From Click to Boom: The Political Economy of E-Commerce in China (book excerpt)

Lizhi Liu's "fascinating account of how Chinese big tech rose to such powerful heights and put China in the forefront of many new digital industries"

How do states build vital institutions for market development? Too often, governments confront technical or political barriers to providing the rule of law, contract enforcement, and loan access. In From Click to Boom, Lizhi Liu examines a digital solution: governments strategically outsourcing tasks of institutional development and enforcement to digital platforms—a process she calls “institutional outsourcing.”

China’s e-commerce boom showcases this digital path to development. In merely two decades, China built from scratch a two-trillion-dollar e-commerce market, with 800 million users, seventy million jobs, and nearly fifty percent of global online retail sales. Contrary to conventional wisdom, Liu argues, this market boom occurred because of weak government institutions, not despite them. Gaps in government institutions compelled e-commerce platforms to build powerful private institutions for contract enforcement, fraud detection, and dispute resolution. For a surprisingly long period, the authoritarian government acquiesced, endorsed, and even partnered with this private institutional building despite its disruptive nature. Drawing on a plethora of interviews, original surveys, proprietary data, and a field experiment, Liu shows that the resulting e-commerce boom had far-reaching effects on China.

Institutional outsourcing nonetheless harbors its own challenges. With inadequate regulation, platforms may abuse market power, while excessive regulation stifles institutional innovation. China’s regulatory oscillations toward platforms—from laissez-faire to crackdown and back to support—underscore the struggle to strike the right balance.

Praise

“How did China’s e-commerce market emerge and thrive in the absence of strong, formal institutions? In From Click to Boom, Lizhi Liu offers fresh answers to classical debates in the twenty-first century context, blazing a new path for future studies on China’s digital economy.”—Yuen Yuen Ang, author of China's Gilded Age

“From Click to Boom is a fascinating account of how Chinese big tech rose to such powerful heights and put China in the forefront of many new digital industries. An essential read for understanding China’s enormous success in e-commerce and answering larger questions about China’s development path and its future trajectory.”— Mary Gallagher, University of Notre Dame

“From Click to Boom is a masterful and captivating work of scholarship that poses – and persuasively resolves – crucial puzzles regarding the successful development of China’s e-commerce markets in the absence of strong legal institutions. Liu’s provocative insights offer an innovative approach to understanding institutional development in China and beyond.”— Brian S. Silverman, University of Toronto

“From Click to Boom will quickly become the leading English-language research monograph on the governance functions performed by China’s e-commerce platforms, and a must-read for anyone who wishes to understand how and why this occurred. Its combination of research methods is cutting-edge and sets a new standard in the field.”— Kellee Tsai, Northeastern University

“From Click to Boom is a landmark book, one of the best books I have read on political economy and Chinese politics in the last two decades.”—Yuhua Wang, Harvard University

Lizhi Liu is an Assistant Professor in the McDonough School of Business and a faculty affiliate of the Department of Government. Her research specializes in the politics of trade, technology and innovation, and the political economy of China. Her work has been published by American Economic Review: Insights, Studies in International Comparative Development, and Minnesota Law Review, and has been funded by numerous institutions, including the Bill and Melinda Gates Foundation, Weiss Family Program Fund, and the Stanford Institute for Innovation in Developing Economies. She received the 2020 Ronald H. Coase Best Dissertation Award from the Society for Institutional and Organizational Economics (SIOE), and the 2019 Best Dissertation Award in the area of Information Technology and Politics by the American Political Science Association (APSA). Her research has been featured in media outlets including Bloomberg, WIRED, and South China Morning Post.

Lizhi Liu teaches both undergrads and MBA students. She was listed as a Poets&Quants Top 50 Undergraduate Business Professor of 2021 and received a Georgetown Faculty & Staff Career Champion Award in 2022.

Excerpted from From Click to Boom: The Political Economy of E-Commerce in China by Lizhi Liu. Copyright © 2024 by Princeton University Press. Reprinted by permission.

Wantou village, nestled in China’s Shandong Province, sits in a region long marked by economic deprivation. For centuries, the Yellow River frequently flooded the region and acidified the soil, making it unsuitable for farming. Local households traditionally relied on crafting straw wickerwork for livelihoods, but the local market was limited. In the late 2000s, a returning migrant ventured into selling these handicrafts on Taobao.com, China’s largest online trading platform, and quickly amassed a fortune. His success lured other villagers to follow suit. Since then, e-commerce has transformed the entire village—even its walls. The wall slogans that once exhorted the Communist Party’s one-child policy have been replaced by e-commerce advertisements like “running around for a living away from home doesn’t beat selling on Taobao at home” (在外东奔西跑，不如在家淘宝).

