The nature and functioning of China’s state Enterprises / Li Ran

Li, Ran (2014) The nature and functioning of China’s state Enterprises / Li Ran. PhD thesis, University of Malaya.

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Abstract

China has re-emerged at global centre stage. It has achieved impressive economic growth under a political system and using strategies quite different from other countries. Not recognizing its distinctiveness and assuming that the prevailing system of “democratic” government in its various guises must be the universal norm, many commentators think that the Chinese political system must collapse and even market reform under this system cannot work. But so far, the Chinese model not only defies this prediction but has done very well. Because China follows state-led growth, its state enterprises are the central instruments of this strategy. The same commentators referred to earlier also accuse them of holding the economy back. The reality is that since the establishment of the People’s Republic in 1949, these enterprises have been going through many changes. Some functions were shed, others preserved. The enterprises today are very different from those when China began its transition in 1978. The central question for this study is whether China’s development model can be sustained with reformed state enterprises leading the economy. In assessing this question, this study posits two specific research questions: what is the dynamic role of the Chinese state and its state enterprises and how different is it from what western public enterprise theory argues? Do different ownership-control combinations affect performance outcomes? Four public enterprise theories – agency theory, property rights theory, public choice theory and neoliberalism – argue that state involvement in the economy must be reduced to realize better performance. However, these may have limited applicability to China. Four alternative theories (economic embeddedness, market socialism, developmental state and the role of history) that stress the importance of the role of the state are likely to have greater applicability. Specifically, three dimensions are analysed. First, this research assesses the nature of the Chinese state from a national perspective. Second, it applies the above framework to state enterprises in strategic sectors that are wholly owned by the state. Third, it examines stateholding enterprises operating in “commercial” sectors with partial state ownership and control. The study’s findings from its country-wide review are that the state’s role in these enterprises has remained substantial, that this role has resulted in many of these enterprises adapting successfully to the growing competitive environment, but at the cost of jettisoning their social safety net role. From the analysis of strategic enterprises, the rationale for full ownership goes beyond strategic to include historical reasons. The cost of ownership retention represents a conscious choice the state has made. For commercial state enterprises, there is de facto separation between ownership and control, but the separation between state and private is less clear-cut. How close its top management is with the political leadership matters. Overall, the results of this study point to the need to modify western theoretical perspectives for China. It also shows that totally economic arguments may lead to only partial explanation of the behaviour of the Chinese state and its enterprises.

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