World Development Vol. 21, No. 1, pp.

169-200, 1YYY
Pergaman 0 1998 Published by Elsevier Science Ltd. All righls reserved
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Beyond Privatization: Institutional Innovation and

Growth in China’s Large State-Owned Enterprises
PETER NOLAN and WANG XIAOQIANG:‘:
Univel-istyof Cambridge, Cambridge, UK
Summary. - This articlc demonstrates that China’s large state-owned enterprises (SOEs) arc
not stagnant fossils waiting to die. Under economic reform policies this sector has undergone
large change due to enhanced enterprise autonomy, the impact of market forces, rapid growth of
domestic demand for upstream products, strategic integration with the world economy and the
state’s policy to promote large businesses. China’s large SOEs are developing new institutional
forms that do not neatly fit into existing patterns. China is experimentally changing its
institutions through a combination of central policy, local initiative and interaction with
internalional investment. This presents a challenge to the “transitional orthodoxy” and to ideas
concerning property rights in development economics. There is not a universal model of property
rights and government action that works best in all circumstances. China’s experience with the
reform of large SOEs shows the diverse possibilities for effective industrial institutions. 0 1998
Published by Elsevier Science Ltd. All rights reserved.

Key words - China, transition, privatization, institutional change

1. FOREWORD are the Siamese twins of the new Chinese

industrial revolution.
If one takes a journey southward from the
center of Shanghai one passes mile after mile
of thriving new businesses. They are mainly 2. INTRODUCTION
township and village enterprises (TVEs)
mostly housed in new buildings, often Sino- It is widely thought that small-scale
foreign joint ventures, making a vast array of non-state enterprises, notably the “township
goods, many destined for the world market. and village enterprises” (TVEs) are the chief
The bewildering array of products includes source of China’s new industrial revolution
footwear, packaging, luggage, sports goods, (e.g., World Bank, 1996a, pp. 71-75). SOEs
electronic goods, clothing, furniture, and toys. are widely thought to be a homogenous group
One could be forgiven for thinking this was that has lagged far behind non-state enter-
the new Chinese industrial revolution. After a prises, making increasing losses, stagnant and
journey of some 70 kilometres, one has almost simply waiting to die. The widely held conclu-
reached the edge of greater Shanghai and is at sion drawn from this set of stylized facts is
the border with Zhejiang Province. There, on that China’s industrial reforms confirm the
formerly desolate sand flats, stands a vast new central hypothesis of the “transition ortho-
petrochemical complex, the huge state-owned
Shanghai Petrochemical Company (SPC). :This paper is based on research carried out by the
Production began at SPC only in 1977. It is authors in China between December 1994 and
now the largest petrochemical complex in December 1996, supported by a grant from the British
Economic and Social Research Council (Grant number
China, in the process of high-speed expansion.
R 000235525). The research project which this grant
A large fraction of the synthetic fibers, resins supports is entitled “The emergence of the modern
and plastics consumed by Shanghai’s booming industrial corporation in China”. It is administered by
TVEs is provided by SPC. Large-scale the Department of Applied Economics, University of
upstream industry and downstream industry Cambridge.

169
I 70 WORLD DEVELOPMENT

doxy”, namely that only privatization can solve economy than the TVEs will be. Moreover,
the industrial problems of communist the complex changes in this sector are of deep
countries. These views receive their latest importance for the theory of the role of
airing in the World Bank’s recent publications property rights and institutions in economic
Bureaucrats in Business and From Plan to development. Its performance also casts light
Market (World Bank, 1996a,b). It is argued on the potentialities that were latent in the
that China’s booming non-state enterprises, Soviet Union’s large-scale industrial sector,
whose goods flood Western markets, show the and thereby, upon the argument that it was
way to China’s state-owned “fossils” and all “necessary” and “inevitable” for there to be a
other such “fossils” in the developing world, ;eas;k;ion post-Soviet Russian industrial
trapped in an archaic world of state-owned,
inward-looking, heavy-industrial development This article demonstrates that China’s large
presided over by “corrupt” bureaucrats. SOEs are not stagnant fossils waiting to die.
This paper demonstrates that the reality of This sector has already undergone large
China’s industrial reforms is much more change due to enhanced enterprise autonomy,
complex than this. First, a large share of the the impact of market forces, rapid growth of
assets in non-state industry is owned by the domestic demand for upstream products,
whole of each local community, of which the strategic integration with the world economy
TVE workers are a small minority, even in the and the state’s policy to promote large
most advanced areas. Local bureaucrats have businesses. China’s large SOEs are developing
strong incentives to employ well-paid, new institutional forms that do not neatly fit
dynamic, profit-seeking managers who make into existing patterns. China is experimentally
money for the whole community. These enter- changing its institutions through a combina-
prises are better seen as local state-owned tion of central policy, local initiative and inter-
multi-plant firms. This institutional innovation action with international investment. This
presents a much more severe challenge to presents a challenge to the “transitional ortho-
conventional approaches toward property doxy” and to ideas concerning property rights
rights and economic performance than the in development economics. There is not a
World Bank (World Bank, I996a, p. 1 31) and universal model of property rights and govern-
many other commentators acknowledge. The ment action that works best in all circum-
lessons from this experience are still to be stances. China’s experience with the reform of
absorbed by the wider literature in develop- large SOEs shows the diverse possibilities for
ment economics. Although the analysis of effective industrial institutions.
them is far from complete, there are now Even the largest and most effective of
many studies outlining the basic features of China’s large SOEs however are still far short
their operation. Instead of adding to this of being “modern industrial corporations”.
literature, this paper instead focuses on large The achievement of this goal has nothing to
SOEs. do with privatization, and still less to do with
In fact, China’s large SOEs have played a downsizing. It is intimately related to global-
vital role in China’s explosive industrial ization, and the ability to bargain with the
growth. The main body of this paper (Section multinationals for transfer of technology. It
4) analyzes the growth and institutional evolu- involves going beyond autonomy and requires
tion of these enterprises. Analysis of China’s further state policies to assist the construction
SOEs has focused on aggregate statistical of giant corporations that can do business with
studies of the whole state industrial sector. the multinational corporations on an equal
Rarely is a distinction even made between footing.
different branches and sizes of state enter- Such a realistic perspective on the nature of
prise, as though the economic characteristics big business and the goal of large SOE reform
of the production of plastic toys were identical in former communist countries is absent from
to that of the petrochemical sector which Bureaucrats in Business, as it is from most
provides the inputs for the toys. Since William “transitional orthodoxy” writing (e.g. World
Byrd’s pioneering work in the mid-1980s Bank, 1996b). As the first part of this paper
(Byrd, 1992) there have been virtually no will show, the World Bank’s perspective is
micro-studies of the institutional evolution of a-historical, lacking real world content about
this massive sector.’ Yet in the long-run the the role and nature of big business in the
evolution of this sector will be much more advanced economies, and of the role of the
important for China and for the global state in supporting big business.”
 BEYOND PKIVATIZATION 171

