Repackaging globalization: A case study of the advertising industry in China

Repackaging globalization: A case study of the advertising industry in China

Geoforum 37 (2006) 752–764 www.elsevier.com/locate/geoforum Repackaging globalization: A case study of the advertising industry in China Lanchih Po B...

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Geoforum 37 (2006) 752–764 www.elsevier.com/locate/geoforum

Repackaging globalization: A case study of the advertising industry in China Lanchih Po Beijing Development Institute, Peking University and China Center for Economic Research, Peking University, Beijing, 100871, China Received 12 April 2005; received in revised form 11 October 2005

Abstract This paper analyzes the transformation of China’s advertising industry as a result of China’s economic reforms and the globalization of the advertising industry. Spatially clustered in the city-regions of Beijing, Shanghai and Guangzhou, the industry has been structurally and operationally integrated with the global advertising giants, as well as developing local strategies to attract the interest of local consumer markets. While the entry of global multinational advertising businesses has compelled China’s advertisers to accept and adapt to the industry’s globalized institutions, standards, operational procedures and corporate culture, the transformation of China’s advertising industry is best understood as a consequence of the interaction between globalization and localization. Ó 2006 Elsevier Ltd. All rights reserved. Keywords: Globalization; Global and local; City-regions; China; Advertising

1. Introduction Economic globalization is redefining China’s regional spatial structure. Since the country embarked on its program of economic reforms in 1979, the introduction of market mechanisms, the arrival of foreign investments, the expansion of international trade, and increasing global flows of information, people, and technology have fundamentally changed China’s economy and society. However, the effects of globalization on a given nation or region are never evenly distributed across different spaces and social sectors, and its impact on local institutions and culture is far from homogeneous. This paper focuses on the advertising industry, an important part of the producer services sector1 that has become increasingly globalized in the last two decades. Specifically, the paper will assess how the advertising industry in China has been affected by the globE-mail address: [email protected] Or ‘‘advanced services’’ as Hall (2001) calls them, which mainly refer to insurance, banking, legal services, accounting, consultancy, advertising, etc. (Singelmann, 1978). 1

0016-7185/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved. doi:10.1016/j.geoforum.2005.11.010

alization of the industry and their spatial and operational consequences. Advertising globalization is the vanguard in opening up new markets for the influx of global commodities. By linking consumer products, mass media and regional markets together, the globalizing advertising industry has significantly reshaped local consumer cultures while at the same time moving local places closer to global networks of economic production and distribution. This case study of China will provide some evidence for these developments. In an interview in 2003, Saskia Sassen argued that the ‘‘global economy’’ might be more aptly described in terms of the emergence of a set of institutional structures and mechanisms (including a range of regulations and standards) that enable the global operations of businesses (Hsia et al., 2003, p. 42). Any enterprise that wishes to operate globally will need to enter this framework. Many scholars have also noted that the concentration of producer services in cities is crucial for the sound management of such businesses, given the complexity of international divisions of labor (Sassen, 1991; Daniels, 1993). Following along these lines, an important theoretical framework has been

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developed that positions global cities as the key command and control posts used to build global economic networks. (Friedman, 1986; Sassen, 1991, 1994; Daniels, 1993; Castells, 1996; Hall, 2001). Because multinational companies are the driving force in promoting functional integration across borders (Dicken, 2003), the diffusion of branch offices of multinational producer services firms in cities throughout the world has enabled these urban areas to be linked together through the newly globalized networks of different industries. The Globalization and World City Research Group, led by Peter Taylor and Jon Beaverstock, has argued that the primary actors linking world city networks are not local urban policy makers, but multinational corporations (Beaverstock et al., 1999; Taylor, 2001; Taylor et al., 2002). Moreover, in the geography of transnational production networks, regional headquarters act as the intermediary between corporate headquarters and their affiliates within a particular region (Dicken, 2003, p. 239). In this sense, regional headquarters, and by extension, large cities, represent ‘strategic windows’ on regional development and opportunities (Yeung et al., 2001, pp. 169– 170). These facts merit serious investigation by scholars and policy makers who seek to understand the complexities of global markets in rapidly emerging economies. However, the discourse of global cities literatures, as McCann (2002) points out, tends to be bifurcated between the world’s leading cities and ‘‘ordinary,’’ ‘‘less global,’’ or ‘‘local’’ cities. London, New York, and Tokyo have been used as the benchmarks for determining how ‘‘global’’ a city is. This conceptualization has strongly influenced urban theory and practice in the developing world. With increasing integration into the global economy, for instance, cities in China are eager to be seen as being ‘‘global’’ or international in nature, as is evident in the drive to achieve the status of ‘internationalized large cities’ (guojihua dachengshi) on the part of many large and mediumsized cities.2 At the same time, much effort is being expended in academic circles in China to develop various indexing systems—based on GDP, infrastructure, international traffic flows, etc.—that purport to measure the level of ‘‘globality’’ of individual cities.3 Indeed, the whole global city theory has helped create an (imagined) dichotomy between modern/global cities and backward/third world cites. However, this new version of the core and periphery hypothesis regarding the world’s spatial structure is inadequate (Robinson, 2002; Stahre, 2004). I argue here that coming to a better understanding of the specific processes through which China’s cities and regions are being trans-

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formed ought to be the focus of our efforts. From the perspective of the spatial logic of the new global system, what matters is the versatility of its networks. Therefore, ‘‘the global city is not a place, but a process’’ (Castells, 1996, p. 386). Such an interpretation has rescued the global city hypothesis from the fruitless task of categorizing and ranking cities with respect to some ‘normative’ standard or degree of globalization. Cities in any part of the world can have some segments that function globally, while at the same time exclude a considerable portion of their area and people from global economic networks. Indeed, the defining characteristic of the global city phenomenon is precisely in the coexistence of the local and the global. Multinational service firms, together with their multinational clients, are locating in specific cities in the newly developing markets to service globalization. This involves a process of building globalized institutional frameworks, rules, and, more importantly, discourses and ideologies of globalization. Firm strategies are important in the transformation of business systems and institutional configurations as they adapt to a changing context (Yeung and Olds, 2000). However, the processes whereby global firms have established their businesses in China’s cities and regions remain little understood. Existing literature on China’s role in the global economy has mainly focused on manufacturing, emphasizing the extent to which China has become a large ‘‘world factory’’ producing goods for the global market. The service sector, especially producer services, has heretofore been understudied.4 This paper tries to show how China’s advertising industry is spatially concentrated and to suggest that the restructuring of China’s advertising agencies is a consequence of the impact of global forces and the subsequent adoption of locally-based advertising strategies aimed at developing local consumer markets. As a highly globalized and conglomerated industry, advertising is emblematic of globalization. As in other industries, multinational giants have been the trend-setters for advertising globalization. The top 10 advertising agencies account for 70% of the global market share.5 Moreover, these top 10 agencies are mainly owned by four multinational holding groups—Omnicom (New York), WPP (London), Interpublic (New York), and Publicis (Paris)—that have come to collectively control business standards and (re)shaped the basic characteristics of advertising. In this paper, I focus mainly on the processes transforming China’s advertising industry. Specifically, I discuss three vital processes involved in the penetration of the global advertising industry into China: (1) the restructuring of

