The Increasing Role of Small Business in the Chinese Economy. (Global Perspective)

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Introduction

This paper examines the changes in firm ownership since the Chinese government implemented its "open-door" policy in 1978. Most significant among these is the relative decline in state-owned enterprises (SOEs) and the marked increase in the numbers of small business. By 1999, there were 10 million registered small businesses in China. We first discuss the background to change and review the changes in legislation that have allowed different forms of ownership; then we show how the changes in ownership forms have affected industrial output and employment. We conclude, with some caveats, that these changes offer opportunities to pursue an exciting research agenda.

Since China implemented its open-door policy in 1978 and moved toward a socialist market economy, it has experienced rapid economic growth. One characteristic of this change has been the relative decline of large SOEs and the expansion of the number of small enterprises. Although the role of small businesses in creating economic development in the advanced economies is well documented, the exploration of the extraordinary growth of small business in the transition economy of China is less understood. From a position of no privately owned small businesses in 1979, by 1999 there were more than 10 million small to medium-sized enterprises (SMEs) registered in China (Chinese Statistics Bureau 1999), representing some 90 percent of all firms.

These small firms made an increasingly important contribution to national income and employment at a time of relative decline of the contribution of larger firms. Moreover, these changes have to be set in the context of an extremely turbulent and uncertain political environment. The purpose of this paper is to demonstrate the expanding role of small firms within the changing sociopolitical context of China.

Economic Tranformation

China is the world's oldest state (Tam and Redding 1993), with a traceable history of over 3,000 years. Recently, there have been radical ideological and practical changes in state attitudes to enterprise and ownership. The year 1978 marked the beginning of a series of radical changes from the state-controlled centralist command economy that previously had followed the Soviet model of central planning based on the control of inputs and outputs. China implemented major economic reforms to create an open-door policy (Davies 1995). This represented a shift from a centralist-planned economy to a new market-based socialist economy. In the long run, this was intended to prepare China for entering the global market (Tseng, Ip, and Ng 1999), a reflection of the commitment to admit China to the World Trade Organization. Since that period, the country has experienced rapid growth. The World Bank reports the gross domestic product (GDP) growth rates approaching 10 percent per annum, albeit from a very low base. Peng et al. (2001) note the increasing academic interest in China, reflecting the dramatic rise in the Chinese economy. Indeed it is argued that the GDP of Greater China--China, Hong Kong, Taiwan, and Macao--may be on par with that of the United States and Greater Europe in the early part of this century (Lardy 1994; Overholt 1993). Buck et al. (2000) argue that China adopted a "gradualist" path, whereby incremental, partial reforms started as localized experiments that spread inexorably gradually to replace central planning. These reforms "crossing the river by feeling the stones" were initiated by Deng Xioping in the period 1979-1990. The era of 1990-1997 was a time of rapid economic growth, which was characterized by Deng's Southern Tour when he voiced the epoch change with "to get rich is glorious." Schell (1994) compares Deng's appearance in the south to "the shock value of the U.S. president showing up in Las Vegas to proclaim its glittering strip of hotels and gambling casinos was the new American prototype of urban development" (p. 342). Tan (1996) shows how the new environment has introduced a new class of private and collective firms, which are radically different from the SOEs and are characterized as being more entrepreneurial. …