3. THE TRANSITION ORTHODOXY”: had “failed”, due to the destruction of the

SYSTEM REVOLUTION, bureaucracy m the one an d the sustaining
PRIVATIZATION, CLOSURE, bureaucrats’ power in the other.
GLOBALIZATION The transition orthodoxy ridiculed the
possibility that a “gerontocratic”, “hard-line”
(a) Anti-hwenucmtic r-evolution communist bureaucracy might possess the
skills successfully to lead a communist transi-
There was wide disbelief that the commu- tion along a “third way” to the mark&:
nist bureaucracy could lead a movement
toward a market economy sufficiently far to The b~~rert~ccrrrcy,~w~dcs au estrao~(lirlrt~ii), irupo,?~ln/
cross a minimum “threshold” level of market pructmd icrpmerlt jiw wtlictll Jkw mndW plic~ie.s,
activity. The correct “sequence” of system cv~n in circumstances where “market failures” exist
and pun-e theory might suggest more nuanccd
reform in communist countries was seen to be:
politics. It is naive to think of 11x2 existing hul-cauc-
first, an anti-communist revolution, second racy as cquippcd, pt-ofcssionally and tcniperamcn-
economic liberalization. Anders Aslund, Janos tally, to implement sophisticated politics hascd on
Kornai, and Jeffrey Sachs are three of the Western-style thcorics of the “second best”. The
most influential figures in the “transition bureaucracy cannot bc rclicd lor efficiency in
orthodoxy”, given wide prominence in World regulating monopoly prices. promoting inl’ant indu-
Bank-organized conferences and publications tries, or implcmcntin g induslrial policy (Liplon and
on the “transition”. They argued passionately Sachs, 1993, p. 35, emphasis added).

for the necessity of a liberal anti-communist

revolution in order to allow “real” economic It was thought that foreign investors would
reform: not invest substantially in a country still ruled
by communist bureaucrats: “The low regard in
the West for the communist governments,
[makes] it impossible for them to mobilisc the
international linancial support vital for the
economic transition” (Lipton and Sachs, 1993,
p. 34).

Privatization was viewed as the “indispen-

Thct-c is .,, a stubborn contradiction in the whole sable process” by which the very institution of
reform process: how lo get the active participation of
private property would be reintroduced in th e
the very people who will lose a part of their powct- if
socialist economies (Borenzstein and Kumar,
the process is successful (Kornai, 1986, p. 1729).
1991, p. 230). A rapid transformation of the
ownership of the means of production was
considered to be necessary “to ensure a
complete break with the old regime” (Borenz-
The collapse of commmist wwpudy de was the sine
qua non for m @ictive transition to 0 nwd<tel
stein and Kumar, 1991, p. 231). The Shatalin
ecomn~y. If one proposition has been tested by 500 day program in Russia, the quintessential
history, it is that the communist partics of Eastern document of the transition orthodoxy,
Europe would not lead a process of radical rcl’orm expressed the populist theme of privatization
sufficiently deep to create a real market economy as follows: “The [privutisution] pqyamme
(Lipton and Sachs, 199 3, p. 34, emphasis added). gives eq~ml chances to eveu)iho~ly...practically
everyone, even if he does not have any
For initiating the revolutionary political considerable initial capital, will have an oppor-
change which destroyed the communist tunity to get his share of the national wealth”
bureaucracy, the transition orthodoxy (Yavlinsky et al., 1991, p. 217, emphasis
considers that Gorbachev deserves “undying added).
merit” (Kornai, 1992, p. 574). Deng Xiaoping For the Bretton Woods orthodoxy “entcr-
was a villain who sustained bureaucratic rule prise reform” was equated with privatization.
to the detriment of democracy and system Autonomous owners and managers must “take
change. In the late 19SOs and early 199Os, it responsibility for the full range of business
was almost universally thought that the Soviet decisions and for the financial benefits and
system reforms had “succeeded” and China’s costs of those decisions”; “Experience shows
172 WORLD DEVELOPMENT

