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ROBIN MCNEAL: I will introduce our speaker tonight. So Professor Sida Liu comes to us from the University of Wisconsin at Madison, where he has appointments both in sociology and in law. And, in fact, he has these two degrees in these two research interests. His LL.B is from the law school at Peking University. And in 2009, he finished his PhD in Sociology at the University of Chicago. And then he's been teaching at Madison most of the time since then.
And as I said, his research interests are in this intersection of society and law. I was trying earlier today to imagine if there was any place where law doesn't intersect with society.
SIDA LIU: Exactly.
ROBIN MCNEAL: But maybe there is, and someone can illuminate me. But also working on organization and occupations, criminal justice, and a range of other things, and will speak to us tonight on Chinese law firms in the age of globalization. So welcome, Professor Liu.
SIDA LIU: Thank you, Professor McNeal, for the nice introduction. It is my great pleasure to be here today. This is my first trip to Ithaca. Over the years, I've heard so many good things about how beautiful the Cornell campus is from my friends and colleagues. And it is really exciting to be here. And the campus actually lives up to its name, so I'm really pleased to be here.
So what I'm presenting today is a paper that I'm about to finish. It's a forthcoming article in The American Journal of Sociology. So it's, as you can see from the title, "Chinese Law Firms in the Age of Globalization."
I want to say just a word or two about the background of this paper. This paper grew out of a Harvard Law School project-- it was a very happy name-- called The GLEE Project. It's not the TV show Glee. GLEE stands for Globalization, Lawyers, and Emerging Economies. So what we're looking at in that bigger project is the impact of globalization on the corporate legal sector in three countries.
Originally we wanted to study all the BRIC countries-- Brazil, Russia, India, and China. But then somehow, we couldn't find people who do Russia. So it become the BIC countries-- Brazil, India, and China. So this paper especially is one of the China papers for the bigger GLEE project.
So let me start by actually telling you a little bit about three law firms, which can give you an idea of what I'm about to talk about tonight. And then I will move on to the theory and other stuff.
So the first law firm I want to talk about is a Chinese law firm called King & Wood. Just to be clear, there's no Mr. King or Mr. Wood, as many American or British law firms. This law firm, the Chinese name is Jindu. It just sounds like King & Wood. So they just decided, when the firm was founded in 1993, we're going to call ourself King & Wood.
So this firm got a lot of attention in the legal industry a few years ago because in March 2012-- at that time, King & Wood has about 1,000 lawyers, mostly in mainland China. And at that time, King & Wood announced a merger with the Australian firm called Mallesons Stephen Jaques. At that time, Mallesons had about 800 lawyers in Australia. It's one of the largest Australian law firms. King & Wood, of course, was also one of the largest Chinese law firms at that time.
So after that merger in March 2012, it become one of the largest law firms in the world. Not the largest, but one of the probably top 20 largest law firms in the world, with about 1,800 lawyers. So that made headlines in The Wall Street Journal and some others, especially legal newspapers and magazines.
And then a year and a half later, this law firm did another merger, this time with a even more prestigious target. It's a British law firm called SJ Berwin. For those of you who are from the law school, you know there's this Magic Circle of British firms. There are five law firms that are very prestigious. SJ Berwin is not one of the Magic Circle, but it's also still one of the largest and most highly regarded
British law firms. So SJ Berwin also merged with the new firm King & Wood Mallesons. And this time, they even gave up its name. SJ Berwin had basically gave up the firm title to join King & Wood Mallesons.
So after these two mergers, the second merger happening in November 2013, this new firm, King & Wood Mallesons, now they claim themselves-- this is a screenshot actually, of more than a year old, in 2014. Said, "We are a global combination of over 2,700 lawyers" in pretty much everywhere except for North America. A few places. But the vast majority of Asia Pacific and Europe, and even Middle East, are covered.
But I want to point out that even after the two mergers, if you count everybody in King & Wood Mallesons, this now globalizing firm, this is still not the largest Chinese law firm. The largest Chinese law firm is this firm. It's called Dacheng. It's funny. I've been doing this presentation for about two years now. Every time I do the presentation, I have to go back to their website, count how many offices they have, because it kept increasing.
So the most recent figure, they have 41 offices in mainland China, nine offices abroad. There are too many. The left part couldn't even list all of them. So this law firm now has-- well, even by last year, it has about 4,000 lawyers in mainland China. This is the largest Chinese law firm.
And then this law firm used to be a predominately Chinese law firm, not really well known outside China. But this year, in January, Dacheng announced a similar merger as the King & Wood Mallesons merger with Dentons, which is not the most prestigious, but one of the largest international law firms. So now it become a firm called Dacheng Dentons. If you look at the logo, Dacheng even used the Chinese characters in the logo of the two firms.
The merger is still being worked out at the moment. But now they claim this law firm, Dacheng Dentons, is the single largest law firm in the world, with almost 7,000 lawyers in total. This map shows all their locations. Of course, all these locations in China are mostly Dacheng, and all these locations in other places are mostly Dentons.
So that's the second law firm I'm talking about. This is now the largest Chinese law firm, but also the largest law firm in the entire world-- larger than Baker & McKenzie, Clifford Chance, all those Anglo-American law firms.
And if you look at the history of Dacheng, you realize that actually, all these law firms-- the Chinese law firms-- by 2002, when I first started to study the Chinese legal profession, at that time, no Chinese law firm had more than 200 lawyers. Dacheng at that time had only less than 100 lawyers-- probably 70 lawyers at that time. So it increased to 4,000 in about a decade.