2

There are currently 118 such cities that claim to be developing themselves into ‘‘internationalized large cities’’ (guojihua dachengshi). This figure is cited by Yao Bing, a high-level official in the Ministry of Construction (China Youth Daily, 10/14/2003). 3 A typical title, from a research project conducted in 2001 by a think tank associated with the municipal government of Beijing, reads ‘‘Which index should be employed in building Beijing into an internationalized large city?’’ See the Beijing Research Institute for Economic and Social Development (Beijing shi jingji yu shehui fazhan yanjiusuo ketizu).

4 Research on China’s advertising industry has been limited to market research. Professional advertising journals tend to focus on the characteristics of the Chinese market only (Prendergast and Shi, 2001; Zhou et al., 2002; Gao, 2003). Although Wang’s work on glocalization (2000)is important, the latest data it covers is from 1996. 5 They are Dentsu, McCann-Erickson, BBDO, J. Walter Thompson, Euro RECG, Grey, DDB Needham, Ogilvy & Mather, Leo Burnett, and Publicis (Ad Age International, 2002).

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the advertising industry’s organization in China; (2) the establishment of business institutions in advertising; and (3) the relationship between local imposition of global standards and local responses to global challenges faced by the advertising industry. This study is based on personal fieldwork conducted in Beijing in 2002 and 2003, supplemented by published secondary sources, including China’s advertising yearbooks and various professional reports, journals and newspapers. As my main purpose was to gain insight into the processes of change in the advertising industry in the wake of globalization, I opted for intensive interviews with a few highly knowledgeable senior managers in Beijing’s top advertising agencies, instead of conducting an exhaustive inventory of various advertising agencies in China. All my interviewees are veterans of the advertising field, many of them having worked for various joint ventures and/or having other relevant working experiences in Beijing, Shanghai, Guangzhou, Hong Kong and Taipei.6 I also participated in a few of their seminars and brainstorming meetings to observe the interaction between advertising agencies and their customers as well as among the different segments of this industry—media specialists, creative agencies, and relevant suppliers. I have also drawn upon data from many lively virtual communities catering to advertising professionals on the Internet. The rest of the paper is structured as follows. Section 2 describes the characteristics of China’s advertising industry and investigates its restructuring under the influence of multinational agencies. Section 3 analyzes the agglomeration of China’s advertising agencies in three metropolitan cities: Beijing, Shanghai, and Guangzhou. Section 4 explores the role of advertising in the redefinition of China’s regional advertising markets. The paper ends with some comments on the broader theoretical implications of China’s restructured advertising industry.

The practices of advertising have evolved along with the global expansion of modern capitalism. What we now call advertising agencies refer to companies that represent advertisers in buying media space to promote certain products, and they rely on commissions and fees for profit. However, the professionalism of advertising, as an historical construct, has evolved along with changing economic and social contexts (Nixon, 2000, 2002).7 Advertising practices have developed over time with the globalization of manufacturing enterprises, new international divisions of labor, and changes in the media field and technology, including the invention of broadcast television, satellite

television, and more recently, the Internet (Leiss et al., 1986; Perry, 1990). Since the early 20th century, advertising firms have tended to become full service agencies offering comprehensive solutions that encompass market research, advertising strategy, and media plans. With the intensification of economic globalization since the 1980s, advertising has been increasingly globalized and conglomerated. However, such concentration of capital and control was complimented by a vertically disintegrated, networked model of business organization, which has featured in the proliferation of specialized, independent and competitive agencies under the umbrella of a giant group (Grabher, 2001, 2002). These multinational media and communications groups have powerfully redefined the nature of advertising and its operational patterns globally. China’s advertising industry has experienced dramatic growth in the past decade. The number of advertising firms has grown from 11,231 in 1990 to 101,786 in 2003. At the same time, employment in the advertising sector has also grown from 131,970 to 871,366. More importantly, total advertising billings have increased by a factor of 43 (Table 1). In 2003, China’s advertising expenditure reached 14.5 billion USD, which made it the third largest advertising market in the world, behind only the United States and Japan, according to AC Nielsen8 (China Daily, 3/2/2004). With China’s accession into the WTO and the upcoming Olympics in Beijing in 2008, it is expected that foreign investment will continue to be robust, bringing further gains for the advertising industry. The scale of China’s market also makes huge production budgets possible. As Song Zhiming, the Greater China chair of Ogilvy & Mather, once commented, in producing advertisements for the Chinese market, global CEOs of various clients are usually willing to participate directly in planning, and more importantly, it is common for them to invite advertising directors with an international reputation to film television commercials because of China’s large market and the potential profit involved (Dongfang qiyejia, 2002, p. 5). As a latecomer, the emergence of China’s advertising in the reform era has been highly impressive. Although local networks of personal relations (guanxi) continue to function within China’s advertising industry, the industry has been forced to restructure itself from the early days of economic reforms through deep association with multinational advertising agencies in order to remain competitive. It is important to understand China’s advertising sector in the context of China’s transitional economy. As in other sectors, the socialist legacy of state ownership has played an important role in the developmental trajectory of advertising industry. According to categories provided in official

6 The eight managers I interviewed are from Grey, Ogilvy & Mather, Mediaedge:cia, Bates, and four other local agencies led by former multinational employees. 7 Nixon’s work on the construction of advertising expertise covered debates within the profession from the naming of advertising people as ‘‘agents’’ or ‘‘practitioners’’ (2000) to the models of remuneration (2002).