that this is most likely to happen when assets For the most part, Eastern Europe’s production
are privately owned” (IMF et al., 1990, pp. sector is composed of large, inefficient firms. Many, iJ
16-17). It was thought that private property not most, oJ‘them will /WIVL’ to close, and others will
alone could provide incentives for managers to need to shed labour on a large scale. Growth will
come lqely fkom the wst of the economy, which exists
minimize costs and respond to market signals
to-day only .in enl/qwzic form. Badly needed are
(Borenzstein and Kumar, 1991, p. 229). small to medium-scale firms, high-tech manufac-
Private property was thought to provide the turing, and most f(>rms of services ._. T1ze chullerzge
only means for owners to “monitor, assess, 0J‘restructctrirlgwill be to qfficiently close much qf the
and control the performance of the managers old structure crnrl allow fiv rapid ex~unsiorl of 0 m3v
effectively running the enterprises” (Borenz- one (Blanchard et rrl., 1991, pp. 64-65, emphasis
stein and Kumar, 1991, p. 229). added).
The transition orthodoxy believed that both
economic theory and the experience of the
“third way” in communist countries provided
conclusive evidence that it was futile to expect
that a large SOE could behave as a market- (d) Globalization
oriented agent:
The transition orthodoxy’s vision was that
It is time to let go of this vain hope once and for all. ‘close’ integration into the international
Never, no more.. [Blureaucratic co-ordination is as economic system would spontaneously accel-
much the spontaneous effect and natural mode of
erate growth in the reforming economies.’ No
slate property’s cxistcnce as market co-ordination is
industrial policy was necessary. The privatized
of private property. Twenty years of Hungarian
cxpcricncc together with the experience of all other businesses of the reforming economies would
reform-minded socialist states demonstrate that this simply lock into global markets:
is no longer a debating point, but simply a fact that
must bc accepted (Kornai, 1990, pp. 5X-59). The vision is of one large inter-linked network of
producers and consumers plugged into an cfficicntly
It was argued that governments find it impos- operating level playing field of the open inter-
sible to resist lobby pressure to allow “soft national and globalised economy. International
markets provide co-ordination in and of themselves,
budget constraints” and prevent loss making
which national strategies and policy interventions
SOEs going bankrupt. The “transition ortho- can merely distort (Hirst and Thompson, 1995,
doxy” rejected any option other than transfer- p. 59).
ring property rights from the state to “truly
private hands” (Kornai, 1990, 1992; Lipton It was regarded as essential to quickly
and Sachs, 1991). The goal was thorough remove barriers between the “distorted”
privatisation of large SOEs. As Kornai communist prices and world market prices,
graphically put it: with only a brief period (two to three years) of
protection for a few sectors:
It is my firm conviction that history is not like a film
reel that can be stopped at any moment, or run on
fast forward or backward at will. Socialist state It is _.. essential to move as rapidly as possible to a
ownership means the complete, 100% impersonalisa- transparent and deccntralised trade and exchange
tion of property. We cannot simply reverse this rate system, in order to hasten the integration
process in an attempt to reduce the percentage into the world economy The exchange rate
gradually to 95, 90, 85% and so on. The reel must De [needs] to be moved to market clearing levels. [fA~zlyl
,fully r-wound and played ,fiom the beginning (Kornai, a f&v sector:s [need to he shielded] for n short time
1990, p. 73, emphasis added). from the intense competition qf international murlcet,s
(IMF et ul., 1990, p. 17, emphasis added).

(c) “Close the large, support the small” 4. THE REALITY

The “transition orthodoxy” thought that (a) The complexity qf business institutions in
most of the large-scale SOE sector would advanced capitalism
need to close down. Attempting to support
and reconstruct the large scale sector was (i) Personalization, impersonalization and
regarded as a waste of resources. Industrial competition
growth was visualized as coming mainly from State ownership is the extreme form of
new small and medium-sized enterprises: property impersonalization. The transition
 BEYOND PRIVATIZATION 17.3

orthodoxy advocated the “personalization” of large firms intensified, acutely so in the recent
property, transferring state-owned assets into past with the acceleration of technical
the hands of “real flesh-and-blood persons” progress and liberalisation of global markets.
(Kornai, 1990, pp. 50, 57, 70, 75, 85). The Impersonal, institutional ownership in
fiercely competitive institutions of advanced advanced capitalism is compatible with the
capitalism, however, are far removed from fierce competition among large firms.
personalised ownership. There have been two In Japan, most large companies are
major challenges to the control of firms by members of a small number of industrial
“flesh-and-blood persons”, namely, the joint- groups, the keiratsu. A keiztsu usually owns
stock company, and the Japanese system of less than 2% of any other member firm, but it
manager-controlled cross-holdings. typically has a stake of that size in every firm
In the United Kingdom, in the 193Os, more in the group, so that between 30% and 90% of
than two-thirds of the shares of quoted a firm is owned by other group members
companies were held by individuals. Today, (Drucker, 1991, p. 106). Japanese corporations
the typical large firm no longer belongs mainly have about 70% of their shares held by other
to “real flesh-and-blood persons”. By 1970 in corporations (Aoki, 1994, p. 21; Sheard, 1994,
the UK individual stock holdings had fallen to p. 312). Through the cross-holding process,
45% (Moyle, 1971, pp. 6-7), and currently, Japanese managers effectively hire friendly
are less than 20%. In the United States, insti- owners:
tutions hold about two-thirds of the equity of
the 1000 largest US public companies (Lorsch, The seemingly crisp categorica of principal and agent
1991, p. 139). becolnc fuzzy as the managers of one tirm become
the owners of another, and in turn al-c held by
The joint-stock company was a Schumpe-
managers of that firm. It is less that management has
terian force for “creative destruction” which been separated from control. therefore3 than that
“revolutionized” the economic structure from control had been merged into managcmcnt
within. It destroyed the “personal enterprise” (Gerlach, 1992, p. 238).
through the separation of ownership and
control. When several “real flesh-and-blood The system is a kind of “collective defence
persons” put their property together, estab- to maintain the control by management over
lishing a joint-stock company, their property ownership” (Suzuki, 1991, pp. 78-79).
becomes a legal person, separate from its Under this system there is only a low level
owners. In law, the bloodless joint-stock of merger and acquisition. From the
company has equal rights with any flesh- managers’ point of view, to be taken over by
and-blood person, including its owners. If others is to surrender to their enemies. Exter-
“real flesh-and-blood persons” do not like the nally hired managers are rat-c, reflecting the
way in which the bloodless legal person fact that in Japan competition is a war with no
employs their assets, they can sell their shares, prisoners taken, with a good chance they will
but they cannot withdraw their property: What lose jobs after a take-over. This life-and-death
shareholders really own are their shares and battle forces Japanese managers to build an
not the corporation’ (Demsetz, 1988, p. 114). alliance with their employees building long-
Since shareholders spread their shareholdings term programs, such as housing, training,
to avoid risk, a single shareholder, whether an lifetime employment, and the seniority system.
individual or an institution, generally has little Managers and workers “may agree to trade
interest in personally overseeing the detailed wage increases for job security or better
activities of any given firm’s operation (Fama, opportunities for promotion made possible by
1980). Even big institutional shareholders the growth of the firm” (Aoki, 1987, p. 273).
generally disperse their shares widely.” Share- Hence, the level of strikes in Japan is low.
holders no longer are entrepreneurs who Instead, Japanese labour unions and their
operate firms themselves. They have become members are very interested in having a voice
monitors or share traders, rather than in management (Koike, 1987). Workers in
organizers, operators or managers (Lazonick, large Japanese firms often endure hardship in
1991, p. 78). order to enable their firm to survive and grow
The joint-stock company made it possible (Hashimoto and Raisian, 1985; Mincer and
for entrepreneurs to run the firm as organisers Higuchi, 1988).
or managers, rather than as owners, and The removal of ownership control means
founders. Alongside the decline in owners’ that the unconstrained Japanese managers can
control over managers, competition among afford to ill-treat owners with impunity. In
114 WORLD DEVELOPMENT