Gyatsoling Rinpoche, who is recognized as a Tibetan living Buddha (the reincarnation of a past spiritual leader), started shopping online in 2014 to purchase religious items like yak butter lamps and candles. To his delight, he discovered that these items were cheaper online and that delivery only took four to five days to his temple in Chamdo, a city perched on the “Roof of the World,” where brick-and-mortar options were limited due to high altitude, inclement weather, and a scattered population.

The two anecdotes above are by no means unique. As of late 2022, around 850 million Chinese individuals engaged in online shopping, with 69 million directly or indirectly employed in sectors related to e-commerce. The avid online shoppers refer to themselves as members of the “Hand-Chopping Party” (剁手党), humorously vowing to sever their hands to resist the temptation to splurge again. The spending spree peaks every year on the unofficial holiday of Singles’ Day (November 11)—the world’s biggest shopping bonanza, which generated four billion parcels in 2020. If these parcels were arranged side by side, they would encircle the Earth at the equator approximately thirty times.

China’s e-commerce market is remarkable not only in absolute size but also in relative terms. Since 2013, China has consistently held the position of the world’s largest e-commerce market. Nearly 50 percent of global online retail sales took place in China, while the country accounted for only about 13 percent of global consumption in 2023, reflecting the country’s disproportionate development in e-commerce compared to other nations. Jack Ma, a prominent figure in China’s e-commerce landscape, encapsulated this disparity by stating: “In the US, e-commerce is the dessert, but in China, it is the main course.”

More importantly, e-commerce has been a catalyst for widespread socio-economic transformations in China beyond the confines of the online market. For example, the burgeoning popularity of e-commerce has facilitated the rapid adoption of digital payment and mobile wallets, propelling China toward a cashless society. Even beggars have adapted, now collecting alms through QR codes. Not everyone was happy about this transformation, though. In Hangzhou, a leading cashless city, two individuals robbed three convenience stores in a single night—yielding a meager sum of 1,800 yuan ($260) in cash. Their unawareness of the city’s cashless nature—as they were not local residents—inadvertently turned the criminal endeavors into a comical misadventure.

There are many more headline issues in China linked to the e-commerce boom: the development of highly efficient logistics and express delivery industries, which now employ robots and drones in sorting and delivering packages; the rise of powerful platforms and the fall of brick-and-mortar stores; advancements in big data analytics and artificial intelligence capabilities; the emergence of novel industries like live streaming; concerns about data security and platforms’ monopolistic behaviors—and the list goes on.

It is therefore not an exaggeration to assert, as Businessweek does, that “e-commerce has transformed China” (电商改变中国).

The Paradoxical Market

This now-evident boom was, however, unanticipated. In the early 2000s, China’s e-commerce sales were meager, lagging far behind other major economies. Researchers of the period held a bleak view about the sector’s growth prospects, citing various obstacles to e-commerce development: a lack of technological and public infrastructures; citizens’ concerns about the safety (or lack thereof ) of online transactions; the Chinese government’s unclear policy stance toward this nascent industry; and an insufficient complementary service industry.

Indeed, China’s extraordinary online market seems to defy conventional wisdom in many aspects.

First, many political economists argue that strong formal institutions— including state-provided secure property rights, contract enforcement, and the rule of law—are crucial prerequisites for bolstering efficient markets. For example, a strong legal system can prevent trading partners from engaging in fraud and breaching contracts, thereby nurturing trust and stimulating market activity.

A strong legal system should be particularly vital to the growth of e-commerce. After all, online transactions are not conducted face to face, and sellers and buyers are easily dissuaded by fraud, counterfeits, and information asymmetry. While many legal institutions are not specifically designed to regulate online activities, they play a pivotal role in preempting issues that could infiltrate the online market. For example, in countries with lax regulations on counterfeits, citizens naturally harbor skepticism toward online trans- actions, preferring face-to-face exchanges that enable product inspection before payment.

Nonetheless, China’s e-commerce market took off without strong formal institutions to support it. A case study on China’s e-commerce market in the 2000s highlighted this point: “China lacked norms and laws regulating online behaviors and preventing online fraud . . . In the US if you place a bid, it’s a contract, and by law you need to fulfill that bid if you win the auction. That’s very clear. People would be afraid of getting sued if they did not abide by that contract. In China people don’t care. ‘I place a bid, I don’t want it anymore, tough luck.’” Although China later made strides in legal developments that govern online transactions—including advancements in the general legal system (e.g., the Civil Code enacted in 2020) and the online sphere (e.g., the implementation of the E-Commerce Law in 2019 and the establishment of three specialized internet courts in 2017–18)—these legal frameworks emerged after the e-commerce boom. This aligns with the findings of Donald Clark, Peter Murrell, and Susan Whiting (2007), who show that improvements in China’s legal system are generally a consequence rather than a cause of market growth.

