ‘reorganisation’ dimension of resilience (Martin, 2012). It means a reuse, recombination and anchoring process of existing institutions, seeking to endogenously reform the existing system. Therefore, conversion enables path renewal and path branching, showing a more dynamic resilience than layering (Figure 2). Regions with a high degree of organisational relatedness and thickness, and with a certain degree of institutional ambiguities, have advantages to enable conversion (Isaksen et al., 2018). But conversion can also occur in organisationally thin regions if they have capably strong agents and a long-term purpose for structural change.

Drift

Drift refers to a situation of changed impact on existing institutions because of shifts in the institutional environment and a lack of response of agents to these shifts (Streeck and Thelen, 2005). It may result from the failure of agents to update an institution. These agents are like parasitic symbionts who rely on existing institutions for private gain, lacking motives to impact the institution in any way. Old institutions are not protected, and evolve randomly with external environment dynamics. Drift is a process characterised by high vulnerability, exhibiting a low degree of success in economic renewal. This mode may result in path exhaustion, namely, when an economy gradually loses dynamism and eventually faces decay (Trippl and Isaksen, 2016). Self-contained and organisationally thin periphery regions are particularly subject to drift (Isaksen, 2015). Besides, drift may also occur when agents lack the opportunity, power or motivation to change, restricted by multi-scalar networks and rigid structures (Figure 2).

Displacement

Through displacement, existing institutions are supplanted by new ones (Van der Heijden, 2010). Change agents are insurrectionaries, who reject and do not abide by the existing institution, but strive to displace it with an entirely new one (Mahoney and Thelen, 2010). This may happen when hit by profound shocks, through which the existing system is permanently changed, unable to return to its previous state (Simmie and Martin, 2010). It may co-evolve with and result from Schumpeter-style technological breakthrough derived from the firm/industry level (Gong and Hassink, 2018). It can be also triggered by powerful agents in pursuit of a fundamental reform in the first place, incessantly destroying the old system and creating an entirely new one. This is a type of institutional change leading to path breaking and (radical) path creation. It thus indicates greater power of resilience than any other cases (Figure 2). Despite a very low possibility of occurring, regions whose institutions are highly dynamic and open, and where agents have strong system-level power, discretion and purpose aiming at structural change, are of potential to enable displacement (Figure 2).

Zaozhuang: Positive layering and conversion towards path creation and renewal

In the 1990s, Zaozhuang’s economy was dominated by Zaozhuang Coal Mine (ZCM), a provincial SOE. The 1998 SOE reform ended ZCM’s domination and split it into several small (sub)municipal-level SOEs. From 2002, coal resources started to dwindle. Anxieties about economic decline spread, but the city still lacked the vision to cope with the crisis. In 2005, a new mayor took office who was determined to transform the economy.

The new leader unusually advocated nurturing tourism. Zaozhuang was the location of a key battle won by China against Japan during the Second World War, and there were also plenty of cultural assets related to the Grant Canal which remained under-exploited. Moreover, developing tourism could lighten the social burdens of mining SOEs by absorbing lay-offs (interview with the office director of Zaozhuang City Government, May 2013). Despite these good reasons, the idea encountered wide scepticism from local cadres. This drove the mayor to take an unconventional initiative. He rejected selling lands for transient rewards and rather convinced wider agents to develop tourism. As the director of Zaozhuang Development and Reform Commission (ZDRC) (interview, April 2013) stated: ‘He broke unilaterally a 60 million RMB land-selling agreement with a real estate company. He stressed that “selling lands once, destroying the historical values forever”’.