1990, the total dividend payout of all public 65% for plates and sheets and 78% for wire
corporations in Japan was 30% of profits rod output (Chandler, 1990, p. 138).
compared with 50% in Germany, 54% in the New Japan Steel (Nippon Steel) is currently
US, and 66% in the United Kingdom. the world’s biggest steel company. It had its
Managers in Japan spend more on corporate origins in the Yawata Steelworks, founded in
entertaining than they pay out in dividends 1896 by the Japanese government (Yonekura,
(Aoki, 1987, p. 622). Without ownership 1994, p. 274) producing 62% of Japan’s total
control, internally oriented and immobile crude steel output in 1926 (Yonekura, 1994, p.
managers tend to re-invest profits rather than 97). In the early 1930s the government
distribute them (Boltho, 1975; Lichtenberg “rationalized” the steel industry, establishing
and Pushner, 1992, p. 7). Depreciation and Japan Steel, composed of Yawata and several
corporate savings together have amounted to smaller producers. Technically, the new lirm
as much as one-half of total domestic savings, was a private company, but the government
underpinning Japan’s high investment rates. owned more than 50% of the company’s stock,
Japanese firms acted as if they had “invest- and retained many other rights to intervene in
ment hunger”, and often “over-invested” the firm’s operations (Yonekura, 1994, p.
(Johnson, 1982). Japanese managers can 143). By 1945 it produced almost 90% of
ignore short-term profitability as a measure of Japan’s pig iron output, and over one-half of
their per formance and concentrate instead on crude steel output (Yonekura, 1994, p. 210).
“Schumpeterian” competition, such as foreign The Allied forces demanded that Japan Steel
market penetration, quality control, and long- be split into two companies, Fuji and Yawata,
term product development. “Share price but in 1970, the New Japan Steel (Nippon
incrcasc” is their least important target and Steel) was established out of the re-merger of
“market domination” their most important these two companies. The new “Japan Steel”
one (Best, 1990, p. 10). Outside Japan it is a accounted for around two-fifths of total
common criticism that Japanese companies Japanese steel output (Yonekura, 1994, p.
owe their success to government assistance 210). The merger, “the largest in Japanese
and the restriction of foreign business in industrial history”, was supported strongly by
Japan. Within Japan business leaders think MIT1 who “faced the liberalisation of foreign
the real source of their success is “fierce trade and investment in Japan and felt the
domestic competition” (Kanter, 1991, p. 155). necessity of fostering world class companies to
compete internationally” (Yonekura, 1994, p.
235).
(ii) Institutional diversily ofpoweif2 large firms Posco (South Korea) is widely acknow-
There is not a simple institutional explana- ledged to be the world’s most successful steel
tion for why some firms rather than others firm. It is currently the world’s second largest
emerge as giants. For example, in the steel steel-producing firm, and will soon take over
industry, over the course of the 20th century the top slot. It was founded by the South
there have been just two firms, US Steel and Korean government in 1968 as a calculated
New Japan Steel, which have held the top planning move to enable South Korea to
position, and a third, Posco, is now about to supply domestically the steel needed for its
move into that position. The institutional fast-growing shipbuilding, automobile,
characteristics of these firms, however, are electronics and construction industries
quite different from each other. (Amsden, 1989, Chapter 12). Famously, the
United States Steel (now USX) has always World Bank advised against building the
been privately owned. Carnegie Steel plant, arguing that it was “premature” for the
prospered as an infant industry behind the country to have a large steel plant (Hogan,
high tariff barriers in place in the United 1994, p. 40). The firm is still owned and
States from the mid-19th century onward controlled by the state.7 Posco has had a near-
(Ruigrok and Van Tulder, 1995, pp. 211-212). monopoly within domestic supply.”
In 1900, Carnegie merged with Federal Steel
to create a “giant of giants” (Chandler, 1990,
p. 130) United States Steel, much the largest (b) The centrality of big business in the world
steel producer in the world and the world’s economy
largest industrial corporation. In 1901 its share
of US output was 66% for crude steel, 60% The large-scale “modern” industrial enter-
for steel rails, 62% for heavy structural shapes, prise emerged in the advanced capitalist
 BEYOND PRIVATIZATION 175

