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Organizational dynamics of market transition: hybrid forms, property rights, and mixed economy in China

Administrative Science Quarterly, March, 1992 by Victor Nee

This paper underscores the importance of hybrid forms in the current market transitions in state socialism through an examination of the emergence of marketized firms and cadre-entrepreneurs in China. The paper develops a new-institutionalist analysis of the organizational dynamics that propel market transition in reforming state socialism. Under conditions of partial reform, marketized firms enjoy a transaction cost advantage over alternative governance structures. Changes in the institutional environment stemming from the spread of markets and the changing structure of property rights, however, increasingly favor private firms. Nonetheless, a mixed economy characterized by a diversity of organizational forms and a plurality of property rights will be a persistent feature of transitions from state socialism. Analysis of the interaction between government, enterprise, and market forces illustrates how the new-institutionalist perspective is applied to a dynamic model of market transition in China.(*)

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China's transition from central planning has assumed a trajectory quite different from that of Eastern Europe and the Soviet Union. Whereas Eastern Europe and the Soviet Union rejected communism for Western-style democracies and initiated rapid state-guided transitions to market economies, China has steadfastly refused to carry out reform of its political institutions and has fixed its course to remake the economic institutions of state socialism not by revolution but by reform. As a result, China, which was perceived as innovative and daring in the 1980s, today is viewed as a bastion of communist reaction to the changes sweeping through Eastern Europe and the republics of the former Soviet Union.

Despite the political retrenchment in China, the market reforms implemented in the 1980s have lasting consequences that are not easily reversed, even with a hard-line conservative faction in control of state power. Economic reform from 1978 to 1989 brought about changes in power relationships within the state structure and in society, which in turn gave rise to new alignments of interests that champion marketization. First, fiscal and organizational reforms carried out in the 1980s led to a significant devolution of power from the central state apparatus to provincial and local governments (Tong, 1989). Despite Beijing's efforts to recentralize fiscal control, over 50 percent of the Chinese state budget is now in the hands of officials in the provinces. Second, over the years, for both private producers and industrial enterprises, dependence on vertical ties to state redistributive agencies has lessened, as market transactions have assumed greater significance (Du, 1988- Nee, 1989b, 1991; Solinger, 1989; Lardy, 1991). Here redistributive refers to the collection, storage, and redistribution of goods and services by administrative fiat in state socialism (Szelenyi, 1978). Peasant households and firms in particular have gained more autonomy as they shifted production from a near-exclusive reliance on staple food crops to more diversified commodity production for the marketplace. By contrast to the Maoist emphasis on local self-sufficiency, specialization - stimulated by commercialization - has brought to the marketplace a wide array of commodities, both agricultural and light industrial (Nee and Su, 1990: 9-1 1).

Market-oriented growth in the 1980s was centered primarily in the coastal provinces in China (Vogel, 1989), with inland regions undergoing the least change. This market-oriented growth was most pronounced in the collective and private sectors, which emerged as the most dynamic within the Chinese economy, with rural industries experiencing explosive growth through the 1980s (Byrd and Lin, 1990; Naughton, 1991). The center of gravity of the collective and private economies is in the countryside, in towns and villages, where the state initiated market reforms in 1978 and bequeathed markets the broadest license for expansion. Despite the unauthorized interference of local cadres, rural markets experienced rapid growth (Watson, 1988), largely unrestricted by formal state interventions. Following a brief recession (1989-1990), the Chinese economy resumed its high-speed growth trajectory, with industrial growth in 1991 at 12 percent. The coastal provinces of southeastern China now encompass the most rapidly growing market-driven economy in the world.

The transition economy has given birth to a new diversity in organizational forms and a plurality of property rights. The spectrum spans the continuum from the formal and hierarchical state-owned enterprises to small family-owned firms run by peasant entrepreneurs. Among the consequences of rapid market-oriented economic growth in the 1980s was the incremental transformation of collective enterprises into a hybrid organizational form - the marketized redistributive firm (hereafter, marketized firm). Marketized firms represent an intermediate property form shaped by new pressures for efficiency and flexibility in rapidly changing environments in which market forces incrementally replace the state redistributive mechanism (see Powell, 1988). Their structure of ownership is in flux. For example, when township and village governments lease collective enterprises to private operators, these firms become a mixed property form, with local government and private operators claiming property rights over them. Like hybrids in advanced capitalist economies, the hybrids of the transition economy are organizational forms that "use resources and/or governance structures from more than one existing organization" (Borys and Jemison, 1989: 235). Similarly, as in capitalist economies the advantage of hybrids in the transitional economy is their capacity to reduce uncertainty in interorganizational relationships involving bilateral dependency (Pfeffer, 1972; Pfeffer and Nowak, 1976).

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Organizational dynamics of market transition: hybrid forms, property rights, and mixed economy in China

Administrative Science Quarterly, March, 1992 by Victor Nee

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