But even with this speed of growth, Dacheng is still not the most rapidly growing law firm in China. The most rapidly growing law firm in China is this one, called Yingke. This is a miracle in the history of Chinese law firms. By even as recent as 2007, which was seven or eight years ago, this firm had a single office in Beijing with about 30 lawyers. Now this law firm has more than 2,000 lawyers all over China. You can count how many offices they have. Probably about 20 offices inside China.
And also, the firm claims that it has more than 50 overseas offices. But of course, as I will show later in the paper, not all those overseas offices are actually real offices. There are various kinds of ways of doing it. But nevertheless, this is the most fast-growing law firm in China.
So of course, the experience of these three law firms leads to the central research question we're trying to answer in this project, which is, why or how have some Chinese corporate law firms grown into mega firms with global presence in less than a decade? Because if you look at the work history of the legal profession, the speed or magnitude of growth had never happened like this. Just like many people were puzzled by the speed of growth of the Chinese economy in the past 20 years, it's the same thing-- an even more rapid growth in terms of the legal service industry. So this is really the puzzle we're trying to explain.
And to explain this, of course, the first thing that we did is that we go into some existing theories about law firm growth, mostly based on the experience of the growth of large American law firms and British law firms. And what I found is those theories were not very useful. I don't have time to go into detail, because I think the empirical stories are a lot more interesting than these theories.
But in a nutshell, almost all of the existing theories about law firm growth try to explain why law firm growth from what's happening inside the law firm. They either talk about the promotion-to-partner tournament, or the referral network, or reputational bonding, all those. But all what's inside the law firm. But this actually doesn't work very well for the Chinese case because it's really clear it's not really what's inside of-- doing inside the law firm driving the growth, as I will show later with empirical data. It's what's happening actually outside the law firm between these lawyers.
So that actually leads to, of course, another set of literature. I don't know how many of you have background in organizational analysis. But if you're familiar with organizational analysis, these are some theories that actually try to explain organizational development or organizational growth by theorizing these organizations in the field, called organizational field. The idea is that these organizations are not isolated firms; they just grow by themselves. They exist in a larger field. They interact with one another. There are forces in the field that actually help the organizations grow or prohibit their growth. Again, I don't want to just go into the details about this.
But our theory, basically, is quite similar to this general perspective. We're also trying to explain the growth of these law firms from the organizational or the environmental perspective. But we use a different framework than the organizational field framework.
For those who are interested in sociological theory-- I assume the vast majority of the audience are not sociologists, so I won't go into detail. But there's actually a forthcoming paper I wrote with my Wisconsin colleague, Mustafa Emirbayer, called "Field and Ecology." Actually compared these two perspectives of field theory from Pierre Bourdieu, the French sociologist, and the ecological theory, which is the theory we're using in this paper. Originated from The Chicago School of Sociology in the United States.
So the main idea of the ecological perspective is really to try to theorize firms, or individuals, or ethnic groups, actors, in the social space, called ecology. So in this ecological system, different actors occupy different positions. They have a specific position. And where they are located in the ecology actually determines the patterns of growth and pattern of interaction with other kinds of actors. So that's the basic idea.
So from that idea, we basically try to develop a new model of law firm growth and organizational growth in general, which we try to situate these law firms-- Chinese law firms-- or firms in general in a larger ecological system with other firms in the same industry. And they compete, we argue, not only for business and for legal talent, obviously, but also for a lot of symbolic things. For example, size. Which firm is the biggest firm in the industry? Or, how many offices you have. Do you have overseas offices? Are you a multinational firm or a predominately national firm?
So in other words, it's really the interaction, the competition, the conflict, and all these patterns of interaction that happen between them that drives the organizational growth between them. So in other words, firms adopt different growth strategies and generally different processes of interaction based on their various spatial position. In other words, where you're located in the social space, in the ecology, is actually quite important.
So there are two important concepts in the theory. One is positions, is where are firms are located. And the other one is process-- in other words, the various kinds of processes firms interact with one another.
So I'll summarize the thing in a table so it's easier for you to see. So basically, for the case of the Chinese law firms, those firms we're talking about-- those three firms and many other firms I'm going to be talking about-- first, we classify them into four categories-- global generalists, elite boutiques, local coalitions, and space rentals. And also, we look at different patterns, how they interact. Both there are some the social processes happen within the firm-- how the firm adjusts itself to adapt to the interaction-- and also, some inter-firm processes, how they compete or how they have symbiotic relations between them.
And again, for the sake of time, I won't go through the-- you saw the table here. And I'll illustrate some of these concepts with empirical data to give you a sense of what I was talking about.
And also, very quickly about data and methods before we get to the real stories. We did most of the research by interviews, where both my collaborator, Professor Wu at Chinese University of Political Science and Law, and I are qualitative researchers. So we did in-depth interviews in 2010 to 2013. All together, we did about 39 interviews with 39 lawyers in 12 different corporate law firms. All of them belong to these large corporate law firm categories.
And you can probably see here, we oversampled partners a lot. And we did it on purpose. It's not a sampling error because we're talking about very large macro things about firm growth to partners, especially senior partners-- has a lot more to say about this topic than the associates. And also, we interviewed for bar association leaders in various places, both at the national level and municipal level, and also a very senior Ministry of Justice official who actually regulates the entire legal profession in China.
And our research sites. We have three domestic sites. Beijing, Shanghai obviously are the cities where the headquarters of most of these firms are in. And also, we went to another provincial city, Xiamen. My collaborator, Professor Wu, was teaching in Xiamen University at that time. He moved back to Beijing last year. So he was convenient. And the reason we went to Xiamen is because for convenience, but also because we wanted a provincial city to find out what's going on in the branch offices of these firms, not just the headquarters, hear the managing partner of their headquarters say about their work.