economies at the end of the 19th century, income elasticity of demand is high, techno-
alongside rapid changes in production logical progress is rapid, and labour produc-
technology and has remained at its core ever tivity rises fast” (OECD, 1972, p. 15, quoted in
since: Wade, 1990, p. 25).
An important influence upon the “transition
The modern industrial enterprise played n central orthodoxy” was the increased role of small
role in creating the most technologically advanced, and medium-sized firms in the advanced
fastest growing industries of their day. These indus-
capitalist countries. Using computer numeri-
tries, in turn, were the pace-setters of the industrial
sector of their economies...[They] provided an
cally controlled machine tools, firms
underlying dynamic in the development of modern frequently replace conventional automated
industrial capitalism (Chandler, 1990, p. 593). production with flexible manufacturing
systems. A large increase has occurred in
It is playing a central role also in the late outsourcing of components and service activi-
industrializing economies. Even in Taiwan, an ties by large firms. A clear move towards a
economy with a reputation for small scale “Toyotist” pattern of industrial organization is
enterprise, the large-size firm (often a govern- occurring across the capitalist world, as core
ment enterprise) spearheaded industrialization firms become connected with “second tier”
in the early stages of growth. In Korea, the and “third tier” suppliers (Ruigrok and Van
modern industrial enterprise takes the form of Tulder, 1995). The early 1990s saw a consider-
diversified business groups, or chaebol, whose able “downsizing” in employment in large
size and diversity are similar to those of the firms associated with the cyclical downturn in
zaibatsu, Japan’s postwar big business groups demand in the OECD countries: total employ-
(Amsden, 1989, pp. 8-9). ment in the firms included in the Fortune 500
The large multi-plant firm has been a list fell from over 16 million in 1990 to under
central force in cost reduction and technical 12 million in 1994 (Ruigrok and Van Tulder,
progress. It often bene fits from economies of 1995, p. 155). This process was as&cd by the
scale, associated with reduction in unit costs large increase in the intensity of labor as
from large plant size. In many sectors plants managers took advantage of the huge rise in
of less than a certain scale face substantial the “reserve army of labor” and changes in
unit cost disadvantages (Scherer and Ross, labor laws to alter radically traditional
1990, pp. 115 and 140). Large firms often working practices. A sea change took place in
benefit from economies of “scope” from management philosophy, with a pronounced
product diversification associated with reduced shift of emphasis in large firms away from the
transaction costs involved in multi-plant “top line”, growth in revenues and diversifica-
operation (Chandler, 1990). Large, multi-plant tion toward profitability, “downsizing”,
firms may benefit from reduced transport “bottom line” and focus on “core business”.
costs, superior research and development,’ Despite these large changes, however, big
reduced risk, lower capital costs, the capacity businesses still occupy center stage in the
to create a brand name, credit provision to advanced capitalist economics. Huge corpora-
customers and after-sales service (Chandler, tions with tens or even hundreds of thousands
1990, p. 200). In many sectors firms which do of employees stand at the centre of the
not operate several plants are at a competitive capitalist system. In the United States, the
disadvantage (Scherer and Ross, 1990, pp. 115 share of the 100 largest manufacturing compa
and 140). nies fell from 29.1% of GNP in 1978 to 24%,
Large firms are found disproportionately still a very large share, and their share of
(though not exclusively) in capital intensive, employment remained steady, at 43.3% in
“upstream” industries, in which economies of 1978 and 42.3% in 1990. Over the same
scale and scope tend to be relatively strong. period in Japan the share of the top 100
Chandler’s analysis of the 401 giant companies manufacturing firms rose from 22.1% of GNP
with more than 20,000 workers found that in to 29.7% and their share of employment rose
the mid-1970s, 72% of them were clustered in from 17.4% to 22.40/o, while in Europe the
a narrow range of industries, namely, chemi- share of the top 100 manufacturing firms in
cals, petroleum, primary metals, the three GNP rose from 18.1% to 19.5% and the share
machinery groups (non-electrical and of employment rose from 25.1% to 28.2%
electrical machinery, transportation equip- (Ruigrok and Van Tulder, 1995, p. 155).
ment), and food (Chandler, 1990, p. 19). Around 37,000 transnational corporations
These are “precisely the indust ries where (TNCs) worldwide directly employ around 73
176 WORLD DEVELOPMENT

