China's SOE Reform and Technological Change: A Corporate Governance Perspective
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China’s SOE Reform and Technological Change: A Corporate Governance Perspective Andrew Tylecote and Jing Cai Management School and Economics Department, 9 Mappin Street, Sheffield S1 4DT, UK. E-mail: [email protected]
Since the beginning of its economic reforms in 1979, China has been searching for an effective corporate governance system for its state-owned enterprises (SOEs). Although some progress has been made, a large proportion of SOEs remain inefficient and uncompetitive, and in general they have failed to exploit their advantages in scale, experience and resources. This paper argues that this is mainly due to poor corporate governance, in the broad sense of control relationships. The structure and culture of these relationships creates poor disciplinary and incentive mechanisms, and these not only cause poor management in a day-to-day sense, but distort technological development. Management has an incentive, in general, to avoid spending over the long term, and in particular to avoid investment with low visibility. We show how this tends to privilege the upgrading of technology in such a way that the enterprise remains dependent on external sources. We conclude with proposals to change the financial and corporate governance system to improve the situation. Asian Business & Management (2004) 3, 57–84. doi:10.1057/palgrave.abm.9200070 Keywords: China’s SOE reform; corporate governance; technological change
Introduction In quantitative terms, the role of China’s state-owned enterprises (SOEs) has declined very sharply since the great reform process began in the late 1970s. At that point they produced 75 per cent of output, with the rest produced by ‘collective’ enterprises; by 1999 their share was down to about 28 per cent, with the private sector rising from 0.5 per cent in 1980 to 44 per cent in 1999 (Table 1).1 The reader should be warned at this point that government statistical data is, to put it politely, not entirely reliable. Most of the decline has been accounted for by the greater dynamism of the collective and private sectors, although some has come from the privatization of small SOEs. The decision was taken not to privatize large and medium SOEs, but to transform them into ‘modern enterprise corporations’ in which the state retained at least a majority shareholding. By the end of 2000, 70 per Received 10 September 2002; revised 24 July 2003; accepted 30 October 2003
Andrew Tylecote and Jing Cai China’s SOE Reform and Technological Change
58 Table 1 Comparison between State and Non-state sectors Year
State sector
Non-state sector
% of gross % of fixed % of total % of loss-making % of gross % of fixed % of total industrial capital industrial enterprises industrial capital industrial output investment employment output investment employment 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001
76 65 55 34 36 32 28 28 — —
82 66 66 54 53 52 54 53 50 47
— — — 67 66 65 57 54 51 47
— 9.6 27.6 33.8 33.6 38.2 — 36 — —
0.5 3 10 29 32 36 40 44 — —
13 21 22 29 32 32 31 32 35 39
— — — 11 12 14
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