It took two years to turn the initiative into a shared goal. For example, the mayor proposed a vivid concept in his formal political speeches and daily talks in public, namely the ‘tank of fuel’ theory (an analogy between the resource-based economy and a car running on only a tank of fuel, referring to the critical condition of Zaozhuang for structural transformation). At every chance, he emphasised the need to transform the coal-based economic structure into a more sustainable one. As a result, it helped local stakeholders to accept the initiative and see the possibility of doing things differently. The CEO of a local coal SOE stressed the importance of the theory:

We [coal companies] never think of new developing sectors unrelated to mining, not mention to tourism. We did need a vision. The ‘tank’ theory was explained and widely disseminated in many occasions for two years, and eventually, a consensus for tourism development was achieved. (Interview, January 2014)

Based on this, local state elites were able to mobilise local governance resources for tourism development. This can be exemplified by the launch of the Zaozhuang Tourism and Service Industry Commission (ZTSIC) in 2010, and also that of tourism training programmes in two local vocational colleges (ZEC, 2014). These organisation-adding arrangements helped to generate a new labour poor supporting the tourism sector. However, with local coal exhausting and plant closure, the city encountered financial obstacles to fostering tourism development. To overcome it, the mayor set up a new governance rule in the mining industry, namely, conditionally approving coal SOEs to enact mergers and acquisitions (M&As) in China’s coal-rich regions. The condition was that these SOEs contribute a share of the profits reaped from M&As to support tourism, e.g. by transferring money to the ZTSIC or by financing and/or operating hotels, restaurants or scenic spots (interview with the office chief of ZTSIC, April 2015). As such, the local state acquired initial investment funds to build a tourism theme park – Taierzhuang Ancient Town. For the SOEs, operating coal plants out of the city, on the one hand, meant they survived the local depletion crisis. On the other hand, they became key investors, shareholders and operators of local tourism-related businesses. As the vice manager of a coal SOE (interview, August 2013) recognised: ‘The strategy has significantly changed the past monotonous business model of coal companies. It enabled the coal industry to step into other entirely new businesses. Like our company, we are no longer a pure coal company any more’.

In order to explore market sources, the mayor introduced a set of new criteria onto the prevailing GDP-centric local cadre evaluation system. One newly added criterion was the extent to which cadres attract tourists to invest in Zaozhuang. To put it into action, he initiated the ‘Zaozhuang Two Day Tour’ programme. By giving each (municipal- and lower-level) government unit a compulsory quota of tourists to attract, local stakeholders were designated (and incentivised) to explore new tourism markets. As the Director of Zaozhuang Coal Industry Bureau (interview, May 2013) put it: ‘Our bureau got a quota of 3000 tourists in 2012, but we attracted over 5000 tourists from Xuzhou, Baoding, and Hefei combined. Given our performance, many collogues got promotion’.

As a result, between 2008 and 2016, the tourism industry revenue increased six-fold, from RMB563.6 million to 3760.5 million yuan (ZSB, 2017). It has contributed an average increase of 2% annually to the city’s GDP growth and significantly shifted the share of the tertiary sector in the economy from 28.4% in 2008 to 41.4% in 2016 (ZSB, 2017). Over 100,000 new jobs were created in Zaozhuang, 80% of which benefited from the tourism and service industry. Moreover, it is estimated that by 2020 tourism will be the city’s pillar industry, accounting for over 50% of GDP growth (China Economic Net, 2014). More relevant to our purpose here, not only does the tourism industry itself grow rapidly, but it also starts to benefit the mining industry. It is documented that between 2005 and 2016 about 56,000 of a total 83,400 laid-off mining workers were re-employed in tourism, the others being primarily designated by SOEs to work in newly built mining plants elsewhere (e.g. Shannxi, Yunnan) (ZSB, 2017). Such efforts helped the SOEs alleviate unemployment and paved the way for economic renewal.

Zaozhuang is evident as having undergone quality-orientated institutional change. This change was achieved by positive layering and conversion in which local state elites played key roles (Table 3). In terms of positive layering, the introduction of new governance institutions including new developmental visions (e.g. developing tourism), concepts (e.g. the ‘tank of fuel’ theory), policy initiatives and organisations created social dialogues between change (the mayor) and continuity agents (local coal stakeholders). Such dialogues involving incremental social reconstructs have shifted the institutional environment at the broader system context, namely, allowing local agents to be cognitively reflective, to see the context differently, and thus generating collective agency towards new path creation. This new path is underpinned by an endogenous process in which local state elites with strong institutional leadership strategically enable major changes both in governance institutions and institutional environment at the regional level. More importantly, the new industry is not just fostered alongside the old coal industry, but rather has made significant impacts on the latter, evident by considerable inter-industry labour mobility and reciprocity. The revisions on the conventional GDP-centric cadre evaluation system set in motion for coal SOEs to step into tourism, leading to an intra-organisational diversification within the old path. This is a typical ‘conversion’, in which the established path has been gradually orientated to benefit tourism as a new path, showing a sign of path renewal.

