Chi­nese Cor­po­rate Or­ga­ni­za­tions Since 1978: A Jour­ney of Ex­plo­rations


China Economist - - Articles - YuJing(余菁)

Ab­stract: The mar­ket eco­nomic sys­tem is an eco­nomic sys­tem of cor­po­rate or­ga­ni­za­tions. China’s sus­tained and rapid eco­nomic devel­op­ment over the past four decades of re­form and open­ing-up was sup­ported by the emer­gence of its busi­ness com­mu­nity. Dur­ing this pe­riod, China’s cor­po­rate or­ga­ni­za­tions in­creased, ex­panded and de­vel­oped from strength to strength, serv­ing as a solid mi­cro-level ba­sis for the pros­per­ity of the so­cial­ist mar­ket eco­nomic sys­tem. Hav­ing achieved sig­nif­i­cant progress, China’s cor­po­rate own­er­ship re­struc­tur­ing led to the com­mon devel­op­ment of en­ter­prises with var­i­ous forms of own­er­ship. An in­sti­tu­tional fac­tor that un­der­girded cor­po­rate pros­per­ity was China’s choice of a cor­po­rate sys­tem char­ac­ter­ized by the in­ter­play be­tween mar­ket com­pe­ti­tion and gov­ern­ment ad­min­is­tra­tion. How China’s cor­po­rate or­ga­ni­za­tional sys­tem will evolve in the fu­ture is de­ter­mined by (1) how ef­fi­ciency varies among firms with dif­fer­ent own­er­ship sys­tems, and (2) ex­ter­nal in­sti­tu­tional pres­sures fac­ing firms in their rapid in­ter­na­tion­al­iza­tion process.

Key­words: cor­po­rate or­ga­ni­za­tions, SOEs, sys­tem, re­form JEL clas­si­fi­ca­tion code: L25; L33; O12

DOI: 1 0.19602/j .chi­nae­conomist.2018.07.04

At the mi­cro level, China’s re­lent­less eco­nomic growth over the past four decades of re­form and open­ing-up since 1978 is man­i­fested in the rise of firms. Cor­po­rate growth en­livened and re­in­forced the vi­tal­ity of the eco­nomic sys­tem, which in turn con­trib­uted to the pros­per­ity of China’s busi­ness com­mu­nity.

1. First-Wave Cor­po­rate Growth and Sub­se­quent Changes

Chi­nese firms in­creased in num­ber for the first time dur­ing the late 1970s and the mid-1980s. In 1978, there were 348,400 in­dus­trial en­ter­prises at the town­ship level and above in China, ex­clud­ing nu­mer­ous vil­lage busi­nesses, ur­ban-ru­ral co­op­er­a­tive busi­nesses and in­di­vid­ual busi­nesses. This num­ber 1 in­creased to 377,300 in 1980 and 437,200 in 1984 (see Fig­ure 1). Over 98% of the nearly 90,000 new

in­dus­trial en­ter­prises were en­ter­prises of col­lec­tive own­er­ship. By 1986, the num­ber of China’s in­dus­trial en­ter­prises was close to 500,000, which was an in­crease of more than 100,000 over the eight-year pe­riod. The newly emerged col­lec­tive en­ter­prises and in­di­vid­ual busi­nesses in cities and the coun­try­side2 not only cre­ated jobs for China’s ru­ral sur­plus la­bor and ur­ban ed­u­cated youth who re­turned to cities af­ter the “down to the coun­try­side” move­ment but also in­vig­o­rated China’s bur­geon­ing mar­ket sys­tem and cre­ated com­pet­i­tive pres­sures for state-owned en­ter­prises, forc­ing them to re­form.

The in­crease in the num­ber of en­ter­prises was ac­com­pa­nied by a steady rise in the share of large in­dus­trial en­ter­prises. The im­pli­ca­tion is that large en­ter­prises de­vel­oped rapidly in the process of China’s mar­ket- ori­ented re­form. In 1984, re­form pres­sures on large en­ter­prises started to emerge, and lasted un­til the early 1990s. Back then, most large SOEs were still sub­ject to tight con­trol, and new chal­lenges emerged be­fore old prob­lems were solved. In Au­gust 1984, the In­sti­tute of In­dus­trial Eco­nomics (IIE) of Chi­nese Acad­emy of So­cial Sciences (CASS) or­ga­nized a work­shop to dis­cuss how large en­ter­prises should com­pete with thriv­ing small busi­nesses (Xu, 1984). The work­shop was at­tended by 25 large en­ter­prises in­clud­ing Shougang Group, Daqing Oil­field, First Au­to­mo­bile Works (FAW),

Shang­hai Jin­shan Wei­hua, Bei­jing Yan­shan Petro­chem­i­cal and Shang­hai Ma­chine Tools Plant. At var­i­ous lo­cal­i­ties, small and medium-sized en­ter­prises poached key per­son­nel at man­u­fac­tur­ing and tech­ni­cal po­si­tions from large en­ter­prises by of­fer­ing lu­cra­tive com­pen­sa­tion and ben­e­fits (Zhou, 1984).

