Academic journal article International Journal of China Studies

How Much "State" Is in China's State Enterprises? A Case Study of ZTE Corporation in an Era of Reform

Academic journal article International Journal of China Studies

How Much "State" Is in China's State Enterprises? A Case Study of ZTE Corporation in an Era of Reform

Article excerpt

1. Introduction

The state has played a dominant role since the establishment of the People's Republic of China in 1949, with this role fulfilled by state enterprises since 1978. Reform of state enterprises was a central area of reform in the country's transformation towards a socialist market economy. One product of this reform is that it is very hard to characterize a state enterprise in China today. Some enterprises are 100% owned by the state, while others are partially owned with varying degrees of state control. Some are held by a state enterprise which is a subsidiary of another state enterprise. In addition, there are enterprises over which the state has control despite having less than a controlling ownership share. Because of the complicated ownership of these enterprises, as well as an unclear link between ownership and control, characterizing state enterprises is not a simple matter.

This situation raises questions that have implications for both the applicability of theory as well as the meaning of state enterprise as currently understood. The western concept of public enterprise is defined by ownership, whether in whole or in part, by the state. Through ownership, control is exercised. To the extent it is the latter which really matters for the state, two related questions are, first, how control is exercised, and second, how does this control affect enterprise performance. Existing theories answer the latter question by pointing to the inferior performance of state enterprises compared to their private counterparts.

Gaining insights into the above issues in the China context is the overarching objective of this paper. The specific objectives are to: (1) clarify the meaning of state and state enterprise in the Chinese context, (2) assess the applicability of extant Western theories of public enterprise in light of (1) above, (3) link the complexity of Chinese state enterprises ownership and control and performance to the reforms that brought the situation about, and (4) view all the above through analyzing the case of ZTE Corporation, a large enterprise officially classified as a "state-holding enterprise".

In the next section, we provide through a brief literature review the extant theoretical framework underlying this paper, making the case that the Chinese state does not necessarily conform to this framework. A review of China's state enterprise reform that has produced the types of enterprises today is undertaken in section 3. Using a case study approach, we profile in section 4 ZTE Corporation, relating its development to the reforms mentioned earlier. The discussion is centred on the evolution of the magnitude and nature of state ownership and control. How these links with the state impact enterprise performance is the subject of section 5. The concluding section 6 draws together the main findings and highlights several implications, including for the application of existing theories.

2. Theoretical Underpinnings: Contestations of the Role of the Chinese State

Western models have been extensively applied to China's state sector. These models, based on agency theory, property rights theory, public choice theory and neoliberalism, argue against state ownership of enterprises. Agency theory postulated that there would be interest conflicts between the principal and the agent if their interests diverged (Bebchuk and Fried, 2004). Property rights theory implied that the more direct and strengthened were the rights to the property, the better its assets would be used (Alchian and Demsetz, 1973). Public choice theory then argued that when politicians and government officials represented the state to manage public resources, they would give priority to their own interests instead of public interests that state enterprises were to cater to (Tullock, 1987). Finally, neoliberalism emphasizes the efficiency of private enterprises since private sectors face competition and open markets both of which lead to efficiency. …

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