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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One problem is providing adequate incentives for managers to assume responsibility for the growth of the capital assets of the industrial firm. As an economist observed, "In a country operating with a private ownership system, the owners of capital property (assets) will do their best to suppress wages and increase accumulation in order to attain the goal of maximum growth in value of the assets. Without this role of asset owners, there will not be a motivating force for the growth of the value of capital assets" (Wang, 1988: 44). At present, managers have little incentive to resist the political pressure of workers to seek higher salaries, bonuses, and fringe benefits. The power of the party apparatus entrenched in the firm and the influence of socialist ideology far exceed the will of managers to overcome labor costs that outrun gains in productivity. As a result, a disproportionate share of extrabudgetary investment capital has been spent in the past decade in social investments, such as constructing new housing for workers, rather than in modernizing technologically backward plant facilities. At the same time, local governments have become dependent on revenues from the marketized firm to provide funding for a wide range of activities. Despite the impressive performance of the hybrid marketized economy in the 1980s, it bears the markings of its origin. The structure of property rights of the collective enterprise is such that the social benefits of a profitable firm exceed by far private returns. The fatal flaw of the marketized firm may be that its innate tendencies are defined by the conflicting institutional logic of redistribution and market. There is still the tendency for "rush growth" and inefficient allocation of resources.

Despite a substantial increase in capital investments in the early 1990s, productivity and profits in state enterprises continue to plunge. Despite declining returns on investment, the state must pump in more capital to bail out money-losing state enterprises. As a result, the central government faces a classic budget squeeze. Insofar as the state seeks to maximize tax revenues, it favors institutional arrangements that deliver the highest returns North, 1981). The state-owned sector has responded poorly to the central government's effort to sustain economic growth and increase revenues. By contrast, private enterprises, which were the hardest hit by the recession, recovered quickly and constitute the fastest-growing sector of the Chinese industrial economy. The organizational dynamics growing out of disparities in economic performance and access to resources among the state, collective, and private sectors is what drives market transition in China.

The East Asian development model - Japan, South Korea, and Taiwan - rested on continuous but selective state interventions (e.g., Amsden, 1985; Hamilton and Biggart, 1988). There, authoritarian states intervened in markets and firms to shape the course of development, which enabled these late-industrializing economies to mount and sustain high levels of economic growth. China's market transition bears family resemblance to the East Asian model, and economic development there may in time take a similar course (Perkins, 1986). As Biggart (1991) argued, the East Asian cultural tradition encompasses the deep structures that produce the distinctive institutional environments of East Asian market economies, which cannot be readily accounted for by neoclassical assumptions. The market has penetrated the state socialist redistributive economy and is in the process of transforming it into a hybrid market economy characterized by strong government involvement.