In the late 1980s, the cen­tral gov­ern­ment raised the mar­ket ac­cess thresh­old to en­hance the re­sults of re­form and open­ing-up in the ear­lier stage. While the num­ber of in­dus­trial en­ter­prises re­mained sta­ble at around 500,000, large en­ter­prises con­tin­ued to in­crease in pro­por­tion and ex­pand in size. In 1987, an af­fil­i­ate of Man­age­ment World launched a rank­ing of China’s large en­ter­prises for the first time ref­er­enc­ing sim­i­lar over­seas rank­ings (China En­ter­prise Eval­u­a­tion Cen­ter, 1989). Back then, China’s largest in­dus­try en­ter­prise was Daqing Oil­field with an­nual sales rev­enue of 6.3 bil­lion yuan; an­nual sales rev­enues for in­dus­trial en­ter­prises ranked 30th to 100th ranged from 400 mil­lion yuan to 1 bil­lion yuan. China’s top 100 in­dus­trial en­ter­prises recorded gross in­dus­trial out­put in ex­cess of 100 bil­lion yuan, ac­count­ing for 7.7% of China’s to­tal. Some 10,000 large and medium-sized in­dus­trial en­ter­prises ac­counted for 41.8% of China’s to­tal gross in­dus­trial out­put value. In the mean­time, the busi­ness cli­mate wors­ened for most in­dus­trial en­ter­prises, espe­cially large in­dus­trial SOEs. Since 1988, all in­dus­trial en­ter­prises re­ported sig­nif­i­cant profit re­duc­tions. In the first half of 1990, China reg­is­tered an in­dus­trial growth rate of 2.2%, while state-owned in­dus­tries dom­i­nated by large en­ter­prises only grew by 0.5%, which was sig­nif­i­cantly be­low the growth rates of town­ship in­dus­tries and other types of in­dus­tries (An, 1990). More and more peo­ple be­gan to re­al­ize that given their im­por­tance to China’s econ­omy, large en­ter­prises should be the top pri­or­ity of China’s eco­nomic re­forms and were essential to im­prov­ing China’s fis­cal rev­enues and macroe­co­nomic op­er­a­tion (Ma, 1991).

2. Sec­ond-Wave Cor­po­rate Growth and Sub­se­quent Changes

Com­rade Deng Xiaop­ing’s pol­icy re­marks dur­ing his tour to south­ern China ush­ered in the sec­on­dround growth of Chi­nese firms. In 1993, China’s in­dus­trial en­ter­prises in­creased to 520,000, up 20,000 af­ter seven years of stag­na­tion. In 1995, this num­ber spiked to over 590,000. In 1996 and 1997, large and medium-sized in­dus­trial en­ter­prises con­tin­ued to in­crease in num­ber and share de­spite a sharp de­crease in the over­all num­ber of in­dus­trial en­ter­prises. Fig­ure 1 shows the num­ber of in­dus­trial en­ter­prises at the town­ship level and above dur­ing 1978 and 1997 and the growth of large and medium-sized in­dus­trial en­ter­prises. Since non-state-owned in­dus­trial en­ter­prises with sale rev­enues be­low 5 mil­lion yuan were ex­cluded from the NBS statis­tics since 1998, statis­tics be­fore and af­ter 1998 are not com­pa­ra­ble, and Fig­ure 1 only shows the data of 20 years be­fore 1998.

Dur­ing 1998 and 2000, large and medium-sized in­dus­trial en­ter­prises slightly re­duced in their ab­so­lute num­ber and share, which was un­prece­dented since re­form and open­ing-up in 1978. Dur­ing this pe­riod, China suf­fered set­backs from the Asian Fi­nan­cial Cri­sis. More im­por­tantly, chal­lenges fac­ing do­mes­tic econ­omy forced China to re­form its SOEs and ad­dress struc­tural con­tra­dic­tions that built up in ear­lier stages. In 2001, large and medium-sized in­dus­trial en­ter­prises started to in­crease in ab­so­lute num­ber. Their share also slightly in­creased at first, but con­tin­u­ously de­clined af­ter 2002 due to faster growth in the num­ber of small in­dus­trial en­ter­prises.

Since the mid and late 1990s, China has ex­pe­dited the re­or­ga­ni­za­tion of large en­ter­prises, which helped ex­pand their size. The size of cor­po­rate or­ga­ni­za­tions in a coun­try or re­gion is of­ten mea­sured by its num­ber of For­tune Global 500 firms. In 1996, only three Chi­nese firms were on the list. At the turn of the cen­tury, this num­ber rose to 11. Ini­tially, Chi­nese firms un­der­per­formed the av­er­age level of Global 500 firms. In 2000, China’s 11 com­pa­nies on the list re­ported an av­er­age prof­itabil­ity of 4.99%,

3 ex­ceed­ing the av­er­age level of Global 500 firms for the first time. In 2001, the dot-com crash dealt a

heavy blow to Global 500 com­pa­nies, but Chi­nese com­pa­nies were less af­fected. More im­por­tantly, China’s large en­ter­prises gen­er­ally out­per­formed the av­er­age level of Global 500 com­pa­nies in terms of growth indi­ca­tors such as as­sets, op­er­at­ing rev­enue and profit growth. This im­plies that large Chi­nese firms ex­panded with great devel­op­ment po­ten­tials dur­ing this pe­riod.