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Table 3.

Differences in institutional change, path development and resilience between Zaozhuang and Fuxin.

Item	Mode of institutional change	Type ofchange agents	Form ofpath development	Differences in economic resilience
city
Zaozhuang	Positive layering and conversion (serve new goals and transformative)	Subversives and opportunists (local state leaders)	Path creation and renewal (towards structural change)	More dynamic (high degree of success in economic renewal)
Fuxin	Thickening (obey national policies and stabilising)	Mutualistic symbionts (national actors and local state elites)	Path persistence and extension (towards structural continuity)	Less dynamic (low degree of success in economic renewal)

Change agents in Zaozhuang acted both as subversives and opportunists (Table 3). They interpreted the existing coal-based institution as a source of development and chose to gradually transform it. To do that, they strategically made good use of the then national policy (M&As) as an opportunity to draw resources locally for the new path creation (tourism) and diversification (service sectors). We acknowledge that the strong local agency in Zaozhuang is not inherent, and is rather underpinned by the interests of agents for political promotion and the loose institutional environment (related to the relatively diversified economic structure and the lack of higher socio-political influences) (Hu and Hassink, 2017c). Zaozhuang therefore has entered into a smooth, inter-organisationally interactive and agency coherent way of economic renewal.

Fuxin: Institutional thickening trapped in path persistence and extension

Fuxin was one of China’s key industrial powerhouses in the pre-reform period. Its prosperity between the 1950s and 1980s represented the epitome of China’s socialist industrialisation under top-down state-led investments. However, in the 1990s Fuxin underwent a severe stagnation (Hu and Yang, 2018). Hit by the 1998 radical SOE reform and suffering from coal depletion since 2000, Fuxin’s monopolist – Fuxin Coal Group (FCG) – was forced to shut down almost all its plants. Over 200,000 workers were made unemployed, pushing the city to the brink of economic collapse and social disorder (FSB, 2014). Thanks for the national aid measures since 2001 (e.g. Northeast China Revitalisation), Fuxin’s economy has recovered.

One key national measure is the M&A strategy as also mentioned in the Zaozhuang case. Despite not being compulsory in implementation, the strategy was seized by the Fuxin government as a ‘now-or-never chance’ (interview with a municipal official, April 2014). It was widely believed among local shareholders (e.g. state and SOE elites) that the strategy signalled that Beijing could help Fuxin to regain dynamism back onto the coal-driven track of growth. The vice-manager of FCG (interview, January 2014) stressed that: ‘The Fuxin economy has been centrally controlled for decades. Once facing problems that we cannot solve, Beijing will always help us. We therefore all have a strong sense of political proximity to the central state’.

Such a strong upward dependent mentality among Fuxin’s state elites has resulted in a local convention of activism subject to central decisions. In 2006, a special local state organisation was established to implement the M&As strategy for FCG. It led to the acquisition of a large open cast mine in Xilingol, Inner Mongolia, and the construction of a special railway directly connecting Fuxin. As such, the coal industry survived and continued to dominate the local economy, regardless of local coal depletion.

Since 2005, Fuxin’s economy has been marked by the rapid growth of wind power, despite the dominance of the mining industry (it still accounted for 31.1% of Fuxin’s GDP in 2016; FSB, 2017). The driving force behind the new sector was not local, but instead came from Beijing. As the Office Director of Fuxin Government (interview, February 2015) stressed: ‘When Beijing decided to foster renewable industries in China in 2005, Fuxin was designated as a pilot city. This is because Beijing’s worries on Fuxin’s problematic economy turned out a deliberate policy care’.