And also, two summers ago, I was in New York, so I also interviewed some of the partners in their New York offices of these large Chinese law firms-- King & Wood, Dacheng, and other firms. And of course, we also drew on some previous interviews I did for my dissertation project earlier when I was at Chicago during 2004 and 2007, to give a little historical perspective to law firm growth. And we also collected data from law firm websites and other kind of media archival sources. So that's data methods.
Now I want to first show you this figure to give you a sense of the speed of growth. You already got a sense when I was introducing those three firms. But this is the most systematic table.
So this table shows the growth in the number of-- not lawyers. Number of domestic offices of seven large Chinese law firms. These are not necessarily the seven largest. There are a few firms a similar size. But we only can collect data of these seven. But it can give you a sense of the kind of the pattern of growth.
So you can see this firm, Jun He, who is still not widely regarded as the most prestigious, or one of the most prestigious law firms in mainland China. It was founded a little earlier than the others. Most of these firms were founded in this period. That was right after Deng Xiaoping's southern tour, of course, in 1992. You can establish partnership law firms, first in Beijing and Shenzhen, but also then spread to the entire country.
But Jun He was founded actually earlier in 1989 as a cooperative law firm-- in Chinese, [CHINESE]. The idea, it's a transitional organizational form between state-owned law firms, which all Chinese law firms in the 1980s were state-owned law firms. And then they made a transition into partnership law firms in the 1990s. But Jun He was caught in between. It was founded a few years earlier.
Of course, it gives the firm-- it's a Beijing-headquartered firm-- advantage in the earlier growth. So we can see the number of offices keep increasing. Jun He has the largest number of offices until about early 2000.
Also, I didn't count the number of lawyers, but the number of offices, because the number of lawyers in these large law firms are constantly changing. You can never get a precise number for a given year. Every year, it changed so much. But the number of officers is a lot more reliable figure.
So Jun He was a early leader, you can see, in the growth of law firms. But by 2000, around 2000, you can see a few other firms, like King & Wood, Zhong Lun, and some other firms, their size was about the same as Jun He in terms of number of offices. That's only five. Now the largest has 41 and 42.
So the real growth really happened in the past 15 years, you can see. It started with a few firms like King & Wood, for example, that started to really expand domestically. And also, Dacheng and a few other firms started to develop really fast.
But the really big growth actually happened in the past 10 years, from 2005. You can see firms like Dacheng, and DeHeng, and also Yingke, those miracle law firms. Yingke was like this, all the way here. And all of a sudden, [INAUDIBLE] become now the second-largest law firm in China. So this gives you a sense of the sequence and the speed of the growth.
So you can see, the early leader, Jun He, it was the largest law firm in China for a long time. But now they only have seven offices. If you do a head count, Jun He is not even the top 10 largest law firm in China-- although if you look at the profit per partner and all those billings, then Jun He is still one of the best.
As I said earlier, there are four different types, different species of law firms-- global generalists, elite boutiques, local coalitions, and space rentals. So I'll just go by each one to give you a sense of their different path of growth to also illustrate the ecological theory that I was talking about.
So King & Wood, the law firm, as I said, as most large corporate law firms in China, was established in 1993. That was right after Deng Xiaoping's southern tour. So by 2000, this firm was already widely considered one of the top law firms in China-- also, one of the largest.
And also, King & Wood is different from most other Chinese law firms in the sense that from very early on in the firm, they really tried to be like the Western firms in the sense they even adopted the lockstep system, which is a system of renumeration among law firm partners basically based on seniority-- not based on how much money you bring into the firm every year, but how senior you are in the firm. That's a very traditional way of distributing profit within the law firm adopted in the United States and in Britain until recently.
So they really tried to replicate this. So that's why they're called global generalists. They replicate the Western experience.
And they, [INAUDIBLE] King & Wood, took two steps-- the domestic expansion first, and then the international one. The domestic one, we call it assimilation. The way they expand is to assimilate partners from other firms into the King & Wood system rather than directly merge with other law firms. I'll give you a few quotes to show you the process.
For example, this is one of the King & Wood partners talking about their strategy of development. He says, "King & Wood does not have many domestic offices-- only about 11 to 12 in the mainland. When opening a new office, we mainly consider business needs, not geography.
"For example, Shanghai, Suzhou, and Hangzhou are close to one another. But the business in Shanghai is mainly about foreign trade. Suzhou has an industrial park that has good relations with us, and Hangzhou because private enterprises are highly developed in Zhejiang Province.
"So we set up offices in all the three cities. Except for some places where we recruited a group of local partners, many offices were established by sending our own partners there. For every office, we request uniform logo, uniform management, and uniform personnel-- and administrative rules to guarantee that the entire King & Wood system can provide standardized, uniform legal service."
So you can see, that's what we call assimilation. Every time they expand, they go to a place, they actually try to incorporate the new partners and the new office into the King & Wood system.
When we did our interview, they even had this very interesting term called [CHINESE], taking a bath. The idea is every new partner-- in the early years, especially, when they expanded from Beijing to other cities-- they recruit a local new partner. They would rotate this partner to different offices, to the more mature King & Wood office in Beijing or in Shanghai. Let them work there for a few months, as long as half a year. Take a bath-- basically, let this person get to know the King & Wood culture and all those things, and then send him back to the local place to run the office.
So that's what we call assimilation. It's a very integrated way of recruiting partners. This is also quite similar to the experience of a lot of Western firms.
Then what about this foreign expansion, international expansion? The merger with Mallesons and with SJ Berwin? We also interviewed a couple of King & Wood partners. They talked about the King & Wood and Mallesons merger, which got a lot of media attention.