In 2002, the China En­ter­prise Con­fed­er­a­tion (CEC) re­leased the “Top 500 Chi­nese En­ter­prises” list for the first time. In the same year, the Na­tional Elec­tric Power Cor­po­ra­tion ranked first, with 1,346.3 bil­lion yuan and 400.4 bil­lion yuan in to­tal as­sets and op­er­at­ing rev­enue re­spec­tively. China’s Top 500 com­pa­nies had to­tal op­er­at­ing rev­enues of over 6 tril­lion yuan and to­tal prof­its of 300 bil­lion yuan. Their av­er­age as­sets stood at 52 bil­lion yuan, or less than 1/15 of the level of Global 500 com­pa­nies. In the same year, Walmart ranked first on the Global 500 list, with op­er­at­ing rev­enues of 220 bil­lion US dol­lars. In this stage, large Chi­nese com­pa­nies were still smaller in size and less in­no­va­tive and ef­fi­cient com­pared with other Global 500 com­pa­nies.

3. Third-Wave Cor­po­rate Growth and Sub­se­quent Changes

In 2004, Chi­nese en­ter­prises started to em­brace the third round of growth. Dur­ing 2004 and 2005, there was an in­crease in the share of large and medium-sized in­dus­trial en­ter­prises. How­ever, this in­crease rel­a­tively lagged com­pared with more rapid growth of the to­tal in­dus­trial en­ter­prises above the des­ig­nated scale. Af­ter 2005, the share of large and medium-sized in­dus­trial en­ter­prises started to de­cline once again4. Such de­cline did not abate un­til 2009. Dur­ing this pe­riod, cor­po­rate op­er­a­tions were af­fected by the erup­tion of the global fi­nan­cial cri­sis in 2008 and the sub­se­quent coun­ter­mea­sures adopted by the Chi­nese gov­ern­ment.

Af­ter 2009, China’s eco­nomic ag­gre­gate in­creased rapidly. As China over­took Ja­pan to be­come the world’s sec­ond largest econ­omy, Chi­nese cor­po­rate or­ga­ni­za­tions also sub­stan­tially in­creased in size. First, the av­er­age size of Chi­nese com­pa­nies in­creased. In 2010, the thresh­old for China’s Top 500 com­pa­nies list was raised to 11 bil­lion yuan. Mean­while, the av­er­age size of large in­dus­trial en­ter­prises ex­ceeded 6 bil­lion yuan, and that of medium-sized in­dus­trial en­ter­prises also reached around 500 mil­lion yuan. On the other hand, the ab­so­lute num­ber of large and medium-sized in­dus­trial en­ter­prises in­creased sig­nif­i­cantly for five years in a row. In 2011, the NBS made an­other ad­just­ment to the def­i­ni­tion of large and medium-sized in­dus­trial en­ter­prises from an­nual rev­enue from pri­mary busi­ness in ex­cess of 5 mil­lion yuan to an­nual rev­enue from pri­mary busi­ness over 20 mil­lion yuan. Al­though the thresh­old was raised, large and medium-sized in­dus­trial en­ter­prises sharply in­creased from 46,600 to 61,300 in the same year.

It was not un­til 2014 that the ab­so­lute num­ber of large and medium-sized en­ter­prises started to fall - a real in­di­ca­tion of eco­nomic con­trac­tion. In 2016, the num­ber of in­dus­trial en­ter­prises above the des­ig­nated scale re­duced for the first time in al­most two decades. Ex­cept for the eco­nomic tur­bu­lence in the late 1980s, early 1990s and mid and late 1990s, such re­duc­tion was rare.

For this stage, two fac­tors war­rant our at­ten­tion. First, the ser­vice sec­tor re­placed pro­duc­tion in­dus­try as the largest sec­tor of China’s econ­omy. Sec­ond, the Chi­nese gov­ern­ment in­tro­duced a “mass en­trepreneur­ship and in­no­va­tion” cam­paign to pro­mote emerg­ing eco­nomic sec­tors spear­headed by the In­ter­net econ­omy. Ac­cord­ing to the State Ad­min­is­tra­tion of In­dus­try and Com­merce, there were 60.6238 mil­lion mar­ket en­ti­ties in China by the end of 2013. In the re­cent few years, the num­ber of mar­ket en­ti­ties in­creased by 10 mil­lion on an an­nual av­er­age ba­sis. By early 2018, the num­ber of mar­ket en­ti­ties

5 in China ex­ceeded 100 mil­lion.

For the above rea­sons, it is nat­u­ral for the num­ber of China’s in­dus­trial en­ter­prises to shrink af­ter ram­pant growth. But such con­trac­tion is also at­trib­ut­able to deep-seated struc­tural con­tra­dic­tions, as well as chal­lenges and pres­sures in pur­su­ing high-qual­ity devel­op­ment.

4. Eco­nomic Re­struc­tur­ing through­out Cor­po­rate Growth Jour­ney

De­vel­op­ing and im­prov­ing the so­cial­ist mar­ket econ­omy with Chi­nese char­ac­ter­is­tics is the theme of China’s eco­nomic devel­op­ment and re­form. At the mi­cro level, the re­form is in­tended to trans­form China’s planned econ­omy into a mar­ket- based one, and de­velop en­ter­prises of var­i­ous own­er­ship sys­tems.