million people, or around 20% of the employ- the quality of their hugely expensive products
ment of the advanced capitalist countries. and have the resources to be able to rectify
Such firms, however, increasingly stand at the problems if they arise. Bidding for projects
center of an industrial “web” of suppliers who requires the investment of large sums with
depend on them for their existence and uncertain outcomes. Increasingly, power
prosperity, in a new global form of the late equipment makers have to be able to provide
medieval “putting out system”. These account capital for project construction. A firm such as
for at least as many “indirect employees” as General Electric has a huge advantage in
arc directly employed by the giant firms. The winning orders in that it is supported by GE
TNCs’ total share of employment in the Capital, the financial services division of the
advanced economies may be around 40%: parent company. A sharply increasing share of
power equipment companies’ profits are
Thcrc is dire need for new statistical technic~ucs to generated by after-sales service, so power
assess the inllucncc of “transnationals” on indirect equipment firms need to have large service
cmployn~cnt and to cope with the paradox that divisions. Increasingly, long-term service
core firms with a Toyotist concept of control have contracts form part of the package provided
incrcarccl thcir- structural inllucncc over the by the major producers.
economy, because they have lower-cd their number
The industry was already highly concen-
of dir-cctly employed workers (Ruigrok and Van
Tulder. 1995, p. 155).
trated at a global level by the 1980s and has
become more so since then. There are now
just five main integrated producers of power
The “core” of the world’s most powerful
plants worldwide. In the gas turbine sector in
firms is growing fast, despite outsourcing and
199 O-95, Genera1 Electric accounted for
disposal of “non-core” business. In the 1990s
500/o, Westinghouse (in alliance with Mitsu-
the rapid liberalization of world markets has
bishi Heavy Industry) for 18%, Siemens for
led to a powerful tendency toward concentra-
14% and ABB for 14%, while in steam
tion of ownership. In industry after industry
turbines GE accounted for 20%, Westing-
there has occurred a rise in the global market
house/Mitsubishi for 14%, GEC-Alsthom for
share accounted for by a small number of
ll%, and ABB for 10% (Wagstyl, 1996). It is
firms expanding through organic growth, likely that the already small number of firms
merger and acquisition within their core will grow even smaller alongside growing
competence as the size of competitive global world demands for power-generating
markets has massively incre ased. Hardly a equipment:
sector has not seen this process, with a
powerful trend towards concentration in The all-round skills needed to compete simultane-
activities as diverse as automobile compo- ously in building, alliance making, financial invest-
nents, aerospace, defence equipment, power ment and servicing gives enormous advantage to the
equipment, farm machinery, pharmaceuticals, big integrated companies. The time when this battle
soft drinks, snack foods, household goods of the giants is resolved is fast approaching (Wagstyl,
(from detergents to shampoo and toothpaste), 1996).
telecommunications, chemical fertilizers,
advertising, power generation, investment
finance, and legal practices. (c) The centrality of state action: the “end of
For example, in the power equipment history is not yet in sight”
industry, there are large economies of scale
and scope. The main elements of power (i) The importance, still, of the nation state
stations, boilers and turbines, are of enormous The activities of the national government
size. Moreover, their size has steadily risen as have been central to the explanation of
technical progress has brought down costs of successful growth in developing countries.
electricity generation, in part through ever Lloyd Reynolds concludes his magisterial
bigger units of production, but also through a survey of “growth” in the Third World since
wide range of other aspects of technical the mid-19th century as follows:
progress. A major advantage for a giant such
Even though we know that growth of agricultural
as General Electric in establishing its technical
output, growth and diversification of exports, and a
lead in turbine technology has been the high rate of investment seems to be important, the
spillover from its aero engine division (Finan- sources of sustained growth remain mysterious __
cial Times, May 16, 1995). Power generation Some of the most important variables excluded from
equipment firms must be able to guarantee economic models can be labelled as political.
 BEYOND PRIVATIZATION 177

Government mrrttels For good or ill, govemment is (Wood, 1994). In the face of these pressures,
cerltml /o economic growth (Reynolds, 1985, pp. controls on international migration are
413-414, emphasis added). The way in which tightening:
“government matters” is elusive, however.
[DIespite the rhetoric of globalisation, the bulk of
When we ask in precisely what ways government the world’s population lives in closed worlds, trapped
matters, the answer seems to include the following: by the lottery of their birth. For the average worker
strength of nationhood; the degree of continuity in or farmer with a family, one’s nation state is a
political leadership; degree of interest in economic
community of fate. Wealth and income are not
growth by the governing group; administrative global, but are nationally and regionally distributed
competence of government; and general stance of
between poorer and richer states and localities (Hirst
economic policy (Reynolds, 1985, p. 44).
and Thompson, 1995, pp. 181-l 83).

From the mid-19th to the mid-20th century,

Indeed, far from becoming less important,
China, for so long the world’s leading
nationality may become ever more important:
economic region, failed conspicuously to
“catch up”. While Japan and other East Asian As the advanced economies seek to police the
countries did “catch up”, China was mired movements of the world’s poor and exclude them,
initially by massive internal turmoil, and later the capriciousness of the notions of citizenship and
by Mao’s inward-looking, commandist policies. of political community will become ever more
It is now making up for lost time, catching up evident (Hirst and Thompson, 1995, pp. 181-153).
at high speed. China’s rise is challenging the
dominant economic position of the OECD In these circumstances, the national govern-
and the world hegemony of the United States. ments of poor countries have a duty to employ
It is in this epoch that the philosophy of the every means at their disposal to promote the
“borderless”, stateless world (Ohmae, 1996) industrial advance of their countries and
and the “end of history” (Fukuyama, 1992) thereby lift their citizens out of poverty. There
has developed. is no “ethical” duty for poor country govern-
It is unlikely that the end of US hegemony ments to obey the laws of the international
will indeed coincide neatly with the end of the “level playing field” established by the rich
nation state. The world is increasingly countries.“’ Rather it is their “duty” to
integrated in terms of the mobility of goods manipulate these arrangements so as to
and capital. The migration of capital, however, benefit the growth of output and income in
is not random. It is strongly related to the their own country.
policies pursued by different national govern-
ments. Moreover, for people, it is farcical lo
talk of a “borderless” world. There is still a (ii) The state and big business
vast, and arguably growing, difference in The state has been central to the rise of
income and life chances for citizens in most of the world’s giant corporations. Far
different countries. Even measured in terms of from simply emerging from the free market,
PPP dollars, the average output per person in the normal path through which the world’s
developing countries, which contain almost leading corporations developed was through
three-fifths of the world’s total population, still extensive government support:
stands at only $2,700, and at just $900 in the
least developed, compared to over $15,000 in Virtually all of the world’s largest core firms have
the industrialized economies (UNDP, 1996, experienced a decisive influence from government
pp. 135-137). Behind these figures stands a policies and/or trade barriers on their strategy and
world of difference in terms of well-being and competitive position. History matters! There has
the opportunities to realize human potential. ncvcr been a “level playing field” in international
Between 1870 and 1920 around 18 million competition, and it is doubtful whether there ever
Europeans migrated to the United States, will be one (Ruigrok and Van Tulder, 1995. p. 221).
mainly to escape poverty in Europe
(Foreman-Peck, 1983, p. 146). In the past Britain’s Industrial Revolution took place
decade the rich countries have experienced under an explicitly Mercantilist philosophy of
relentless competitive pressure, businesses high protection and export promotion. Its
have downsized, and either US-style adjust- infant industries were heavily protected,
ment of falling real wages, or “European”- denying the massive textile industries of China
style adjustment of rising unemployment and and lndia access to the British market (Smith,
falling welfare spending, have taken place 1776, Vol. 1, Book iv, Chapter 2), and gave
178 WORLD DEVELOPMENT