This partner says, "We often say the third-tier firms talk about case sources, second-tier firms talk about management, and first-tier firms talk about culture." And they see themselves as a first-tier firm, of course. "From the very beginning of our firm, we have always been learning from the Western firms. But we always felt that something was missing. We feel that the most effective way is to merge with them.
"Of course, British or American firms would not work, because they are too strong. They would eat us up in a merger. The biggest benefit of the merger with Mallesons is not economic profit, but reputation, management, and culture."
So here's another quote from another partner making very similar point. He said, "Many people have misunderstandings of this merger. They thought we were seeking size and profit. Actually, our idea was to elevate King & Wood to another level, to learn experiences from Mallesons, a firm with a history of 180 years and a beautiful management structure.
"We used the Swiss Verein structure and established a cross-national management team. In formal occasions, we do not use the word merger, but strategic alliance. This alliance is dominated by us. And it was done outside mainland China, so it does not violate Chinese law."
I want to explain two things here. First is that, what the Swiss Verein structure? It's a structure that enables law firms, but also some accounting firms, consulting firms, to come together without sharing profit. So the idea is that King & Wood and Mallesons have a Swiss Verein merger, which means that the two firms share the brand now, and they probably refer business to one another, but they don't share profit. So King & Wood makes money as King & Wood. Mallesons still makes money as Mallesons.
So the only office of the two firms that merged is the Hong Kong office. Both firms before the merger have offices. They actually merged.
But even the Hong Kong-- I actually ran into a University of Hong Kong law professor in Shanghai about a month ago. He said even today, the merged Hong Kong office, they're in the same building, but two different floors. The King & Wood people are in one floor and Mallesons people in another floor.
That's called a Swiss Verein merger. It's usually the first stop of a more integrated merger. So that's the first thing I want to explain. And of course, then the question, why they use the Swiss Verein structure? To avoid risks, of course, for one reason. But more importantly, it's because they don't want to violate Chinese law, because the Chinese Ministry of justice has this regulation foreign law firms cannot merge with Chinese law firms, and cannot employ licensed Chinese lawyers.
So think about it. If you allow the King & Wood firm to merge with a Australian firm, why can't an American law firm just go into China and merge with a Chinese law firm, right? So actually, it's a very controversial merger. A lot of people say this is actually violating Chinese law. It's a different treatment. You're treating a foreign law firm differently from a Chinese law firm.
But King & Wood people argue no, it doesn't violate Chinese law because everything we did was outside China. Even if you check their website today-- this is almost three years after the merger-- the Chinese website is still called King & Wood, even the English version. And there's a King & Wood Mallesons website. But if you look at the Australian firm's website, they actually call themselves King & Wood and Mallesons outside China.
So they're very careful trying to avoid violating Chinese law. But of course, it's still very controversial. Actually, after this merger, it was copied by the Dacheng-Dentons merger. They used exactly the same structure. But also, I think some innovative or opportunistic American firms actually also started to try to do the same thing with Chinese law firms. They just use a different brand in China, and then use something else outside China.
But go back to my earlier point. What I was saying is that the King & Wood experience is really-- you can see this is the assimilation and symbiosis story. I mean, domestically is more assimilation, and an international merger is really-- they formed this symbiotic relationship with Mallesons or SJ Berwin, these international law firms. They share resources, but without actually integrating with them.
And of course, after the merger, there are some questions. King & Wood closed down, I think, one or two less profitable domestic offices, because they realized their profit per partner is actually a lot less than the Mallesons, the Australian firm. They wanted to raise their profit level. So they actually closed down some less profitable offices.
And also, another big question, of course-- what is the nature of this King & Wood and Mallesons firm? Is it still a Chinese law firm, or it's becoming an international law firm? It's kind of a hybrid, in between? Nobody knows.
But King & Wood basically illustrated this story along the new instiutionalists, the global convergence story. They're trying to converge with the Anglo-American firms.
There are two other firms are also-- we call them global generalists, Jun He and Zhong Lun. I don't have time to go into detail, but these are also two firms, together with King & Wood, widely regarded as the three best on large generalist law firms in China. But these two are actually less aggressive than King & Wood in expansion. They also set up offices in different places, both in China and abroad, but mostly by market opportunity, not careful strategic planning like King & Wood.
But of course, they also respond to the King & Wood and Mallesons merger. After King & Wood-Mallesons merger, for two years, they were actually happening-- serious discussions between Jun He and Zhong Lun. They want to merge with each other as a response. We become a bigger law firm, more dominant law firm in China than this King & Wood Mallesons firm.
But the merger didn't happen, or hasn't happened. But you can see clearly there are ecological pressures by the King & Wood merger generated to the other generalist law firms.
So that's the first type of law firm, global generalist. And the second type of law firm, I call them local coalitions. So Dacheng is a great example of this. They use a different kind of strategy in their expansion. We call it accommodation.
So Dacheng has a little different history than King & Wood. Look on paper, they look very similar. Dacheng was also set up in 1992-1993, around the same time as King & Wood. In the 1990s, Dacheng was also one of the largest law firms in China.
But then there were some serious internal politics, problems in the firm, so some partners left. So by early 2000, Dacheng became a really small firm. I think the smallest time of Dacheng, it has about probably 50, or even less than 50, lawyers in early 2000.
But then from that point, they realized they were far behind Jun He, King & Wood, Zhong Lun, and these other big law firms, because those law firms are not only bigger, they also occupy a better position, because the vast majority of foreign-related business-- the FDI-- Foreign Direct Investment-- merger and acquisition, IPO, this kind of lucrative corporate work-- were monopolized by Jun He, King & Wood, Haiwen, and a few other corporate law firms. They couldn't really get into that circle anymore. So you can see that's where the ecological position comes in, where they're located-- because they're not located in the very top tier of the hierarchy.