4.1 Fall­ing Share of the State Sec­tor of Econ­omy: From 78% to 28%

At the end of the 20th cen­tury, China’s state sec­tor gave way to en­ter­prises of other own­er­ship sys­tems in terms of the share of gross out­put. This be­came a defin­ing fea­ture of China’s eco­nomic re­struc­tur­ing since re­form and open­ing-up in 1978. In the early 1980s, SOEs and col­lec­tive en­ter­prises rep­re­sented a lion’s share of China’s in­dus­trial out­put. From the late 1970s to the mid-1990s, col­lec­tive en­ter­prises as a share of China’s in­dus­trial out­put in­creased. In 1978, SOEs and col­lec­tive en­ter­prises ac­counted for 77.63% and 22.37% of China’s gross in­dus­trial out­put re­spec­tively. In 1994, SOEs as a share of China’s gross in­dus­trial out­put re­duced to 37.34%, which was smaller than the share of

col­lec­tive en­ter­prises (37.72%) for the first time. The gross in­dus­trial out­put value of other en­ter­prises in­creased to 25% from scratch. In 1996, col­lec­tive en­ter­prises as a share of China’s gross in­dus­trial out­put peaked at al­most 40%. After­wards, how­ever, the role of col­lec­tive en­ter­prises in China’s econ­omy

6 di­min­ished. In 1997, state-owned and state-con­trolled en­ter­prises as a share of China’s gross in­dus­trial out­put sig­nif­i­cantly de­creased to a level be­low en­ter­prises of other own­er­ship sys­tems for the first time. In 1998, state-owned and state-con­trolled en­ter­prises as a share of China’s gross in­dus­trial out­put dropped be­low 30% for the first time. Fig­ure 2 shows how SOEs as a share of gross out­put re­duced from 78% in 1978 to 28% by the end of the 20th cen­tury.

4.2 Eco­nomic Own­er­ship Re­struc­tur­ing

Dur­ing 2000-2004, SOEs as a share of in­dus­trial out­put con­tin­ued to de­cline rapidly. Dur­ing 20042005, the re­treat of the state sec­tor as a share of the econ­omy rel­a­tive to ad­vanc­ing pri­vate sec­tor sparked heated de­bates. Sub­se­quently, the down­ward trend of SOEs in terms of shares of as­sets, rev­enues and prof­its in to­tal in­dus­trial en­ter­prises was curbed. How­ever, af­ter a cou­ple of years, th­ese indi­ca­tors con­tin­ued to de­cline at a slower pace.

Fig­ure 3 shows changes in eco­nomic indi­ca­tors of en­ter­prises of dif­fer­ent own­er­ship sys­tems dur­ing 2006-2016. As can be seen from the chart, the to­tal as­sets, op­er­at­ing rev­enues and prof­its of state-owned and state-con­trolled en­ter­prises ac­counted for 38%, 21% and 17% re­spec­tively in 2016, down from 46%, 32% and 44% in 2006. The as­sets, op­er­at­ing rev­enues and prof­its of pri­vate en­ter­prises ac­counted for 22%, 35% and 35% re­spec­tively in 2016, up from 14%, 21% and 16% in 2006. The as­sets, op­er­at­ing rev­enues and prof­its of for­eign-funded en­ter­prises and en­ter­prises in­vested by Hong Kong, Ma­cao and Tai­wan com­bined, known as over­seas-funded, ac­counted for 20%, 22% and 24% re­spec­tively in 2014, down from 26%, 32% and 28% in 2006.

Over the past cou­ple of decades, China achieved re­mark­able progress in re­struc­tur­ing eco­nomic own­er­ship, which led to a di­ver­si­fi­ca­tion of its pre­vi­ously SOE-dom­i­nated econ­omy. To­day’s China boasts an eco­nomic sys­tem char­ac­ter­ized by the in­ter­play be­tween dom­i­nant pub­lic own­er­ship sys­tem and eco­nomic el­e­ments of var­i­ous own­er­ship sys­tems. Mar­ket mech­a­nism plays a piv­otal role in China’s eco­nomic sys­tem. Ac­cord­ing to An­drew Szamosszegi and Cole Kyle (2011), China’s SOEs ac­counted for an es­ti­mated 38% to 40% share of in­dus­trial value-added. If the state-re­lated por­tion in other own­er­ship sys­tems is in­cluded, this per­cent­age is roughly es­ti­mated to be 50%. A more widely ac­cepted em­pir­i­cal es­ti­mate is that SOEs con­trib­uted to 25% to 30% of China’s in­dus­trial out­put. For a rather long pe­riod of time, the state sec­tor of econ­omy played a piv­otal role in China’s eco­nomic sys­tem. So far, there is no in­di­ca­tion that China is de­vel­op­ing to­wards a com­plete or free mar­ket econ­omy or de­sires to cre­ate a mar­ket eco­nomic sys­tem dom­i­nated by pri­vate own­er­ship.