8 AC Nielsen, the leading media research company, however, points out that the number may be overestimated due to various under-the-table discounts in China. China’s official statistics (Zhongguo guanggao nianjian, 2004) states that the total advertising revenue was 107,868 million yuan in 2003 (13 billion USD), a significant number as it exceeds 100 billion yuan. The USD value is converted with the exchange rate of 1:8.27 in 2004.

2. Globalizing China’s advertising industry

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Table 1 The development of China’s advertising industry (1990–2003) Year

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Advertising billing

Advertising firms

Employment

(million yuan)

Growth rate (%)

Number

Growth rate (%)

Number

Growth rate (%)

2501.72 3508.92 6786.75 13408.73 20026.23 27326.90 36663.72 46196.38 53783.27 62205.06 71266.32 79488.76 90314.64 107868.46

25.1 40.3 93.4 97.6 49.4 36.5 34.2 26.0 16.4 15.7 14.6 11.5 13.62 19.4

11123 11769 16683 31770 43046 48082 52871 57024 61730 64882 70747 78339 89552 101786

0.2 5.8 41.7 90.4 35.5 11.6 10.0 7.9 8.3 5.1 9.0 10.7 14.31 13.7

131970 134506 185428 311967 410094 477371 512087 545788 578876 587474 641116 709076 756414 871366

2.9 1.9 37.8 68.2 31.5 16.4 7.3 6.6 6.1 1.5 9.1 10.6 6.68 15.2

Source: China’s Advertising Yearbook, 1991–2004.

statistics, China’s advertising companies have three types of ownership: state- and collectively owned firms, joint ventures, and privately owned agencies. (1) Large state- or collectively-owned companies: During the early period of economic reforms, some advertising companies were set up by governmental bodies such as the Ministry of Foreign Trade or by statemonopolized media groups to facilitate the opening of the market. For example, China National United Advertising Corp. (CNUAC) was founded under the umbrella of Xinhua News Agency in 1981. Before foreign capital was allowed to take part in joint ventures, such companies took care of most of the business of multinationals in China. Today they mainly serve domestic clients. (2) Joint ventures: Most multinational agencies entered China after the economic reforms, including Leo Burnett in 1979, followed by Dentsu, J. Walter Thompson, Interpublic-Jardine, Saatchi & Saatchi, and Ogilvy & Mather. The 1990s saw the rapid growth of joint ventures, in which foreign capital’s shares were mandated by government regulations not to exceed 49%. Some of these joint ventures were the result of cooperation between multinational agencies and Chinese state-owned companies. For example, BBDO founded their office in China with CNUAC in 1991. The major customers of these joint venture advertising firms are multinationals, although such firms are eager to enter the emergent local domestic market. (3) Private agencies: the rapid development of the China market, both in general and in advertising, has attracted a large number of privately-owned advertising agencies. Such agencies tend to be small and mainly serve domestic customers. Of the 101,786 registered advertising businesses in 2003, 60.3% were privately owned; 23.17% were state- or collec-

tive-owned, and only 401 businesses (0.39%) operated with some sort of foreign investment (China Advertising Yearbook, 2004). While being very small in absolute numbers, multinational agencies have an enormous advantage in terms of both the scale of their operations and the size of their revenues. Among the top 10 advertising agencies in 2003, eight were joint ventures. Their dominance in advertising billing is significant (Table 2). Currently, the world’s 10 largest advertising agencies all have offices in China, located in Beijing, Shanghai or Guangzhou. The legacy of China’s command economy has resulted in a distinctly Chinese market configuration, an important feature of what is unusually tight links between stateowned media and advertising. Because the media is monopolized and controlled by the government, media outlets are often more willing to sell time and space to their own advertising departments. A typical case is Beijing Weilai Advertising, a company under the umbrella of CCTV, the only national television network. Its gross income ranks sixth in China (Table 2), and it was the first among the domestic agencies to be admitted into the top ten. This operational model impeded the rise of agencies dependent entirely on earning commissions. However, the arrival of multinational advertising agencies in China has resulted in a shift toward greater professionalization. Statistical data on the distribution of advertising billings show an increase of business volume for professional agencies since the 1990s (Fig. 1). While the media-owned advertising sector still accounts for a considerable portion, the concentration of advertising billing in professional agencies is significant. This growth of advertising agencies in China is closely related to multinational advertising agencies and increasing efficiency and expanding capacity on the part of Chinese agencies via collaboration with multinational advertising firms. The market dominance of multinationals is noteworthy. First, multinationals by their very nature get the business of international brands that are entering the China market.

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Table 2 Top 10 advertising agencies in China, 2003 Rank

Agency

Ownership

Billing (million USD)

Employees

1 2 3 4 5 6 7 8 9 10

Saatchi & Saatchi, Beijing McCann Erikson Guangming, Beijing Leo Burnett, Shanghai Dentsu, Beijing J. Walter Thompson Weilai Advertising Guangdong Advertising (GDAD) Shanghai Advertising Lintas, Shanghai Shanghai MPI

Joint venture Joint venture Joint venture Joint venture Joint venture State-owned State-owned Joint venture Joint venture Joint venture

332.02 321.63 297.71 282.37 206.00 142.57 130.49 108.86 81.19 50.87

660 380 300 616 n/a 130 223 206 140 150

Source: China’s Advertising Yearbook, 2004, and companies’ official websites.

14 12 10 8 6 4 2 0

Advertising agency Tv radio Newspapers Magazines 1990 1993 1995 1996 1997 1999 2001 2002 2003

others

Fig. 1. Distribution of advertising billing, 1990–2003 (Billion yuan, adjusted by retail price index, year 1978 = 100). Source: Zhongguo guanggao nianjian (China Advertising Yearbook).