Then they thought about the different strategies. That if we cannot get stronger than you, we cannot get more famous or more prestigious than you, we'll get bigger than you, right? So how to get bigger than you? Of course, they open up a whole lot of offices all over the country. If you still remember the earlier figure I showed from 2005, they started to grow like crazy.
Now they have 41 offices the mainland China. And they claim they have offices in every province. They actually have offices in every province, including inner Mongolia and Tibet. They even have an office in Taipei, and Hong Kong too. So they try to set up offices everywhere.
So it's really a strategy of setting up offices by geography, not by business needs. Remember the King & Wood quote. They set up three offices in the Shanghai area because business needs. But for Dacheng, it's really geography. They really want to get everywhere.
So here's a quote from a Dacheng partner explaining why they did what they did. He said, "Now we have set up offices in every province except for Tibet." That was earlier interview. Now they even have a office in Lhasa.
"The main form of our expansion is to merge with local firms. There are two reasons. From our point of view, law is a very local occupation. Of course, we do not have to establish so many offices and could just fly lawyers to the sites like other firms do. But when these lawyers arrive, they couldn't even find the door of the local government agencies.
"On the other hand, in this period, many local law firms also face a bottleneck problem, and they hope to bring their organization and income to the next level. If they were affiliated with a large law firm in Beijing, it could provide them a better platform for development." So their argument is from both sides.
"As for why we set up offices in every province, actually, the legal services in many Western provinces are also important. Xianjiang, for example, looks like and underdeveloped region, but it is in fact China's trade gate to Central Asia."
So you can see they have a very different view of what the market looks like, because they said we can't just concentrate in the coastal cities, the major business centers, like Jun He or King & Wood, and monopolize those most high-end business. So we got bigger. We spread around. We pick up all those business that they don't do. So that's why they have so many offices.
And another thing they said is very important, because at this time there are actually demands from both sides. Not only they want to expand. A lot of local law firms in the provinces-- they're already the top three or top five law firms in the city-- they want to go to the next level, which is to affiliate with a Beijing-based law firm. Actually, that's exactly how Dacheng expand everywhere they go, unlike King & Wood.
Everywhere King & Wood goes, they look around, look at the best partners in the city, and they recruit a partner into the King & Wood firm. They don't merge with another firm directly. Dacheng, everywhere they go, it's like a franchising model. They identify a good local firm, just give the brand to the firm without actually trying to take a bath, let the partners take a bath, and just let them run as they run. And they have an agreement of how to divide the fees for using the Dacheng brand, like a lot of franchising business in this country. So that's how they do business.
And so what's the benefit for the local branch offices? So there's a interview by a Xiamen partner. He's a partner in a Dacheng Xiamen office. He said, "Joining the Dacheng system significantly elevated our whole law firm. The most important change is that it provides us a national or even global service platform. In this service network, we can save much information cost, especially in cross-regional collaborations. It also brings more costs from clients and provides them better services. Many clients, especially corporate clients, value such a service network very much."
It's very simple, the idea, because many of these provincial law firms, their big clients are, of course, the provincial SOEs or the large private enterprises. But they realize that if they don't merge with a Beijing law firm like Dacheng, that their big clients, the provincial SOEs, when they try to be listed in Shanghai or listed in Hong Kong, they will go to the Shanghai firm or the Beijing firms. Then they lose the business. After they lose the business, they gradually lose to client.
So if they just become part of the Dacheng, or part of the [INAUDIBLE], or the King & Wood system, they will be in a much better position to keep their clients. So there are actually demands on both sides for this accommodation model to work.
But of course, there are problems of this model, because the firm is becoming so big that-- 4,000 lawyers, more than 40 offices in the country. So there are whole kinds of problems with management. So this is a comment from not a Dacheng lawyer, but a leader of the Beijing Lawyers Association commenting on the Dacheng model.
He said, "Dacheng is the most locally embedded among large law firms. It best corresponds to the Chinese characteristics. It has history and has gathered a number of very good lawyers. But the problem is its management costs. The King & Wood model is more difficult at the beginning, but easier later. The Dacheng model is the opposite. How to deal with the conflict of interest among branch offices. How to distribute profits. These are challenging questions."
These are indeed challenging questions. It actually happened when we interviewed some of the Dacheng lawyers. They actually say there are even cases two Dacheng partners in the same office compete for cases. This would never happen in a firm like King & Wood or [INAUDIBLE] very well integrated law firm.
But it happened in Dacheng very often because most of their lawyers use the-- they call it the [CHINESE] system, commission fee-based system. So every project or every case they do, they turn in a certain percentage of their income to the firm. That's how they negotiate. So that's why there are internal competitions, even, between in the same office.
And also, some Dacheng partners we interviewed told us that, for example, a Dacheng partner in the Beijing office have a case in Xi'an. And he will fly to Xi'an. But when he landed in Xi'an, he will go directly to the clients or to the court, never really visit the branch office in Xi'an because they don't consider themselves in the same firm. It's a very loose coalition model.
So go back to this slide. So this model is actually not invented by Dacheng. There's a earlier form of this local coalition model called [CHINESE], or legal group, or lawyer group, no matter how they translate it. You're actually promoted by the Ministry of Justice in China. From the late 1990s, there are many examples of still-- firms called [CHINESE], like Grandall and Zhonghao, these kind of law firms.