In China’s di­verse eco­nomic sys­tem, en­ter­prises with dif­fer­ent own­er­ship sys­tems play dif­fer­ent roles in the econ­omy. Among them, SOEs demon­strate an “as­sets-heavy” char­ac­ter­is­tic. With their as­sets ac­count­ing for al­most 40% of all en­ter­prises, their rev­enues and prof­its only ac­counted for about 20%. On the con­trary, pri­vate en­ter­prises ac­counted for 35% of to­tal cor­po­rate rev­enues and prof­its de­spite their smaller share of as­sets slightly above 20%. For­eign-funded en­ter­prises and en­ter­prises in­vested by Hong Kong, Ma­cao and Tai­wan com­bined ac­counted for more bal­anced shares of as­sets, rev­enues and prof­its in the range of 20% to 25% of all en­ter­prises. Other en­ter­prises ac­counted for sim­i­lar shares, i.e. about 20% of all en­ter­prises. With less than 20% of to­tal as­sets, the over­seas-funded en­ter­prises cre­ated

over 20% of to­tal cor­po­rate rev­enues and prof­its in China.

5. Del­i­cate Balance be­tween Gov­ern­ment and Mar­ket Roles

Growth of Chi­nese firms in terms of num­ber, size and own­er­ship di­ver­si­fi­ca­tion is a man­i­fes­ta­tion of China’s cor­po­rate sec­tor re­form. In the course of China’s eco­nomic re­form, China’s cor­po­rate or­ga­ni­za­tional sys­tem ex­pe­ri­enced a grad­ual but dy­namic learn­ing process. At the be­gin­ning, China at­tempted to over­come the con­straints of the planned econ­omy to its so­cial and eco­nomic devel­op­ment through com­plete mar­ket-ori­ented and cor­po­rate joint-stock re­forms. Af­ter the global fi­nan­cial cri­sis in 2008, how­ever, Chi­nese pol­icy-mak­ers be­came aware of the draw­backs of free-mar­ket philoso­phies, and strove to avoid, mit­i­gate and over­come the neg­a­tive so­cial and eco­nomic ex­ter­nal­i­ties of a free-mar­ket sys­tem. To­day, China chooses to pur­sue cor­po­rate devel­op­ment within a dual in­sti­tu­tional frame­work char­ac­ter­ized by the syn­ergy be­tween the “de­ci­sive role of mar­ket” and the “more ef­fec­tive gov­ern­ment func­tions”.

5.1 Tran­si­tion from Ad­min­is­tra­tive Af­fil­i­ates into Mar­ket-Based Cor­po­rate Sys­tem

At the in­cep­tion of re­form and open­ing- up in 1978, Chi­nese en­ter­prises still op­er­ated like gov­ern­ment af­fil­i­ates, and hosted so­cial func­tions such as schools and hos­pi­tals for their own em­ploy­ees. They formed a closed struc­ture where re­sources, in­clud­ing hu­man re­sources, could not be shared with

each other (Lu Feng, 1989). In the late 1970s and early 1980s, in­de­pen­dent mar­ket en­ti­ties started to emerge and thrive in the form of col­lec­tive and in­di­vid­ual econ­omy free from ad­min­is­tra­tive in­ter­ven­tion.

At a crit­i­cal junc­ture in the 1990s with re­spect to the choice of cor­po­rate or­ga­ni­za­tional sys­tem, China chose to mod­ern­ize its cor­po­rate sys­tem to be com­pat­i­ble with the mod­ern mar­ket eco­nomic sys­tem in line with in­ter­na­tional prac­tices. Th­ese fun­da­men­tal in­sti­tu­tional re­forms vastly un­locked China’s eco­nomic po­ten­tials, al­low­ing China to pur­sue in­dus­tri­al­iza­tion and cre­ate mar­ket-based mod­ern en­ter­prises based on the ex­pe­ri­ence of ad­vanced economies.

In the mid and late 1990s, China hes­i­tated about whether it should learn from the Bri­tish-Amer­i­can or Ger­man-Ja­panese cor­po­rate gover­nance sys­tem. At first, Chi­nese firms tended to adopt a Ger­manJa­panese cor­po­rate gover­nance struc­ture con­sist­ing of a board of di­rec­tors, man­age­ment and board of su­per­vi­sors, and con­sid­ered en­hanc­ing the role of banks in cor­po­rate gover­nance based on the ex­pe­ri­ence of both coun­tries. As China’s cap­i­tal mar­kets came into shape af­ter the dawn of the new cen­tury, China thor­oughly turned to the Bri­tish-Amer­i­can cor­po­rate gover­nance sys­tem, which high­lights the roles of in­de­pen­dent di­rec­tors and pro­fes­sional com­mit­tees un­der the board of di­rec­tors. It was widely dis­cussed whether the po­si­tions of board chair­man and gen­eral man­ager should be as­sumed by two dif­fer­ent per­sons or the same per­son, and the di­ver­sity of board mem­ber­ship was high­lighted as well.