This means big billing numbers and the creation of highend markets. Multinational agencies have tended to gain business by wining new countries or new products from existing clients (Leslie, 1995). Many have indeed made ‘global deals’ with their long-term global clients, and they enter a new advertising market at the same time as the products of their clients enter the market. For instance, IBM has a tradition of working with Ogilvy & Mather in the US, and this partnership was extended to China when IBM entered the Chinese market. Similar global pacts have also been made by Saatchi & Saatchi, whose clients include such companies as Kodak and Procter & Gamble; by McCann Erikson, which serves Motorola, Loreal, Nestle, Maybelline, and Colgate; and by J. Walter Thompson, on behalf of Nike, Siemens, and Pepsi-Cola (Interview A4, 2002). In short, multinational brands have worked hand in hand with multinational advertising agencies in the expansion of their markets in the newly developing economies. As a result, the top 10 international agencies have all set up regional offices in Beijing, Shanghai, or Guangzhou. In addition, some global agencies have established branch offices in second-tier cities such as Qingdao (Dentsu), Nanjing (Grey) and Chengdu (Dentsu, JWP) as their clients’ business interests in China have expanded. Multinational agencies have also started to pursue domestic clients in recent years. As China’s domestic industries are putting increasing emphasis on the development of brand-name products, and as there are many more domestically produced products than globally known ones, their total advertising expenditure has far exceeded that of

multinational manufacturers. According to AC Nielson Advertising Monitoring (2002), nine of the top 10 products with the highest advertising billings in China were national brands, including Gaizhonggai Pharmaceuticals, Naobaijin Pharmaceuticals, and others. The only foreign brand in the top 10 list was Oil of Olay (P&G) which was ranked ninth in billing in 2003. Nokia and Motorola were ranked 16th and 17th (http://www.csonline.com.cn). In the last two decades, Chinese businesses have reached the consensus that developing good brand-name products is the best practice for business success. Thus the demand for advertising to promote products targeted for brandname recognition has been growing rapidly, and a huge advertising market exists for the promotion of domestic brand-name products, which multinational agencies are eager to break into. For example, JWT China, established in 1992, had no local clients when its Shanghai office first initiated contact with Sanjiu Pharmaceuticals in 2000. By 2002, however, local clients such as TCL, Yili, and Wanjiyansen constituted 28% of JWT’s accounts (Jingji yuekan, 2003). Similarly, Leo Burnet earns about 30% of its revenues from large local enterprises, including Lining Sports, China Mobile, Shanghai Expo, Mengniu Dairy, and other companies (Zhongguo jingji kuaixun, 2003, p. 18). It is worth noting that the top of the pyramid of local markets has been rapidly captured by joint-venture agencies. Most of the well-known brands of food, soft drinks, electronics, telecom services and the like, both foreign or domestic, are represented by multinational agencies (Table 3). How this trend has shaped the industrial organization and professional standards of the advertising industry in China will be discussed in the following section. 2.1. Reshaping organizational structure The influence of multinational agencies has compelled the nascent Chinese advertising industry to follow the rules of the game developed in the West. This influence is often quite direct. The constant mergers, acquisitions, expansions and downsizing taking place between and within the media and advertising groups at the global level have significantly impacted the organizational structure and

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Table 3 Major international and domestic clients of joint-venture advertising agencies Agency

Major clients International brands

Domestic brands

Saachi & Saachi

Kodak, P&G, Shanghai Dupont, Johnson & Johnson, Ikea

Xian-Janssen (Pharmaceutical Ltd), TCL (color TV), Robust

McCann-Erickson

Coka-Cola, Motorola, Loreal, Nestle, Maybelline, Colgate, Gillette, Dupont, Lucent, Master Card, UPS

ADSL, Pingan Insurance, Beijing Daily News, Beijing Evening News

JWT

Nike, Siemens, Unilever, Pepsi, Nestle, Shell

Yili, Changan Ford

Ogilvy & Mather

IBM, KFC

Shanghai Volkswagen, CNC

GREY

Volkswagen, SmithKline-Beecham, Holiday-inn Hotel, Novartis, SKODA

FOUNDER, NCPC (north China Pharmaceutical Company)

Dentsu

Canon, Toyota, Citizen, Panasonic, TOTO, Suntory, Kao Corporation

Midea, Lenovo, Master Kong, Mini-nurse, Kejian, Taikang Life, Dongfeng Automobile, China Mobil, CNC, Dalian SANYO

Leo Burnett

MacDonald, Marlboro

Li-Ning, China Mobile, Expo 2010 Shanghai China, Mengniu Beijing, Shenzhen Development Bank

Source: Collected by the author from diverse sources.

personnel of their Chinese subsidiaries. For example, when the French agency Publicis bought Bcom3 (based in Chicago) and became the 4th largest advertising and communication group in the world, it immediately announced the closure of 121 Darcy offices in 72 regions and countries. Accordingly, their old clients (including GM and P&G) were sent to the other three agencies under Publicis (LOWE, Saatchi & Saatchi, and Leo Burnett). It was impossible for Darcy China to avoid this shock. Its chairman for greater China, Lin Junming, an advertising veteran of 27 years, remarked after his step-down: ‘‘Mergers and acquisitions are inevitable. They are a ‘natural force’ in the business world’’ (China Entrepreneur, 2003, p. 5). People in the advertising business have adapted to the fact that their work and fate are determined by their superiors working at the global level. China’s accession to the WTO has cleared the way for foreign advertising companies to control joint ventures in China in 2003 and to have 100% private ownership of firms by 2005. It is inevitable that more mergers and acquisitions will lead to more and greater changes in China’s advertising agencies, affecting their ownership, organizational structure, personnel, corporate culture and management style. Compared with other producer services such as consultancy, accounting, and law, the advertising business in China has witnessed a rapid expansion of its local agencies. This development is consistent with the industry’s policy of aggressively establishing local offices in newly developed markets to be as close as possible to local consumers and to maximize the recruitment of local talent as well as local clients (Leslie, 1995). It is common for local offices to build flexible and complementary cooperative relationships with each other. In addition, the flow of talent within this industry further stimulates the creation of new offices. As human capital is central to the advertising business, it has become customary within this highly competitive community for