In a short time span, the National Energy Administration designated nine centrally owned wind power SOEs to deploy projects in Fuxin. Again, the local state was enthusiastic about the strategy, and opted to fully comply with it. For instance, a new municipal-level bureau, namely the Fuxin New Energy Bureau (FNEB), was launched in 2010. FNEB’s duty is to deliver national instruments and to provide tailor-made services (e.g. offering land quotas and subsidies) to the central SOEs. Likewise, the local financial system was regulated to provide low-interest bank loans and tax exemptions specifically to wind power firms. With these changes to governance institutions, Fuxin quickly became a leading wind power generator in China, with its installed capacity of 2094 MW in 2011, and accounted for over 50% of the total capacity of Liaoning (FSB, 2012).

Nevertheless, Fuxin still lacked the dynamism to restructure its economy. Critical voices from our interviews indicated that the so-called ‘institutional innovation’ of the launch of FNEB (since it is rare among municipal-level bureaus in China) was for the purpose of pleasing central SOEs within the wind power industry, rather than for higher level structural change. As an official in the Fuxin Development and Reform Commission (FDRC) (interview, October 2016) complained: ‘We chase central policies and spare no effect to implement them. New institutions are set to respond national polices by no means to change the existing economic structure’.

Moreover, wind power in Fuxin is operated by central SOEs and its consumption market is barely local-based. Most firms focus on equipment assembly lacking original innovation. The lack of local skilled labour and technologies has hindered knowledge spillovers between central SOEs and local firms. Despite huge investment for years, the new industry had only created 5500 jobs by 2015 (China Energy News, 2017). The recent top-down regulation tightening on forestry and land protection has significantly slowed down the approval process of large wind power projects in Fuxin, resulting in a significant decrease of central investment (FBS, 2017). The new industry indeed has contributed little to the local economy. Similar evidence can be found in other sectors, such as agriculture, food and coal-chemicals, which are all initiated and supported by national policy interventions (Hu and Yang, 2018). However, with the M&A strategy the mining industry grew, as its share of the local GDP increased from 14.8% in 2010 to 23.1% in 2016 (FBS, 2017: Table 2). But the old path seems to have failed to boost the economy too. Due to the shrinking coal markets and prices, Fuxin suffered from a severe economic decline with 5.5% negative GDP annual growth rate in 2015 and an even worse record of –12.2% in 2016 (FSB, 2017). The Director of FDRC (interview, October 2016) noted: ‘We [local state elites] focus too much on how to seize national policy opportunities to either pragmatically create new sectors or sustain the preferred mining industry, and thus overlook our own advantages, resources and capabilities’.

Based on the empirical evidence, we found that the resource crisis in Fuxin did not trigger significant changes in the established institution of the economy. Fuxin’s change agents include national SOEs and local state elites (Table 3). As mutualistic symbionts, they had no interest in reforming the institutional status quo of the system. In particular, local agents treat national policies as a code of conduct, and thus act in unison with them, bypassing local-specific needs and conditions. Their actions are not only limited in scope and discretion because of the limited institutional ambiguities (mainly caused by the highly specialised economic structure and strict central-local state relations), but are also constrained by historically conditioned local cultures avoiding risk-taking and entrepreneurship. As a result, change agents choose to narrowly set new governance arrangements for either maintaining their old industry path (by implementing M&As) or blindly catering to top-down decisions without reflective concerns on whether and to what extent they match place-specific conditions. To a large extent, the new industry itself can be seen as an added institution (an industrial layer) that stays in isolation with the established main path – mining. This refers to thickening – the institutions are thickened, whereas the core functionality of the economy remains barely changed.

Besides the economic structure, the long-term presence of central SOEs and national policy intervention has led to a self-reinforcing institutional environment. This environment undermines the power, discretion and purpose of agents towards structural change. Local stakeholders deliberately choose to neglect local comparative advantages (e.g. with only a 120km distance from both the nearest harbour and Liaoning’s capital city, Fuxin could have improved its transportation to these places instead of building the railway to Xilingol), and underrate locally rooted non-coal sectors such as agate polishing/design and hydraulic machinery. This can be seen as a typical political lock-in, which is preventing substantial changes at the system level (Grabher, 1993). The rise of wind power does not demonstrate a robust new path creation. With institutional stubbornness and strong protectionism towards the coal industry, Fuxin’s economy is trapped in path persistence and extension, showing a low degree of success in economic renewal (Table 3).