5.2 Cor­po­rate Or­ga­ni­za­tional Sys­tem Com­pat­i­ble with the So­cial­ist Mar­ket Eco­nomic Sys­tem

In the so­cial­ist mar­ket econ­omy, the mar­ket and gov­ern­ment are sup­posed to ful­fill their re­spec­tive roles and re­spon­si­bil­i­ties. The gov­ern­ment plays an essential role in China’s so­cial­ist mar­ket eco­nomic sys­tem. SOEs rep­re­sent an im­por­tant form of gov­ern­ment in­sti­tu­tions that par­tic­i­pate in mar­ket eco­nomic ac­tiv­i­ties. In cre­at­ing and im­prov­ing mar­ket-based cor­po­rate sys­tems, Chi­nese en­ter­prises and espe­cially SOEs have re­tained cer­tain in­sti­tu­tional el­e­ments of gov­ern­ment ad­min­is­tra­tive sys­tems.

His­tor­i­cally, Chi­nese en­ter­prises cre­ated the “old three in­sti­tu­tions” ( Party com­mit­tee, the em­ploy­ees’ congress and the trade union) as the setup of power. A ques­tion is how th­ese in­sti­tu­tions should be aligned with new in­sti­tu­tions cre­ated in mod­ern cor­po­rate gover­nance re­form, i. e. share­hold­ers’ meet­ing, board of di­rec­tors and board of su­per­vi­sors (“new three in­sti­tu­tions”). In prac­tice, Chi­nese com­pa­nies have de­vel­oped spe­cific in­sti­tu­tional ar­range­ments to im­prove the ad­min­is­tra­tive pow­ers un­der mar­ket and ad­min­is­tra­tive sys­tems. For in­stance, they cre­ated over­lapped po­si­tions be­tween the “old three in­sti­tu­tions” and the “new three in­sti­tu­tions”, par­tic­u­larly be­tween the Party com­mit­tee and the board of di­rec­tors. While the po­si­tions of board chair­man and gen­eral man­ager should be as­sumed by dif­fer­ent per­sons, Party sec­re­tary and board chair­man can be the same per­son. Em­ployee rep­re­sen­ta­tives serve as di­rec­tors or su­per­vi­sors. There are other ex­am­ples as well.

In re­cent years, SOEs’ or­ga­ni­za­tional sys­tem con­tin­ued to evolve to­wards two dif­fer­ent in­sti­tu­tional di­rec­tions. First, they cre­ated in­de­pen­dent boards of di­rec­tors with greater au­thor­i­ties in ac­cor­dance with cor­po­rate gover­nance rules. As a crit­i­cal in­sti­tu­tional ar­range­ment, SOE boards of di­rec­tors were given the author­ity to ap­point se­nior man­age­ment - this ar­range­ment aims to strike a balance be­tween the prin­ci­ple that cadres should be ap­pointed by the Party and the mar­ket-based se­lec­tion of cor­po­rate man­agers. On the other hand, SOEs en­hanced the Party’s lead­er­ship and in­volved Party com­mit­tees in their de­ci­sion-mak­ing of key mat­ters. Specif­i­cally, SOEs wrote crit­i­cal in­sti­tu­tional ar­range­ments into their ar­ti­cles of as­so­ci­a­tion, es­tab­lished de­ci­sion-mak­ing pro­ce­dures, and bal­anced the re­la­tion­ship be­tween the po­lit­i­cal lead­er­ship of Party or­ga­ni­za­tions and the board’s ex­ec­u­tive power.

5.3 Ef­fec­tive­ness of Change in China’s Cor­po­rate Or­ga­ni­za­tional Sys­tem

At the be­gin­ning of re­form and open­ing-up in 1978, China’s state-run en­ter­prises did not fol­low mar­ket-based rules of op­er­a­tion, and used re­sources in­ef­fi­ciently. Through re­form and open­ing-up,

China’s cor­po­rate or­ga­ni­za­tions in­creas­ingly came to terms with mar­ket in­sti­tu­tions at all lev­els. Un­der the in­ter­play be­tween mar­ket- based com­pe­ti­tion and gov­ern­ment- led ad­min­is­tra­tion, in­sti­tu­tional changes oc­curred within nu­mer­ous cor­po­rate or­ga­ni­za­tions - the cu­mu­la­tive ef­fect of th­ese changes in­duced sys­tem­atic trans­for­ma­tions of China’s cor­po­rate or­ga­ni­za­tional sys­tem.

In the so­cial­ist mar­ket eco­nomic sys­tem that China pur­sues to­day, com­pa­nies that do not in­no­vate and skill­fully adapt to an ever-chang­ing en­vi­ron­ment will not sur­vive. Even if they do, their le­git­i­macy may be de­prived by gov­ern­ment ad­min­is­tra­tive power. Com­pa­nies that sur­vive must not only se­cure po­lit­i­cal sup­port from the gov­ern­ment but also ac­quire all types of re­sources from mar­ket com­pe­ti­tion. They must en­gage in pro­duc­tive ac­tiv­i­ties in­stead of purely con­sum­ing re­sources.