senior professionals to start their own companies.9 Sometimes the multinationals are happy to play the role of ‘angel’ investors—after all, a global company can buy up start-up enterprises if they turn out to be successful. For instance, WPP offered financial sponsorship when a group of former Ogilvy & Mather employees established their new firm, Tongmeng Advertising, in Shanghai in 2003 (Jingji Guancha Bao, March 31, 2003). In fact, WPP has owned an enormous number of agencies in China, more than any other leading group, and many of these agencies have expanded through the establishment of specialized sub-branches in various fields of advertising.10 WPP’s gross revenue from China was $153.7 million in 2001 (Financial Times, November 5, 2002), and one industry insider has estimated that WPP controls about 15% of the market share in China (Interview A 2, 2004). 2.2. Redefining the standards of business practice As China’s advertising firms evolve into full-service agencies, the industry’s operational behavior is being 9 The development of Hong Kong and Taiwan in the past three decades has shown how multinational agencies have become important incubators for training advertising talents in new markets. Many well-known advertising people from Hong Kong and Taiwan have set up their own offices in China since the mid-1990s. For example, Alex Chen, formerly a top executive at Leo Burnett Hong Kong, founded his Chuangya advertising agency in Hong Kong in 1992, and a Shanghai branch in 1995. Sun Dawei, former executive creative director of Taiwan Ogilvy & Mather (and also a pioneering figure in bringing Starbucks to China) founded his own advertising agency, Weitai Advertising, in Shanghai in 2003. 10 Including creative agencies: Ogilvy & Mather, Bridge/JW P (billing ranked 4th and 6th in China in 2001), Shanghai Advertising, Rave, BrandOne; public relations: Ogilvy & Mather Public Relations, 21 Century Public Relations; media specialists: Mediaedge:cia, Mindshare, and market research: East Marketing Research Institute, etc.

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redefined through the adoption of globalized business standards for corporate governance and compensation agreements. Firstly, globally recognized standards established by the American Association of Advertising Agencies (AAAA) have appeared in China. Originally founded in St. Louis, USA in 1917, the 4A was the world’s first national trade association representing the advertising industry in the United States. This management-oriented organization initiated many professional rules. For example, it advocated the standard commission rate of 15% to help secure long-term relationships between agencies and advertisers.11 The rules established by the 4A have been followed in the industry and evolved into a self-regulating system of firm behavior that has been critical in governing the ethical practices of this business. Virtually all of the large multinational agencies are members of the 4A whose standards have been adopted globally by agencies, advertisers and other parties to govern their business relationships. In China, as elsewhere, the 4A is seen as the global symbol of business standards. China’s leading advertisers are mostly affiliated with multinational advertising agencies that are invariably 4A members. Meanwhile, China’s national agencies are trying to establish local 4A associations to enhance self-regulation and to become more professional. For example, Guangzhou, the city with the most mature local agencies, set up the first 4A organization in China in 1996.12 4A membership is a symbol of pride because it implies that agency member has met the standards of firm size, research capacity, management efficiency and financial strength. The recognition of 4A in China means advertising has become a business that transcends mere intuition and creativity. As one article widely circulated on Chinese advertising-related websites comments: ‘‘Operators of advertising agencies are managers of standardized products, not geniuses full of inspiration and insights’’ (Hebei Daily, 2002/5/28). This article was titled: ‘‘China’s advertising no longer just plays with ideas.’’ It is clear that the adoption of 4A rules and business culture by Chinese agencies has pushed the agencies to become more efficient and professional and to allow more of them to quickly join forces with the leading global agencies. These developments have allowed global advertising firms to securely anchor themselves in China on the one hand and brought the Chinese advertising industry onto the global stage on the other. The remuneration system has been an important factor influencing the organization of agencies and their financial 11

The 15% fixed commission was set up in the 1910s in the United States. In spite of protests from advertisers and the intervention of federal regulation and the Justice Department over the century, this commission system has been engraved in clients’ minds (Said, 1999; Stole, 2000). As recent as the mid-1980s, 43% of all clients gave their agencies the full 15% commission (Said, 1999, p. 126). 12 In order to mimic 4A, the association is literally called ‘‘Guangzhou 4A’’ in Chinese. Its English name is the ‘‘Association of Accredited Advertising Agents of Guangzhou’’ (http://www.gz4a.cn).

managements in the advertising industry. Following the arrival of 4A multinationals, commissions have become a main form of compensation in China. However, the state’s monopoly over the media has nurtured a group of brokers who gain special access to the media, who are thus able to get exceptional discounts. Kickbacks are common in various black-box trades. In such an environment, commission is usually much lower than 15%, although this percentage is stipulated by an official legal regulation passed in 1993. Many agencies are paid under 5%, and some even down to zero (Modern Advertising, September 2003). In turn, service fees become a more reliable source of revenue than commissions.13 At a time when the trend of project-oriented organizational model is restructuring the advertising industry at the global scale and bringing about a new wave of debates on the traditional commission system (Leslie, 1995; Grabher, 2001, 2002), the local institutional context is also reshaping its practices in a new market. Because agencies often need to pay for media buys in advance before getting their commission, strong financial resources are essential for a firm to stay in business. This can be achieved through economies of scale and sound corporate finance. In this regard, multinationals are superior to local agencies by virtue of their deep pockets and their close business affiliation with media specialists whose rise in the advertising world in the 1990s further enhanced the strength of the multinational advertising firms. Unbundled from the full-service agencies, media specialists concentrate on offering media solutions for advertisers. In doing so, they tend to buy media space and time in large quantities and then redistribute them to their clients. However, they are different from traditional media brokers, such as those surrounding CCTV. Media specialists buy according to the specialized needs of their clients. Backed by their capital, management expertise, and control of high-end markets, media specialists are becoming the most profitable segment in the global advertising industry. Since the late 1990s, the world’s leading media specialists such as Mindshare and CIA (both under WPP), Zenith Media (under Publicis/Cordiant), Universal McCann (under Interpublic) have all entered China. Their operations are a significant challenge to the existing media brokers in China. Buying media space and time in great quantity at substantial discounts, media specialists have a strong competitive advantage over local individual brokers who are still playing by the old rules of relying exclusively on personal connections to conduct business. The emphasis on economies of scale has changed the rules of the game in Chinese advertising but, at the same time, it has also strengthened the role of global advertising conglomerations in China. However, numerous local agencies remain unchanged in the way they conduct their business and they 13 According to a survey conducted by sina.com, 47.7% of the advertisers pay commissions to their agencies, 50.8% pay project-oriented service fees, and 32% pay monthly or annual fees (http://tech.sina.com.cn/me/2004-0102/1548276786.shtml). The compensation agreements are rather flexible.