Britain’s infant textile industries the chance to Within Asia, a distinction can be made
mature. Moreover, while Britain’s authori- between the “developmental state”, notably in
tarian state had no laws to prohibit capitalists Japan, and the “entrepreneurial state”,
from combining to lower the price of labor, it notably in Taiwan and South Korea (Blecher,
had “many [laws] against [workmen] 1991). In Japan the catch-up process after
combining to raise it” (Smith, Vol. I, Chapter WW II was facilitated by the Japanese govcrn-
viii, pp. 74-75). By the mid-19th century rnent, MIT1 in particular, through a wide array
Britain’s “big business” (compared to the rest of trade and industrial policies that went
of the world) was able to prosper with free counter to mainstream economic theory
trade. (Johnson, 1982). As one of the key bureau-
The United States in the 19th centmy crats in MIT1 said: “[w]e did the opposite of
unashamedly industrialized behind high what the American economist told us to do.
protectionist barriers, “Cree riding on free We violated all the norm al concepts” (quoted
trade” (Lake, 1988, Chapter 3). As early as in Ruigrok and Van Tulder, 1995, p. 214).
1791, Alexander Hamilton argued for US Only in the 198Os, after the catch-up had
industrialization behind tariff barriers largely been completed, did Japan begin to
(Ruigrok and Van Tuldcr, 1995, p. 21 l), and join the ranks of the supporters of an inter-
for almost two centuries, US tariffs rarely national free trade regime. It was in this
were below 30%, and often much higher environment of close indirect support from
(Ruigrok and Van Tulder, 1995, pp. 211-212). the state that the giant Japanese firms that
Despite the passage of antitrust laws, huge today lie at the heart of the Japanese economy
oligopolistic firms were allowed to grow. By developed. Japan currently has no less than 12
the interwar period, US firms dominated big firms among the top 50 firms in the Fortune
business globally, with around two-thirds of index of the world’s largest companies
the world’s top 50 companies (Schmitz, 1993, (Ruigrok and Van Tulder, 1995, Table 9A).
p. 3 I). Government procurement spending has The history of the Japanese motor car
been a continuing strong influcncc on US big industry illustrates the big business-govern-
business, with an cspccially powerful cffcct mcnt relationship well. In the 1920s and 1930s
upon the aircraft, computer, semiconductor car production in Japan was dominated by
and electronics industries (Ruigrok and Van Ford and General Motors, who occupied
Tulder, 1995, p. 221). around 90% of the total market. Under strong
There is a common current of economic pressure from the army, the government
thinking which stretched from Meiji Japan licensed just two domestic firms, Toyota and
through to Sun Yatsen and the Kuomintang Nissan, to make automobiles, and simultane-
(initially on mainland China, and subsequently ously outlawed car imports and foreign car
in Taiwan), through to South Korea and production in Japan. Toyota and Nissan grew
Singapore since the 1950s. This approach rapidly under the impact of huge government
pragmatically regarded the best arrangement procurement demand. In the early 1950s the
as that which would more rapidly produce domestic car industry faced certain destruction
national prosperity in a world of hostile inter- as imports Ilooded the market. The govern-
national competition. The free market and the ment responded by erecting a “barrage of
Stalinist command system were regarded as import barriers”, including outright prohibi-
equally irrelevant. The broad approach owed tion of most types of car imports and high
much to that of Friedrich List. Chiang tariffs. The share of imports fell from 45% in
Kaishck, the leader of the Kuomintang, in the 1951 to just 1% in 1960 (Nestor, 1991, p. 103).
midst of his party’s struggle with the Chincsc MIT1 played a key role in upgrading motor
Communist Party wrote in 1947: industry technology in the 1950s by bargaining
with foreign producers to establish short
period joint ventures during which technology
was transferred over a few years and the joint
venture was then terminated (Nestor, 1991,
pp. 104-lOS).” MIT1 supported the growth of
a small number of oligopol istic “national
champions”: by 1970 Toyota and Nissan
between them accounted for over 65% of
national vehicle sales (Nestor, 1991, p. 107).
Huge firms were established, gaining massively
 BEYOND PRIVATIZATION 179