Chi­nese com­pa­nies op­er­ate un­der a del­i­cate balance be­tween com­pet­i­tive mar­ket mech­a­nism and gov­ern­ment ad­min­is­tra­tion. Pub­lic mem­ory has also evolved with chang­ing times. The level of so­phis­ti­ca­tion demon­strated by Chi­nese com­pa­nies is rare in the world. The com­plex­ity is man­i­fested in the sense that the spe­cific type of sys­tem at work is of­ten in­dis­cernible. In dif­fer­ent sit­u­a­tions, the “mas­ter­mind” sys­tem at play may not be the same (Dame Mary Dou­glas, 2013) - whether it is the com­pet­i­tive sys­tems that pro­mote busi­ness ideas or ad­min­is­tra­tive sys­tems that de­fend the Party com­mit­tee as a po­lit­i­cal or­ga­ni­za­tion, they all fight for peo­ple’s “struc­tural for­get­ful­ness” for other forms of sys­tems and jus­tify their own glory and cor­rect­ness un­der the ban­ner of “undis­puted le­git­i­macy”.

6. Or­ga­ni­za­tional Tran­si­tion of Chi­nese En­ter­prises: Fu­ture Di­rec­tions

This sec­tion at­tempts to iden­tify the fac­tors that in­flu­ence the or­ga­ni­za­tional sys­tem of Chi­nese firms. Given the sub­jec­tiv­ity of ad­min­is­tra­tive sys­tems, our analysis will fo­cus on how mar­ket sys­tems as a hard con­straint af­fect cor­po­rate ef­fi­ciency for com­pa­nies with dif­fer­ent own­er­ship sys­tems. In ad­di­tion, we will also ex­am­ine the ex­ter­nal in­sti­tu­tional pres­sures from the in­ter­na­tional com­mu­nity fac­ing Chi­nese com­pa­nies in their in­ter­na­tion­al­iza­tion process.

6.1 Pos­si­bil­ity for Mar­ket Com­pe­ti­tion and Cor­po­rate Ef­fi­ciency Dif­fer­ences to In­duce Change

At the end of the last cen­tury, China’s SOEs were con­fronted with two co­nun­drums: “insider con­trol” due to a lack of su­per­vi­sion over the own­ers and the “soft bud­getary con­straint” aris­ing from their de­pen­dence on gov­ern­ment fi­nance. Over the past two decades, th­ese prob­lems have abated but are far from re­solved.

Th­ese prob­lems can be best solved by a com­bi­na­tion of mar­ket sys­tem and ad­min­is­tra­tive su­per­vi­sion. Ide­ally, while the mar­ket sys­tem prevents insider con­trol or soft bud­getary con­straint, ad­min­is­tra­tive su­per­vi­sion un­der the Party’s lead­er­ship will re­move com­pa­nies or in­sid­ers with bad be­hav­iors. Also un­der de­sir­able con­di­tions, com­pa­nies may de­rive po­lit­i­cal ad­van­tage to en­hance their eco­nomic com­pet­i­tive­ness.

Nev­er­the­less, the re­al­ity is far more com­plex since the dual-sys­tem ar­range­ment may also give rise to a con­flict of in­ter­est. Un­der the new in­sti­tu­tional frame­work, the “insider con­trol” and “soft bud­getary con­straint” prob­lems will con­tinue to ex­ist in new and more tacit forms. It takes tremen­dous time and ef­forts to pre­vent th­ese prob­lems through su­per­vi­sion, re­duc­ing the re­sources oth­er­wise avail­able to firms for mar­ket-based pro­duc­tion ac­tiv­i­ties. As a re­sult, com­pa­nies will have to op­er­ate with ex­or­bi­tant in­sti­tu­tional costs to the detri­ment of their ef­fi­ciency and debt-to-as­sets ra­tio.

As Fig­ure 4 shows, with each unit of as­sets, China’s in­dus­trial en­ter­prises cre­ated 1.07 units of rev­enue from pri­mary busi­ness and 0.07 units of prof­its in 2016, while state-owned and state-con­trolled en­ter­prises only cre­ated 0.57 units of rev­enues from pri­mary busi­ness and 0.03 units of prof­its. Com­pared with the be­gin­ning of this cen­tury, there has not been much change in the ab­so­lute ef­fi­ciency of SOEs, but gaps be­tween SOEs and in­dus­trial en­ter­prises over­all in terms of ef­fi­ciency have widened.

When China en­deav­ored to help SOEs over­come their dif­fi­cul­ties in the late 1990s, the debt-to-

as­sets ra­tio of China’s in­dus­trial en­ter­prises reached a high level of over 60%. In the most dif­fi­cult year of 1997, this ra­tio ap­proached the warn­ing line of 65%. This ra­tio dropped to 55.87% in 2016. But the debt-to-as­sets ra­tios of SOEs and state-con­trolled en­ter­prises in­creased to a high level of 61.58%. Among var­i­ous types of state-owned and state-con­trolled en­ter­prises, the debt-to-as­sets ra­tio of solely state­funded com­pa­nies climbed to a high level of 63.53%, as shown in Fig­ure 5. Ac­cord­ing to data re­leased by the Min­istry of Fi­nance at the end of March 2018, the debt-to-as­sets ra­tio of SOEs ap­proached 65%, and over­all SOE li­a­bil­i­ties ex­ceeded 100 tril­lion yuan.

Fore­see­ably, dif­fer­ent forms of in­sti­tu­tional ar­range­ments will lead to dif­fer­ences in cor­po­rate op­er­a­tional ef­fi­ciency that will con­tinue to ac­cu­mu­late and cre­ate pres­sure and mo­men­tum for deep­en­ing SOE re­form.