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face serious challenges from their globalized competitors. The survival of such local agencies will depend on how they deal with the winds of change brought by globalization, how to better adapt to the changing markets of advertising, how to be more professional, and how to better define their relationships with their competitors. 3. Agglomeration of advertising firms in China China’s advertising is concentrated in Beijing, Shanghai and Guangzhou (Fig. 2).14 In 2003, advertising accounts in the three cities totaled 53 billion yuan (6.4 billion USD), which was 49.3% of total national billing. Each of these three metropolitan areas represents a large, self-contained consumer market: the Pearl River Delta, the Yangtze Delta, and the Beijing-Tianjin area.15 In addition, all three cities have experienced fast growth in their service sector over the past decade.16 The dominance of these three metropolitan areas in China’s advertising industry is not surprising as they are the most developed city-regions, in which a great many global and domestic businesses are already concentrated (Hall, 2001; Scott, 2001). Beijing played a leading role since the re-emergence of the advertising industry in the early 1990s and, as the nation’s capital, it offers the advantage of proximity to the political and economic decisionmaking process. Easy and early access to information relevant to business development emanating from various government ministries may be of critical importance to corporate decision-making. Moreover, the headquarters of many mass media establishments are concentrated in Beijing, including CCTV, China’s only national television network, whose advertising billing in 2003 amounted to as much as 7352 million yuan (910 million USD) (CCTV.com). In addition, governmental regulatory bodies supervising the media are also located in Beijing. Thus Beijing has attracted a large number of media brokers and agencies. While Beijing’s prestige comes mainly from its role as the nation’s capital, Shanghai has been the rising commercial and financial center of China since 1991. The newly developed Pudong New District has attracted a large number of foreign enterprises, including many leading multinationals. With increasing foreign investment in the greater Yangtze delta region,17 Shanghai was able to

14 Available statistics on advertising is compiled at the provincial level. Both Beijing and Shanghai are municipalities with provincial status. The advertising business in Guangdong province is centered in its capital city, Guangzhou. 15 It is worth noting that each municipality is itself a large metropolitan region, with a large periphery of rural counties around a central urban core. In 2001, the population of Beijing was 13.83 million, Shanghai had 16.14 million, while Guanzhou had 7.13 million (China Statistical Yearbook, 2002). 16 In 2003, the share of the tertiary sector in GDP was 61.4% for Beijing, 48.4% for Shanghai and 53.6% for Guangzhou, according to the 2004 statistical yearbooks of the three cities. 17 The Yangtze Delta region covers 16 large and medium cities, 100,000 square kilometers of area, and has a population of 75.7 million.

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attract 86 multinational companies to set up their regional headquarters by the end of 2004,18 as opposed to just 7 in Beijing. Giant multinational brands, such as Unilever and Volkswagen, are big spenders on advertising. As multinational headquarters are established or relocated in the region, their advertising agencies often follow. For example, McCann-Erickson relocated to Shanghai when its major client, Coca-Cola, moved its regional headquarters there. As a result, Shanghai’s billing surpassed Beijing between 1999 and 2001 (Fig. 3). In fact, Shanghai’s booming economy has rendered the city one of the most important advertising markets in Asia. Guangzhou, on the other hand, is the center of the Pearl River Delta, the first region in China to be integrated into the global economy. Manufacturing multinationals such as P&G and Colgate all started local production and marketing in Guangdong in the early 1990s. Accordingly, advertising in this area has also developed one step ahead of the rest of China. International brands have demonstrated the power of advertising in market expansion hand in tandem with their agencies. The fast growth of Colgate, represented by DY&R, is a typical example. During an interview, an advertising veteran recalled the millions of dollars of advertisement spending in 1993 and 1994 that overwhelmed Guangdong (Interview A7, 2004). After successfully capturing the Guangdong market, Colgate rapidly continued its long march north to Shanghai, and finally completed its expedition by conquering the Beijing market as well. Indeed, this particular trajectory has become common for multinational manufacturers breaking into the Chinese market. The Pearl River Delta still has the largest concentration of foreign direct investment in China, and multinational giants exist alongside a large number of manufacturers of different sizes, including small local firms and joint ventures that produce a wide variety of consumer goods such as shoes, toys, jewelry, clothing, computer components and automobiles, thus creating a diversified market for advertising. However, it is the strength of local advertising that has brought distinction to Guangzhou and neighboring cities. This is reflected in the fact that China’s first local trade association, the Guangzhou 4A, was established here. For advertisers wishing to work with a Chinese advertising agency, Guangzhou has become the best city to locate. The concentration of advertising agencies and related firms in Beijing, Shanghai and Guangzhou is consistent 18

The notion of regional headquarters could be ambiguous. In the competition between cities and regions to recruit foreign investment, cities tend to loosen the standard in the recognition of ‘‘headquarters’’ in their statistics in order to make a better number. The number I cited here are headquarters which received the official recognition and approval of the Ministry of Commerce under the regulation passed in 2004 which stipulate the registered capital of a headquarters cannot below 100 million USD (http://www.mofcom.gov.cn/aarticle/b/f/200402/20040200183441.html). The data is collected from the Statistical Bureau of Beijing and Shanghai (http://www.bjstats.gov.cn/tjyl/tjgb/200509170013.htm; http://www.statssh.gov.cn/2004shtj/tjgb/tjgb2004.htm).

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Fig. 2. Advertising centers in China: advertising billing of Beijing, Shanghai and Guangzhou in 2003, and some second-tier advertising cities (billion yuan). 7 6 5 4 3 2 1 0 03

02

20

01

20

00

20

99

20

98

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Beijing Shanghai Guangdong

Fig. 3. Advertising expenditure of Beijing, Shanghai and Guangdong Province, 1990–2003 (Billion yuan, adjusted by retail price index, year 1978 = 100). Source: Zhongguo guanggao nianjian (China Advertising Yearbook).

