A healthy hybrid: The technological dynamism of minority-state-owned firms in China

Abstract

Since its economic reform began in 1979 China's economy has grown rapidly but its dynamism has not been shared by the state-owned enterprises (SOEs) at its core. Although some progress has been made, a large proportion of SOEs remain inefficient and uncompetitive, failing to exploit their advantages in scale, experience and resources. In contrast there has been rapid growth first of the collective and township enterprises, and then of the private sector, now the largest ownership type. However, private businesses continue to be handicapped by poor access to finance and other resources. These have however been made freely available to firms with only a minority state shareholding and otherwise owned by private shareholders and employees. This paper, focussing on the telecoms manufacturing sector, compares minority-state-owned hybrids favourably with other ownership types and argues that in the Chinese setting they can and should play a key role in future development.

Notes

1. Most figures in Table 1 are calculated from the State Statistical Bureau's China Statistical Yearbook (various years). The 2001 figure ‘% of gross industrial output’ of state sector and of the non-state sector could not be obtained, because the State Statistical Bureau had changed the scope of the variables by then. The ‘state’, ‘township’ and ‘village’ sectors refer to firms in which the ‘state’, ‘town’ or ‘village’ controls a majority or at least a plurality of assets. The ‘collective’ refers to firms in which a majority or plurality of assets are owned by a group of people. The ‘private’ sector includes individual private enterprises, shareholding corporations and enterprises funded by foreigners or by entrepreneurs from Hong Kong, Macao and Taiwan. See the discussion in Section 3.

2. Xinhua News Agency, 13 September 2002. URL: http://www.xinhua.org.

3. J. Kynge, China plans shake-up for state enterprises, Financial Times, 12 November 2003, p. 11.

4. Ibid.

5. A. B. Tylecote & J. Cai, China's SOE reform and technological change: a corporate governance perspective, Asian Business and Management, 3(1), 2004, p. 57.

6. A. B. Tylecote & E. Conesa, Corporate governance, innovation systems and industrial performance, Industry and Innovation, 6(1), 1999, p. 25.

7. The CDB is a ‘policy bank’ set up in 1994 with the aim of making loans on favourable terms to firms with both strategic technological potential and economic value for the Chinese economy and good profit possibilities.

8. E. W. K. Tsang, Threats and opportunities faced by private business in China, Journal of Business Venturing, 9, 1994, p. 451.

9. Ibid.; Y. Q. Liu, Development of private entrepreneurship in China: process, problem and countermeasures, 2002. URL: www.mansfieldfdn.org/programs/program_pdfs/ent_china.pdf.

10. Liu, op. cit., Ref. 9.

11. ‘Red hat enterprises’ refer to collective, township, village or sometime even partnership enterprises (in some regions) for they are regarded as the main part of socialist economy.

12. J. C. Oi, The role of the local state in China's transitional economy, China Quarterly, 144, 1995, p. 1132.

13. S. Song, Policy, practice and the private sector in China, The Australian Journal of Chinese Affairs, 21, 1989, p. 57.

14. K. Parris, Local initiative and national reform: the Wenzhou model of development, China Quarterly, 134, 1993, p. 242.

15. J. D. Saussure H. Frechette & B. Gryziak, Is the Banking System of the People's Republic of China ready to play with competitive WTO?', 2001. URL: http://www.nhh.no/geo/chinese/2001/papers/BankWTO.pdf.

16. K. S. Tsai, Back-Alley Banking: Private Entrepreneurs in China (Ithaca, NY, Cornell University Press, 2002).

17. Liu, op. cit., Ref. 9; Song, op. cit., Ref. 13; Tsai, op. cit., Ref. 16.

18. Tsai, op. cit., Ref. 16; J. D. Langlois, China's financial system and the private sector, 2001. URL: www.ksg.harvard.edu/cbg/Conferences/financial_sector/Langloispaper.pdf.