6.2 In­sti­tu­tional Pres­sures in the In­ter­na­tion­al­iza­tion Process

China’s re­form and open­ing- up is not an iso­lated process. In a global con­text, Chi­nese firms have al­ways sus­tained great pres­sures from the in­ter­na­tional com­mu­nity. At the dawn of the new cen­tury, Chi­nese com­pa­nies ended their iso­la­tion from the rest of the world by em­brac­ing the WTO, and ac­cel­er­ated their in­ter­na­tion­al­iza­tion process. With the rapid devel­op­ment of new tech­nol­ogy and new econ­omy, the di­ver­sity of cor­po­rate sys­tems in dif­fer­ent coun­tries was greatly tol­er­ated in the in­ter­na­tional mar­ket sys­tem; such tol­er­ance is essential in a world of di­ver­sity. Ex­ter­nal in­sti­tu­tional pres­sures serve as an­other im­por­tant driver of change in China’s cor­po­rate or­ga­ni­za­tional sys­tem.

To­day, as im­por­tant in­ter­na­tional in­vest­ment en­ti­ties, Chi­nese com­pa­nies have em­barked upon a fast track of in­ter­na­tion­al­iza­tion. Chi­nese com­pa­nies are in­creas­ingly in­te­grated into the world mar­ket based on an in­tri­cate sys­tem of in­ter­na­tional rules. China is un­der grow­ing in­ter­na­tional pres­sures to stay abreast with the sys­tem of in­ter­na­tional mar­ket rules. If Chi­nese com­pa­nies are able to cope with ex­ter­nal in­sti­tu­tional pres­sures, they will be able to se­cure or­ga­ni­za­tional le­git­i­macy and greatly re­duce trans­ac­tion cost for en­ter­ing the in­ter­na­tional mar­ket. In re­al­ity, how­ever, it is not un­com­mon for in­sti­tu­tional pres­sures to con­tra­dict cor­po­rate be­hav­iors. In April 2018, the US De­part­ment of Com­merce ac­ti­vated an ex­port ban on ZTE, a top Chi­nese telecom equip­ment com­pany, crip­pling its busi­ness op­er­a­tions. The of­fi­cial rea­son for the ban is ZTE’s vi­o­la­tion of US ex­port re­stric­tion, at­tempt to evade su­per­vi­sion, false state­ments, and non-com­pli­ance with the set­tle­ment agree­ment.

Be­hind the ZTE ban is a grow­ing con­cern of some coun­tries for Chi­nese com­pa­nies. There is no doubt that the own­er­ship struc­ture of Chi­nese com­pa­nies is im­prov­ing over the years. How­ever, the con­cern for their al­leged non-mar­ket op­er­a­tions is un­abated. From the per­spec­tive of fair busi­ness com­pe­ti­tion, some coun­tries are op­posed to the credit sup­port, sub­sidy and pref­er­en­tial gov­ern­ment pro­cure­ment poli­cies of­fered by the Chi­nese gov­ern­ment to its do­mes­tic en­ter­prises. Some peo­ple are con­cerned with China’s “state-owned” en­ter­prises or sim­ply “Chi­nese” com­pa­nies, and be­lieve that

among both Chi­nese pri­vate and state-owned com­pa­nies are the ones that have “grey ar­eas” where they do not fully com­ply with mar­ket laws. Nev­er­the­less, there are still some ra­tional and ob­jec­tive voices that Chi­nese com­pa­nies, re­gard­less of their own­er­ship na­ture, should be treated equally as long as they re­spect and com­ply with in­ter­na­tional rules.

Th­ese con­cerns may not be dis­pelled overnight, so, we should con­sider se­ri­ously the rea­son­able doubts about the com­mer­cial op­er­at­ing ac­tiv­i­ties of Chi­nese cor­po­ra­tions.

Based on ex­pe­ri­ence, the fol­low­ing ba­sic po­si­tions should be clar­i­fied. First, com­pa­nies should ben­e­fit from ex­ten­sive in­ter­na­tional co­op­er­a­tion as a mo­ti­va­tion for com­pli­ance with in­ter­na­tional rules. Only mo­ti­va­tions for long- term co­op­er­a­tion will drive com­pa­nies to make de­ci­sions that re­strict and change their be­hav­iors. Sec­ond, com­pa­nies must un­der­stand “the way pol­i­cy­mak­ers re­flect upon in­ter­na­tional laws and stan­dards and the po­lit­i­cal dis­course they use” ( Pow­ell and DiMag­gio, 2008) in par­tic­i­pat­ing in and chang­ing the sys­tem of in­ter­na­tional mar­ket rules. In un­der­stand­ing and ac­cept­ing their pref­er­ences and power struc­ture, com­pa­nies should in­flu­ence the pref­er­ences and power struc­ture in the ex­ist­ing sys­tem. As can be seen from ex­pe­ri­ences, pos­i­tive and ef­fec­tive re­sponse to in­sti­tu­tional pres­sures from the in­ter­na­tional com­mu­nity is likely to un­leash com­pa­nies’ in­sti­tu­tional po­ten­tials.


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