with the agglomeration of producer services in major world cities, a phenomenon on which there is a large body of literature (Daniels, 1985, 1993; Sassen, 1991; Dicken, 2003). The case of advertising in China offers further concrete evidence of how multinational services tend to locate their offices in large cities. First and foremost, the advertising professionals I interviewed invariably emphasized the importance of proximity to the marketing headquarters of their clients. Thrift (1987) has linked the growth and internationalization of services to the function of commercial capital, of which advertising is one part, mediating in the circulation of commodities for a fee. As a complement to marketing, the location of an advertising business is directly related to the marketing offices of the enterprises—not their headquarters or their manufacturing sites. In a rapidly changing market, enterprises and their advertising agencies have to exchange fresh information as

quickly as possible. Moreover, information regarding the preferences, feelings and opinions of advertisers and consumers is needed in the design and production of creative advertising products. Communications of this sort of sensitive information requires face-to-face contact and thus demand spatial proximity. For example, due to frequent visits, the securely-guarded Beijing Motorola offices even created special badges for their advertising crew so as to allow free and constant access to their headquarters (Interview A1, 2003). In the production of creative advertisements, the requirements of frequent interpersonal communication, negotiation, and persuasion are best served by being clustered in a large city. A host of professional services that support the business of advertising have sprung up in Beijing, Shanghai and Guangzhou, contributing further to the clustering of the advertising industry therein. Such supporting professional groups include market researchers, creative artists, media specialists, public relations experts, and production companies. Multinationals have played an important role in bringing such industries to China, further enhancing the process of agglomeration. Take market research, for example. P&G helped the establishment of the first joint venture for market research in China, the Survey Research Group (SRG), in 1993. This company is in fact a branch of AC Nielsen, the leading market research company in the world. The snow-balling effect of the agglomeration of mutually supportive firms together in a place is best illustrated by the production of advertisements and commercials. The majority of advertising agencies out-source this task to

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professional agencies that specialize in advertisement production. This, however, depends on film production houses, which work with teams specializing in casting, cinematography, photography, graphic design, and post production tasks such as editing, sound, and product integration. These related professional services tend to be found in large cities where their clients, including advertising firms, are located and where their mode of operation, based on flexible specialization, meets the needs of diverse clients. As Storper and Christopherson (1987) have demonstrated in their research on the motion picture industry in the US, flexible specialization has promoted the spatial agglomeration of firms in certain large cities, especially media and cultural centers with significant externalities for small-scale studios. For example, an independent editing workshop can serve producers of movies, TV programs, or advertisements. In addition to these economies of scale and scope, the nature of the advertising industry encourages a firm to locate in an urban center with heavy concentrations of various cultural industries such as fashion, arts and news media. As Grabher points out, advertising agencies consider London important because city ‘‘sets up the agenda in youth culture’’ (2001, p. 366). In China, it is easy to understand why Beijing, Shanghai and Guangzhou, as the most ‘‘urban’’ areas of the nation and the most important centers of media and culture, have become the centers of China’s advertising industry where the economies of agglomeration sustained by cumulative causation have enabled them to dominate China’s national as well as regional advertising markets. In summary, the concentration of advertising billing in Beijing, Shanghai and Guangzhou corresponds to the distribution of marketing quarters in China. Adding on the fact that these metropolitan regions are themselves important and large-scale consumer markets, the agglomeration of advertising in these cities has become relatively stable. Moreover, the evolving media/advertising industry can be seen as participating in a process of specialization, one which involves, in the Chinese context, the localization of multinational capital, rules, and operations. The development of the supply chain is happening through a process of spatial clustering, and this has become an important aspect of the dynamics of China’s city-regions formation. Such clustering has made these cities markets of services. Companies outside these regions also come to buy services. Therefore, these cities have witnessed an evolution of their advertising sector from providing accessible services to the formation of a service market. 4. The localization process Advertising demonstrates clearly the inseparable ties between globalization and localization. As discussed above, China’s advertising business has been fundamentally transformed by the industry’s global leaders. However, as in other realms of globalization, the effects of advertising’s globalization on China’s advertising industry

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are far from a wholesale adoption of the standardized global practices of advertising. On the contrary, in order to cater to different local markets, the production of advertisements in China, as elsewhere, is a mixed process incorporating global as well as local content. While the global firms establish their local bases through close affiliation with local firms, which have in turn adopted global standards of advertisement production, the production of advertisements and the ideas that shape the content are localized. The processes for producing an advertisement have changed significantly in the last two decades. The production of advertisements involves a series of procedures from processing to packaging and distribution. Sometimes advertisements for local products are 100% locally made, for example, the commercials for Yanjing Beer, Beijing’s largest beer brand (Interview, A3, 2003). A lot of them, however, are undertaken within a globalized division of labor, especially those for multinational brands represented by multinational agencies. In order to promote a ‘‘global brand’’, the majority of the advertising people are playing a very small role in the global factory of creative commercial production. When a multinational brand is launching an advertising campaign, a booklet of the product’s global image, known as the ‘‘bible’’ in the advertising business, is produced first. Product positioning and strategies for communicating with potential customers in different countries are then discussed by the manufacturer and the agency chosen to handle the advertising. A region’s position in the division of labor is largely determined by its market conditions, such as the number of competing brands, market size, and the maturity of the local advertising industry. With China’s market scale in mind, international brands are inclined to locate the ‘upstream’ stages of advertising production in China. Motorola is a good example. Currently, China has become the Motorola’s largest market. Accordingly, initial product positioning for selected new cell phone models has been conducted in Beijing, where its China headquarters and its advertising agency are located (Interview A1, 2003).This indicates that China is not simply a passive receiver of global advertising campaigns. Indeed, Beijing is in fact the motor initiating the development of this huge national market. This shifting division of labor of advertising is also a result of constant negotiations between globalization and localization. Existing standardized advertisements, with or without minor modification, are normally introduced as one of the options to be adopted and distributed through the media. But more often than not, after lengthy discussions and negotiations between a client and advertising agency, a mixed strategy will be adopted (Hite and Fraser, 1988). A typical practice is to re-shoot a commercial film using local faces speaking in the local language. Given China’s immense size, and its diverse environments, dialects and regional cultures, secondary markets at the regional level are always taken into account. Thus advertising products made in Beijing, Shanghai and Guangdong are not