So the idea is that they try to have law firms in different cities come together, become a network called [CHINESE], become a group. They even gave them a special name, special treatment. So the Dacheng model basically grew out of that model and become a lot bigger, of course. Dacheng becomes such a gigantic law firm.
And in the whole process, Dacheng also got very strong support from the government and the bar associations. One indicator is that actually the first Chinese law firm-- actually had a [CHINESE], the big party committee in the firm. Because it is so big, there are so many party members, they actually have a [CHINESE], have a party committee inside the firm.
So that also shows you how they're supported politically, because several Dacheng's senior partners were also leaders in the national All-China Lawyers Association or the Beijing Lawyers Association. They got a lot of support from the government. That's why they strategically spread around the whole country. So that's Dacheng, the local coalition model.
Now I want to talk about the third model, which is actually my favorite. This is the most interesting and most Chinese way of law firm expansion, the Yingke model. I call it the space rentals because the way it works, it's almost like a combination of real estate rental and law firm growth.
So the Yingke law firm, as I said, until 2007, it was a very obscure law firm. The firm was founded in 2001 by a divorce lawyer in Beijing. And nobody knows the Yingke until very recently.
And then all of a sudden, in 2007, this new managing partner came to this firm. This managing partner-- of course, I can't disclose the name for research ethic. He's not a traditionally lawyer, training in law school and then become a lawyer. He had an engineering degree from Tsinghua, the most prestigious engineering school in China. I'm a [INAUDIBLE] graduate, so I tend to see Tsinghua as an engineering school, although they have social science and humanities as well now.
So yeah. So this lawyer, he's a licensed lawyer. But he has an engineering degree from Tsinghua. Never had a law degree. He came to this law firm with load of money. And somehow, he got investors behind him. This is a very controversial issue, because in the United States, law firms cannot have the investment from non-lawyers.
But globally it's changing. In the UK, for example, now, actually, non-lawyers can invest in the law firm. In Australia, law firms can even be listed in the stock market.
In Chinese law, this is a ambiguous area. Law firms theoretically should be a partnership. But there's really no rule against investment, who are the investors behind the law firm. So this law firm basically take advantage of that rule. So this new managing partner came in, and then with tons of money from non-lawyer investors.
And then the way they do business is that they quickly grew to more than 2,000 lawyers in five years. How did they do it? [INAUDIBLE], for example, when they set up the Shanghai office, which is their second-largest office now-- they went to Shanghai, I think, around 2009-2010, right after the global financial crisis. At that time, the Shanghai real estate price had always been going up like crazy-- but then took a hit, actually, right after the financial crisis.
So they rented a pretty nice office building-- not in [INAUDIBLE], not in the most prime locations, but one of the central locations, near the train station. They rented two floors of the entire office. And it was a very reasonable price. I can't remember whether they rented the office or they actually bought the two floors.
Anyway, so they don't have any lawyers in Shanghai. They just go there and got the office space first. And then they advertised by email, online, by all kinds of means, to all the lawyers in Shanghai. Look, we have this beautiful office space. If you want to join our law firm, we'll give you a very, very desirable rate. As I said, a lot of Chinese lawyers work on commission fee basis. They just give up 30% or 40% of their billings to their law firms or to the affiliate with that firm.
[INAUDIBLE] you can only pay us 5% or maybe a fixed amount, 50,000 yuan every year. And then you can keep all the rest. We give you office space, which a lot of Chinese lawyers practice without office space. So they give everybody office space, give everybody a kind of a discount in the commission fee. So that's why they were able to actually accumulate a lot of lawyers in a very short time.
And of course, as you can imagine, most of these lawyers are not really the most famous or most prestigious lawyers. Many of them are younger and less experienced than lawyers in other places. But nevertheless, they were able to expand really big.
So that's why we call it a proletarianization. It's a Marxian concept. So it's really talking about the idea that in a capitalist system, that the professionals or the workers were de-skilled and become kind of more like proletariat in the Marxist sense.
So I'll give you a few quotes, again, to illustrate how this actually works in practice. This is from, actually, Yingke's managing partner in Shanghai, not in Beijing. He said, "Yingke's idea is different from most law firms. We adopt a professional manager system. Although the managing partners of our offices are all licensed lawyers, we do not handle cases, but specialize in managing lawyers. In other words, while other firms manage business, we manage lawyers. Lawyers are our business.
"Yingke uses contractual management for all its lawyers. Everyone signs a contract with the firm, including myself. We all have contracts with the firm director in Beijing. If we thought this lawyer was incompetent, the contract could be terminated at will. About 30 to 40 lawyers left the Shanghai office in the past few years. We eliminated some of them. Others quit voluntarily."
So you can see, this is why we call it proletarianization. You reduce lawyers from autonomous professionals into the contractual workers in the law firm. But it actually worked, in their case, quite well.
And this is the interview from one of their Beijing partners. He said, "We do not consider law a profession, but an industry. It needs integration, division of labor, resource sharing, and must be built into a industrial chain." You can see the engineering background at work here.
"A law firm should be a combination between expertise and capital. Now, I often tell other partners in the firm, you must believe in the big shareholder, because the big shareholder would not break his own arm to cut your little finger. Our voting is based on shareholding, not headcount.
"This is a global trend. In England, now non-lawyers can already hold up to 25% of a law firm's share. The actual operation of Yingke is like a limited liability company."
So you can see this is actually really a company in disguise of a partnership law firm, although they have senior partners. They give titles, senior partner or junior partner, depending on how much commissions you contribute to the law firm. But it's actually operated by this single firm director as his company. And this company basically provides service not to clients, but to lawyers. Lawyers join this company as partners or associates, and then lawyers provide a service to the client.
