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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Nonetheless, the cadre-entrepreneur is more oriented to profit making than the factory director. The local government can be likened to the major shareholder who has an interest in maximizing profitability and dividends and who expresses interest through a controlling voice on the board of directors. Whereas the factory director acts to conceal profit or absorb it in operation costs, cadre-entrepreneurs benefit from managing a profitable enterprise insofar as this maximizes the revenues of local government, increases their organizational power, and advances their careers.

The above analysis needs qualification, however, to provide for greater realism. First, it may seem to suggest that the central government does not support economic reform. This inference would be inaccurate. The economic retrenchment of 1988 to 1990 has sought to reinstitute greater reliance on redistributive mechanisms, and this has undercut some reform programs espoused by the radical reform faction; but the conservative faction in command of state power has refrained from attacking the overall objectives of economic reform. Instead, differences between the conservative and radical reform factions are based on opposing strategies for realizing these broader aims (Liu, 1989).

Ironically, the post-1988 economic retrenchment policies have probably made marketized and private enterprises even more competitive than before the current consolidation. Whereas very few state enterprises have closed down, despite inefficiency and chronic losses, in 1989, 800,000 collective enterprises, under pressure from the state's austerity policies, declared bankruptcy. Another 2.2 million either merged with other enterprises or restructured their operation. Recessionary conditions in the domestic economy have driven many collective enterprises to orient production even more to the world economy. Reflecting the speed of response to changing market conditions, export-oriented collective enterprises tripled in number in 1989 to 45,000 firms. Although the growth rate of collective enterprises slowed down from previous years, it still registered an increase in gross value of goods produced of 7.3 percent during the first six months of 1990, while state enterprises recorded negative growth rates. Even more impressive were private enterprises (China Daily, August 13, 1990: 13), which rebounded from the state-imposed austerity policies with a growth rate of 43.7 percent in May 1990 (China Daily, July 10, 1990: 4). As one local official quipped, "Township enterprises are incredibly vital. If you encourage them, they grow fast; if you try to slow them down, they still grow fast. They can always find money to invest and markets to sell. If necessary, you'll see workers taking voluntary wage cuts and making loans to their factory. They will survive." Another official remarked, "Workers and management both know that if the venture fails they will have to go back to the fields. This is a very strong incentive for cooperation between management and labor - one which state enterprises don't have" (Far Eastern Economic Review, September 14, 1989: 65).