19. Tsai, op. cit., Ref. 16.

20. Tsang, op. cit., Ref. 8; Y. L. Liu, Reform from below: the private economy and local politics in the rural industrialization of Wenzhou, China Quarterly, 130, 1992, p. 293.

21. C. P. W. Wong, Central–local relations in an era of fiscal decline: the paradox of fiscal decentralization in post-Mao China, China Quarterly, 128, 1991, p. 691.

22. Revenue was divided into four parts: central fixed income, local fixed income, fixed rate share income and adjustment income. The former two kinds of fixed incomes came from associated types of ownership: a central enterprise remitted its profit to central fixed income and a local enterprise remitted its profit to local fixed income. If a firm was under dual regulation, a fixed proportion of 80 to 20 would be submitted to central and local government. The adjustment income mainly consisted of industrial-commercial tax (gongshang shui). It was negotiable between centre and localities (Wong, op. cit., Ref. 21). In 1994 a tax sharing system was introduced to reduce the negotiability and to increase transparency.

23. Wong, op. cit., Ref. 21.

24. Op. cit., Ref. 22. The revenue could also be grouped into within-budget revenue (yusuannei zijin) and extra-budgetary revenue (yusuanwai zijin). Within-budget revenues are those taxes (income tax, industrial commercial tax) on state and collective enterprises. Local income belongs to extra-budgetary revenue that includes: (1) local tax revenue such as slaughter tax, agriculture tax, salt tax and tax on township village and private enterprises and (2) non-tax revenue including management fee, surcharge for specific local projects and overseas donations, etc. C. P. W. Wong, Fiscal reform and local industrialization: the problematic sequencing of reform in post-Mao China, Modern China, 18, 1992, p. 197.

25. State Statistical Bureau (Ed.), China Statistical Yearbook (Beijing, State Statistical Publishing House, 1989, 1991–1993, 1997, 2000, 2002); J. C. Oi, Fiscal reform and the economic foundations of local state corporatism in China, World Politics, 45, 1992, p. 99.

26. Y. C. Wu, Banking Industry In China: Problems and Prospects, CIEC China International Economic Consultants, 2001. URL: http://www.friedlnet.com/0009.html.

27. Liu, op. cit.,Ref. 9; Langlois, op. cit., Ref. 18.

28. Langlois,op. cit., Ref. 18.

29. G. D. Bruton & D. Ahlstrom, An institutional view of China's venture capital industry explaining the difference between China and the West, Journal of Business Venturing, 18, 2003, p. 233.

30. People's Daily, 20 February 2002. URL: english.peopledaily.com.cn.

31. People's Daily, 1 August 2000. URL: english.peopledaily.com.cn.

32. J. Lo, The problem with venture capital in China, 2000. URL: http://www.vcchina.com/english/source/sj02_02.html

33. Bruton & Ahlstrom, op. cit., Ref. 29.

34. Tylecote & Conesa, op. cit., Ref. 6.

35. Tylecote & Cai, op. cit., Ref. 5.

36. Ibid.

37. Tylecote & Conesa, op. cit., Ref. 6.

38. Oi, op. cit., Ref. 12.

39. Visintin et al., Italian success and British survival: case studies of corporate governance and innovation in a mature industry, Technovation, 25, 2005, pp. 621–29.

40. Oi, op. cit., Ref. 12.

41. S. M. Goldstein, China in transition: the political foundations of incremental reform, China Quarterly, 144, 1995, p. 1105.

42. Tsang, op. cit., Ref. 8.

43. Song, op. cit., Ref. 13.

44. The Chinese securities law stipulates that no one individual (citizen, corporation or institution) can buy more than 5% of the tradable shares. A stake larger than 5% of the shares must therefore go to the category of legal person share that is non-liquid.

45. Actually this method was widely used by Taiwan 30 years ago, Japan 60 years ago—and something like it, by the United States; see Ha-Joon Chang, Kicking away the ladder, Post-Autistic Economics Review, 15, 2002, article 3.