This is a very interesting model. And most recently-- this is actually from the [INAUDIBLE] post of the firm [INAUDIBLE]. You can see they are building a Yingke ecosystem.
For those of you who don't read Chinese, they're building a lot of things. The law firm is on the top. They're also business school. They're Yingke Going Abroad Study Center. They're the law cloud, [CHINESE]. They want to have the cloud online legal service. They're Yingke Coffee Shop. They're Yingke-- a whole bunch of other things.
So you can see, this is not really a traditional law firm. There's a business behind the law firm. So law firm become a way they do business.
And of course, this also generated a lot of criticisms from other firms. For example, this is the partner of Dacheng talking about-- because Dacheng is the now largest law firm in China. Yingke is the second largest. So Dacheng was-- partner was commenting on the income model.
He said, "The income model is based on capital. But capital is not the foundation of the legal profession. From the client's point of view, when they retain lawyers, they would not consider the law firm's capital, but its lawyers' expertise and qualification. Capital doesn't necessarily generate those things.
"But I sincerely hope Yingke can be successful because it is a good experiment for Chinese law firms. And its business is not on the same level as ours, so we do not see it as a competitor."
Well, he's not entirely right, for those of you who are laughing, because in Beijing and in Shanghai, they're not competitors, because Yingke as I said, in Beijing and Shanghai, they can only recruit the less experienced, younger lawyers. So Dacheng really is the-- the business has a different level in Beijing and Shanghai.
But once you go down not even very further, in the second-tier cities, some very important provincial capitals like Tianjin or or these cities, Yingke is already the largest law firm. And Yingke is a good brand.
There's another funny quote I had in the paper-- I didn't show it here-- is that we interviewed this partner from AllBright, [INAUDIBLE]. It's the largest law firm in Shanghai. So this is a woman born in Shanghai. So she really looked down upon the Yingke model.
But she said something important. She said, Yingke is like the Chinese clothing brand [INAUDIBLE], which is a local Chinese clothing brand. She said, [INAUDIBLE], nobody wears [INAUDIBLE] in Shanghai. It's such a terrible brand. But if you go to the second-tier city, a lot of people wear [INAUDIBLE]. But if you go to the third-tier city, [INAUDIBLE] is a cool brand. She said, Yingke will be like that.
In Beijing and Shanghai, it's never going to be the best law firm in the country. But in the second-tier, third-tier cities, it will be a pretty good brand.
And actually, the Yingke law firm director agreed with this view. When we interviewed him, he always compared Yingke with another famous company, McDonald's. He said, McDonald's is my ideal model of law firm growth. We want to build my law firm like McDonald's, although nobody thinks McDonald's has the most delicate food in the world. But we're big and we're a great brand. So that's the idea.
And another thing I want to say about Yingke is the overseas expansion, because as I said earlier, Yingke claims that it has about 15 overseas offices. But if you actually go to those places, look at those, those are not real offices. Most of the time, they either just set up a shell company without anybody or hire-- the funny thing is that Yingke had a new New York office. They actually hired a student, just graduated from the LL program-- either Columbia or NYU, I can't remember-- to be a managing partner of that office, because there's really no business in that office.
And for some other places, they will just go to a country, find a local law firm. If you look at the location map, it's also quite interesting. They're not necessarily in New York or in Hong Kong. They're in Istanbul, or Warsaw, or Mexico City-- a lot of interesting places.
And they just go to a place. They find a local partner. They just sign an agreement that says, you're still your law firm. But when we do business with China, you claim yourself to be Yingke branch office in Brazil or Yingke branch office in Turkey. So these are actually fake offices. They're not real offices.
But they serve an important function, a symbolic function. When we interviewed the Yingke partner, he actually adapted a old Chinese saying. He said, [CHINESE]. Basically means flowers bloom outside the wall and the scent is smelt inside the wall. The idea is that we claim to have these symbolic overseas offices-- actually helps us to recruit better lawyers inside China, because when we recruit a lawyer, we can tell our lawyer, look, we are not just a local McDonald law firm. We're actually a global law firm. We have all these offices in Latin America, in Middle East, and all those places.
It actually worked, especially in the second-tier or third-tier cities. It actually worked quite well. Now Yingke become a quite interesting law firm. So that's actually the most interesting model-- most model with Chinese characteristics among all these law firms.
But then, of course, the last thing I want to talk about before I open up for questions is these are the three different models of law firm growth. They all got very big-- King & Wood, Dacheng, and Yingke. And of course, after these three law firms got really big, it generated a lot of pressures on other law firms. Even Jun He, the oldest law firm and most prestigious law firm, felt a lot of pressure, because Jun He now has probably only about 500 lawyers, and these people have 4,000 or 2,000 lawyers, right? So it generated a lot of pressure.
So of course, different firms responded differently. So there's a quote from a AllBright partner who's basically commenting on the pressure they feel. He said, "The Chinese economy is a model of rough growth. So the growth of law firms is also rough. And the phenomenon of barbarous growth--" [CHINESE] in Chinese-- "like Dacheng or Yingke can happen. If Dacheng still adopted this model 10 years later, it would not work. But its growth now is a phenomenon occurred in a particular time period.
"After those firms have got bigger, of course we are feeling pressure. Actually, this pressure has always been there for many years. AllBright has always been the largest law office in Shanghai, and always the second largest far behind. But now these latecomers have emerged and our advantage has been gradually reduced."
So if you look at AllBright, it used to be-- Shanghai law firms don't grow like the Beijing law firms. They usually concentrate in the Shanghai area. They might have a office in Hangzhou or in Suzhou, but they don't go nationwide.
