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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Further, my models assume that, although they share various characteristics, collective and private enterprises are distinct types. However, many collective firms are actually family businesses whose owners registered their firms as collective in order to gain access to factor resources, bank loans, markets, political protection, and tax subsidies and to circumvent regulatory hurdles that discriminate against private firms (Ma, 1988). In exchange, these "red hat" firms pay a percentage of their profit to local government as a "management fee." A typical "management fee" might be as high as 30 percent of the profit; yet this may represent a fair fee for services rendered by local government. By registering as collective enterprises these firms can avoid paying taxes to the central government. To the extent their profit-sharing arrangement with local government is less than their tax, "red hat" firms economize on transaction costs. However, by registering as collective enterprises, they dilute their property rights to their enterprise and become vulnerable to legal complications arising from these blurred property rights. Reflecting the increasingly blurred distinction between collective and private enterprises, rural enterprises, whether collective or private, are officially labeled "township and village enterprises" (xiangzhen qiye).

Illustrating the convergence of collective and private enterprises is the Wenzhou model in Zhejiang province, which has attracted attention for its reliance on developing the private economy. In fact, 64.13 percent of firms in Wenzhou are registered as collectively owned, 34.96 percent as state-owned, and only .24 percent as privately owned (State Statistical Bureau, 1987: 404). Yet the 1987 Statistical Yearbook of China (p. 129) reported that collective and private enterprises accounted for 56.3 and 26.7 percent, respectively, of Wenzhou's industrial production. According to Kikuchi (1988), who conducted field research in Wenzhou, family-owned businesses commonly register their firms as collective; he claims this accounts for the discrepancy between the reported statistics for registered ownership and industrial production.

The collective and private economies have undoubtedly become loosely interwoven and interact in a mutually beneficial manner, more so than either do with the state sector. The growth of the private economy stimulates the rural collective economy by providing the collective sector with both factor resources and market demand, and vice versa. Sustained interactions between these organizational forms can be expected to induce institutional isomorphism (DiMaggio and Powell, 1983). As private firms mimic the organizational rituals and practices of collective firms, they gain greater legitimacy (Meyer and Rowan, 1977), rendering them less vulnerable to social hostility and cadre malfeasance. By contrast, state enterprises view rural enterprises as rivals that compete for scarce resources and, especially, for markets. Thus, whereas "blending" is increasingly evident in interactions between the collective and private firms, "segregating" tendencies appear to be stronger in boundary dynamics between the state and marketized sectors (Hannan and Freeman, 1989). Nonetheless, the rivalry between state-owned and rural enterprises is muted somewhat by the fact that rural enterprises, through subcontracting arrangements, now provide parts and assembly for most industrial products made by state enterprises. This may be analogous to the American corporation that complains about foreign competition while importing critical components and products.