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always standardized for national marketing. Although the main themes of an advertisement may remain unchanged, it is frequently re-made to fit different consumer tastes in different local markets. According to one insider’s analysis, three principles are commonly applied by local sales and advertising agencies in refitting a campaign to a specific local context (Interview, A3, 2003). First, media related advertisements are generally standardized, while belowthe-line (media unrelated) products, from banners to direct mails, are produced locally. Second, TV commercials are usually nationalized but print advertisements are locally redesigned. And thirdly, feature advertisements are standardized but special promotions are localized. In this sense, standardized advertisements are integrated into local settings by local actors, who serve as message bearers. Thus, advertising strategies at the global level have been localized by advertisement mixture with local flavors in order to cater to the needs of the local markets. In China, although most products are advertised nationally, the identification of a major market and the production of advertisements for specific markets are significant tasks for advertising agencies. Examples of the production of advertisements targeting specific local markets abound. Take the case of Daily Fresh, a soft drink with 20% juice, for example (Interview A4, 2003). The manufacturer had to make a hard decision in picking an advertising agency in either Beijing or Shanghai to introduce the new product. The fact that the product was a latecomer in the soft drinks market was carefully deliberated. As consumers in Shanghai tend to prefer 100% juices, Daily Fresh decided to target Beijing to enter the market, and an advertisment was planned and produced in Beijing. However, when the company launched the products in Shanghai, another Shanghai agency was hired to modify the advertisements. This local creative agency considered the main idea and slogan made in Beijing not ‘cool’ enough, and developed another cartoon logo to promote this product in Shanghai. The uniqueness of a local market is often first identified by a manufacturer who wishes to advertise a product, and the manufacturer often makes the initial decisions as to how to market the product. Once a market has been identified, a local advertising agency is chosen. For example, Master Kong, the most popular instant noodle brand in China, produces many varieties of cup noodles with different mixing and seasoning ingredients. The company has factories in more than 10 cities in China. When their Chongqing branch started to sell their spicy varieties to the Sichuanese market, the noodle manufacturer picked an advertising agency in Sichuan (Interview A8, 2003). Their campaign on this ‘‘peppery series’’ won them an additional 15% of market share in this region (http://www.21food.cn/ html/news/14/23250.html). This attentiveness to the cultural characteristics of local markets was quickly adopted by their competitors. For example, Hualong, a Chinese brand of instant noodle, developed several sub-brands and launched differentiated marketing and advertising campaigns in Henan, Shandong, and the Northeastern

regions. The regionalization strategy has helped the company expand their market share, and they were ranked second only to Master Kong by 2002 (Xie and Chen, 2005). Guangdong is also a region worthy of special attention. Products that target Guangdong as their major market are always represented by a local agency, because outsiders are incapable of making good advertisements in the Cantonese dialect, the most widely spoken dialect in Guangdong, which differs greatly from standard Mandarin, or Putonghua (Interview A3, 2003). Advertising is not only a producer service, but also a kind of cultural industry that promotes consumer culture (Baudrillard, 1988; McFall, 2002). What distinguishes advertising among other sorts of producer services is its emphasis on effective communications with its audience achieved through creative images and attractive sounds. In advertising a multinational brand, a major challenge is how best to embed a product in a local cultural setting in a way that would make the product socially relevant, and thus coax consumers into accepting the product as, on some sense, their own. In this regard, Coca-Cola’s successful ‘‘sinicization’’ has been widely recognized (Dai and Xu, 2003). The company headquarters have always strictly controlled the global advertising strategies of the soft drink. However, beginning with 1999, Coke has employed creative agencies in China that use China’s popular music and film stars as spokespeople and filmed TV commercials in China. Coke’s recent series of Spring Festival-themed advertising campaigns have been particularly popular among consumers and advertising professionals. In 2001, Coke introduced a cartoon character in the guise of a Chinese style clay figurine called Ah-Fu (Lucky), whose purpose was to propitiate its consumers with good fortune (Fu) during the Chinese New Year. Special advertisement content honoring China’s national achievements, such as the national team’s inclusion in the semi-final round of the World Cup tournament, has also become common. As local landscapes, local issues, and regional dialects increasingly pervade a variety of advertisements, even sensitive social issues, such as unemployment and divorce, have started to appear in the scripts of advertisements of various commodities. 5. Conclusion Advertising has played a key role in helping global commodities break into China’s newly developed consumer markets. As it grew in size, China’s advertising industry has also been reorganized and its modes of operation significantly altered by the industry’s global winds of change. As a highly globalized and conglomerated industry, the operational standards of China’s advertising industry have been significantly professionalized and upgraded, with the advertising agencies’ organizational structures and behavior shifting increasingly in the direction of multinational agencies. Business standards and the modes of operation are moving closer to those of the 4A. Over the past decade,

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branch offices of multinationals in Beijing, Shanghai, and Guangzhou have brought China’s advertising industry closer to the global norm, a fact that reflects the dominance of the capital-intensive multinational advertising groups in China. In terms of spatial distribution, China’s advertising is clustered in the city-regions of Beijing, Shanghai and Guangzhou where agencies enjoy the locational advantages of proximity to information, clients and local markets, easy access to supporting professional services agglomerated around advertising, and the subsequent economies of scale. Agglomeration of advertising agencies and related supply chains is reinforced by increasing professionalization and globalization of advertising which demand supporting producer services. In turn, the development of the supply chains through the process of spatial clustering contributes to the dynamics of China’s burgeoning city-regions. With the formation of a national advertising market, China’s advertisers need media plans and promotional campaigns to be tailored to the needs of the regional markets. This has led to the proliferation of local versions of standardized global advertising, which is, in turn, facilitating the penetration of global advertising culture and reinforcing the power of globalization. Theoretically, this paper situates itself within the ongoing discussions of global cities and world city networks. From the perspective of advertising, we have seen one specific trajectory through which globalization penetrates and embeds itself into localities. This paper has looked at how one producer service, advertising, is facilitating the globalization of economic activities. The findings suggest that advertising is not only an integral part of global economic expansion, its results, as revealed in this case study of China, is also a clear manifestation of the process of globalization. The entry of multinational advertising firms has helped create an institutional environment in China’s advertising industry which is now governed by global business rules, more rigorous advertising standards, and flexible local strategies designed to fit local consumer markets. Global cities, in this sense, are the spatial and institutional intermediaries of globalization, which integrate (and dis-integrate) city-regions into larger global economic networks. Acknowledgements The author is deeply grateful for valuable comments from Professor Larry Ma and three anonymous referees. Many thanks go to my research assistants, Chen Shijing and Chen Qianqian for their assistance in collecting and processing the data. Financial support from the 211 Project, Ministry of Education, China is also highly appreciated. References Baudrillard, J., 1988. Consumer society. In: Poster, M. (Ed.), Selected Writings. Polity, Cambridge.

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