But after the Dacheng, Yingke, these gigantic law firms started to happen, AllBright started to set up office in [INAUDIBLE], or set up office in Sichuan, in the more inland places, and also try to expand overseas. So you can see the ecological pressure. That's why I say you can only understand the growth of these from if you situate them in the same ecological system and look at how they interact.
And the last law firm I want to talk about is a law firm called Haiwen. This also represents the fourth type of law firm, called elite boutiques. They have a very different kind of ways of survival. These law firms, Haiwen, Tangshang, Fangda, Han Kun-- in the early 2000, more than 10 years ago, there were about 100 lawyers, or 70-80 lawyers. There are still about 100 lawyers. They didn't grow. In other words, in the social science language, these are the control cases of law firm growth. They don't grow.
But they're still doing very well, because these firms are mostly highly specialized in a niche market. For example, IPO, the Initial Public Offering, or venture capital, or private equity. These are some of the most profitable areas of corporate law. But you don't need to have a firm of 2,000 lawyers to do it, because most of their clients are investment banks or very large companies. They don't have to share the branch with the ordinary people. So they kept their small size.
And if you look at the case of Haiwen, for example, most of the Haiwen's lawyers actually graduated from two very elite law schools, [INAUDIBLE] and [INAUDIBLE]. [INAUDIBLE] is another elite law school in Beijing. So it's a very kind of small, collegial culture inside the firm. They also have a very strict lockstep system based on seniority adopted in the late 2000.
And they never really do lateral hiring. They do very little lateral hiring. They promote their own partners. Kind of the old Cravath model. I don't know how many of you know the Cravath law firm in New York. They basically invented this, called Cravath system-- only promote their own associates into partnership.
And they don't really grow, because they have a different view of the things. Here's a quote from a Haiwen partner to illustrate this. "Haiwen's approach is to specialized and slowly develop, to maximize our own advantages. We have this constant issue of growth on the macro level, but there has been no specific plan. We position ourselves as a boutique firm.
"Now, many firms are expanding, and some are discussing mergers. Mergers would often lead to stronger firms. But they could also lose some opportunities. If two of our major competitors merged, it would not necessarily be a bad thing for us, because we would have one fewer competitors."
So you can see there's a different mentality because they're in such a niche market, like in the IPO market in China. Say if a Chinese company needs to be listed in Hong Kong, for example, there are only five or six major law firms actually handling this business. If two of them merge, Haiwen would have one fewer competitor.
And also, after they don't grow, of course they also feel pressure. They have 100 lawyers, and their competitor has all 2,000 lawyers or 3,000 lawyers. The way they compete is they don't have each partner go out to compete with other partners in other groups. They use the whole firm as the single group. So we use the whole firm to compete other partner groups in other firms. That's how they survive.
But of course, there's a problem with this Haiwen model because it's not very adaptable to the volatile market conditions. For example, after the 2008 financial crisis, for half a year, all the IPO activities in China stopped. No IPO activity in China. Stopped again because of the stock market crash.
So if you're a law firm that only do IPO work, you have nothing to do, right? So all your lawyers are just sitting there, waiting for work, right? So the generalist law firm, the advantage is you can accommodate different market situations better than the boutique firms.
But this is another model we called purification. Instead of assimilate or accommodate other firms, they purify themselves. They retreat to the niche market. But these firms often keep the highest profits per partner in the Chinese market. Their lawyers actually make more money per person than those general law firms.
So to quickly conclude, and I'll open up for questions. So what I've been talking about really, it's about law firm growth. So the big question, of course, what is the model of law firm growth?
Before we did this study, the conventional wisdom, mostly based on Anglo-American experiences, law firm growths are all very similar. It's driven by the partnership tournament or different things. All law firms grow in very similar ways. But we're actually showing at least three different models of law firm growth, and also some control cases.
And also more generally, if you're interested in organizational theory or sociological theory, we're proposing the ecological theory not just for law firms, but for organizational growth in general to emphasize both how low the firms are situated in the ecological system and how they interact with each other, and how these positions and patterns of interaction drives their growth.
And we tend to see firms as-- have a life, like human beings. A firm was born, and then grew up, and then interact with other firms. And then some firms die and some firms survive. So it's really a organizational growth as a survival strategy.
And lastly, I want to just put a few questions out there maybe, just a way to open up the Q&A. The big question at the moment, of course, is whether or not, or at what point China would completely open up the market for foreign law firms. As I said, now there are still barriers to foreign law firms. You cannot merge with Chinese law firms, and theoretically you cannot hire a licensed Chinese lawyer, although many of them do using different ways. So when would that be changed, with all these things hybrid firms, happening?
And also, whether or not there will be more integration in the Asia-Pacific region in the future, because now you look at these Chinese firms, their merger target is in Australia, in other places. But what about Asia? What about Korean firms, Japanese firms, and Southeast Asian firms, right?
And another big question, of course, if you look at the map-- I don't want to go to the earlier map, but most of these Chinese firms are expanding to Europe, or to Australia, or to Middle East. But they don't expand into Africa or Latin America. But Africa and Latin America are exactly the two places for a lot of Chinese outbound investment. And it's going to happen more in the future. So when will Chinese law firms actually enter those two continents, is another big question.
So for the sake of time, I'll stop here. And I'll-- happy to hear your questions. Thank you.
Sida Liu, professor of sociology and law at University of Wisconsin-Madison, explains his ecological theory of organizational growth in relation to Chinese law firms within the last few decades. Recorded Sept. 14, 2015 as part of the East Asia Program's Cornell Contemporary China Initiative (CCCI) Lecture Series. Co-sponsored by the Clarke Program in East Asia Law and Culture as part of their Clarke Colloquium Series.