Second, conventional wisdom also suggests that, in countries lacking strong legal institutions, market transactions often rely on personal networks, social ties, or face-to-face exchanges to proceed. Citizens prefer trading with acquaintances or familiar vendors because repeated interactions can hold the trading parties mutually accountable, thereby fostering honesty and trust in trade. In contrast, impersonal exchanges with strangers are often hindered by trust issues in environments lacking legal protections.

Yet most e-commerce transactions in China are impersonal exchanges between small, anonymous traders in distant localities. Trading parties are often strangers to each other, and they do not repeatedly interact due to limited consumer loyalty. One may assume that consumers buy from these unfamiliar vendors due to their large size or offering of branded products. However, in reality, China’s dominant e-commerce model revolves around marketplaces. Major e-commerce platforms like Taobao/Tmall and Pinduoduo do not sell their own products but host tens of millions of third-party sellers. These sellers are predominantly small-scale, or even microbusinesses, and the majority of sales in the market come from nonbranded products or lesser-known brands. Given the setup, why do Chinese consumers ever trust and trade with online strangers when legal protections remain weak?

The third counterintuitive aspect of China’s e-commerce market is its leap-frog development. Many would naturally anticipate larger e-commerce markets in developed economies compared to China. Despite China’s rapid growth, it remains a developing country by many international standards, with GDP per capita only about one-sixth of the US level in 2023. Developed economies have wealthier citizens, a stronger spending culture, and more widespread Internet coverage, all of which are conducive to e-commerce development. Additionally, developed economies have stronger legal institutions and higher credit card adoption rates, which should offer better protection for online purchases and foster e-commerce growth.

However, China leapfrogged developed economies in e-commerce within a short period of time. In 2006, China’s online retail sales were merely 3 percent of those in the United States. Yet within a decade, its online sales overtook those of the United States and the United Kingdom combined. In 2019, China’s online retail sales accounted for 21 percent of the country’s total retail sales, almost double that of the United States (11 percent). This leapfrogging trend applies not only to overall market size (see Figure 1.1) but also on a per capita basis. Compared to online shoppers in the United States, their Chinese counterparts make online purchases more frequently and conduct more than half (59 percent) of total monthly purchases online.

(Image republished with permission by Princeton University Press)

Lastly, even more perplexing is the Chinese government’s attitude toward the online market, which contradicts two prevailing notions. First, the Chinese internet is often depicted as a giant cage marked by pervasive censorship and state control, suppressing innovation. However, it is often overlooked that there is a duality in China’s control over the internet. While social media and communication aspects of the internet have always been tightly regulated, China’s control over the economic facet of the internet has been much more lenient. This autonomy has paved the way for e-commerce to act as a catalyst for innovations like mobile payment, AI, and smart logistics.

Moreover, China is known for its state capitalist economy, characterized by a large sector of state-owned enterprises (SOE) and active government intervention in economic affairs. Nevertheless, for as long as two decades preceding 2020, the Chinese government refrained from imposing stringent regulations on e-commerce, and SOEs had little presence in the market. While regulations were eventually tightened in 2020, it’s noteworthy that this regulatory adjustment occurred much later than expected. Given the government’s historically interventionist stance and formidable regulatory power, its prolonged leniency toward a highly disruptive industry dominated by private firms is surprising.

These counterintuitive aspects of China’s e-commerce market raise many questions.

If neither formal institutions nor informal networks apply, what constitutes the institutional foundations of this ostensibly well-functioning market? Why do customers trust trading with strangers despite the considerable risks involved? If legal institutions are so important for undergirding a market, why did the e-commerce boom happen in China, where the legal environment was weaker than in developed economies? Why did the Chinese authoritarian government, which has great capacity to directly regulate e-commerce, refrain from doing so for a surprisingly prolonged period? What are the political and economic effects of this paradoxical market boom?

This book represents a decade-long endeavor to analyze the political-economic dynamics of China's e-commerce market, the world's largest. Drawing on extensive field interviews, firsthand observations, and a wealth of original and proprietary data, this book aims to unravel China's seemingly paradoxical boom and its consequences.

Excerpted from From Click to Boom: The Political Economy of E-Commerce in China by Lizhi Liu. Copyright © 2024 by Princeton University Press. Reprinted by permission.