from economies of scale, with a comprehen- Korea’s first colossal shipyard and it was rcspon-
sive program of government indirect support, sible for the Big Push into heavy machinery and
and based mainly on the domestic market. chemicals in the late 1970s. It also laid the ground-
Only then did Japan’s car Rroducers attempt work for the new wave of import substitution that
followed heavy industrialization and that carried the
to conquer world markets - and there were
electronics and automobile industry beyond the
moves to liberalize imports (Nestor, 1991, p. simple stage of assembly. The government enacted
113). Right through into the 1990s there was the automobile protection law as far back as 1962, as
“a bewildering web of non-tariff barriers” part of its five-year economic development plan. In
(Nestor, 1991, p. 108). conjunction with this decision, it promoted the
In Taiwan and South Korea the state went oil-refining industry (Amsden, 1989, pp. 80-81).
far beyond influencing the environment within
which big business operated. In both cases the Uniquely among developing countries, by
state played an important role in the construc- 1993, South Korea had no less than four
tion of large-scale business through the direct companies in the Fortune 100 list of the
operation of upstream, heavy industry which world’s largest companies, namely Samsung,
the private sector was unable or unwilling to Daewoo, Sangyong, and Sankyong (Ruigrok
undertake. Posco in South Korea is the most and Van Tulder, 1995, Table 9A). In the
famous example, but in Taiwan the extent of mid-1990s Samsung and Daewoo were each in
direct state ownership of large-scale heavy course of a massive plan to hugely expand
industry was even wider (Wade, 1990 Chapter their production capabilities abroad, especially
4, “State-led industrialization”). The state in in Europe. ”
Taiwan concentrated its influence upon the
relatively large-scale firms (over 300
employees), which account for around 60% of (d) The difficulties of privatizing large
the total value of industrial output, “leaving enterprises in former communist countries
the downstream smaller-scale firms much
freer” (Wade, 1990, pp.73 and 110). State The transition orthodoxy’s original vision of
control and leadership focused on upstream privatization was to privatize large SOEs by
industries such as synthetic fibers, plastics, and selling them case by case as going concerns, an
metals (Wade, 1990, p. 109), including the approach based especially on the UK’s experi-
highly effective state-run China Steel. Even in ence (World Bank, 1996b, p. 53). In fact, as
sectors where public enterprises did not the World Bank now acknowledges, priva-
dominate, such as plastics and textiles, the tizing large and medium-size enterprises
state “aggressively led private producers in the proved to be far more difficult than originally
early years” (Wade, 1990 p. 110) . Through its thought’ (World Bank, 1996b p. 50). Sales to
extensive ownership and operation of vital outsiders proved to be “too costly and slow,
upstream industries, as well as numerous far more difficult to implement than antici-
other measures, such as import controls, pated, and most important, few in number”
tariffs, entry requirements, domestic content (World Bank, 19961, p. 53). Giving enterprises
requirements, and concessional credit, the free to managers and employees (or in the
Taiwanese state has strongly influenced the World Bank’s inaccurate language “manage-
operation of the private sector (Wade, 1990). ment-employee buyouts”) naturally was
The South Korean government actively “relatively fast and easy to implement” (World
encouraged the growth of powerful, large- Bank, 1996b p. 54). But, the subsequent
scale private businesses, the chaehols, by problems were huge: “The [Russian program]
providing them with a protected domestic well illustrates the drawbacks of management-
market, and supplying them with tightly employee buyouts” (World Bank, 1996b p.
controlled, but low interest credit from the 55). The behavior of Russian privatized firms
state-owned banking system (Chang, 1994). is “hard to distinguish from that of state
The South Korean “entrepreneurial state” firms” (World Bank, 1996b p. 55). Moreover,
instigated “every major industrial diversifica- in the “give away”, the 19% of adult Russians
tion of the decades of the 1960s and 1970s” employed in privatized firms received 56% of
(Amsden, 1989, p. 80): the equity “sold” up until June 1994, while the
remaining 81% ended up with 15% of the
The state mastcrmindcd the early import-substituting divested assets (World Bank, 199613 p. 55).
projects _.. The transformation from light to heavy Moreover, transactions since then “have
industry came at the state’s behest The govern- almost certainly added to the disparity”
ment played the part of visionary in the case of (World Bank, 1996b p. 55). The third form of
180 WORLD DEVELOPMENT

privatization, equal access vouchers to the rather than the former, since the large SOE is
whole population also can be executed rapidly, much closer to the modern impersonalized
but “they raise no revenue for the government firm than it is to the privatized firm owned by
and they have uncertain implications for “flesh-and-blood persons”.‘”
corporate governance” (World Bank, 1996b p. If one approaches the reform task from this
56). perspective, then the main goals of reform
The experience of the first six years of post- become autonomy and competition rather
communist rule shows that there is no satisfac- than privatization. Indeed, in the most
tory way to privatize large SOEs. Still in the important recent example of extensive privati-
mid-1990s in countries such as Hungary and zation in an advanced capitalist country,
Poland over one-half of large SOEs remain in namely in the United Kingdom under Mrs.
the public sector. The ones that have tried Thatcher, the strategy followed was precisely
rapid privatizations of large SOEs have “improvement before privatization”. A series
encountered big difficulties, now explicitly of “changes in the internal environment” was
acknowledged by the World Bank. carried out before privatization, including
changes in the organizational structure, object-
ives, management, labor relations, communi-
(e) Implications for policy in China’s reforms of cation and reporting systems, and the nature
the large enterprise sector and location of the business (Parker, 1993;
Bishop and Kay, 1989; Rowthorn, 1990; Velja-
(i) Eaperimentalism und caution novski, 1992). Indeed, one of the architects of
If the tasks of privatization of large SOEs British privatization, Alan Walters, was
are so complex, if it is practically difficult to scathing about the illogicality of proposals for
do so without implementing schemes that are privatization of large enterprises in the former
likely to damage the construction of large communist countries:
powerful firms, if, as this article argues, this
The naive belief in the emerging market economies,
sector holds the key to the future prosperity of
encouraged on occasion by enthusiasts from the
a large segment of the economy, then the West, is that, with the large-scale state-owned enter-
logical answer is to proceed experimentally prises, all that is needed is to change the ownership
with their reform. Once wild changes have from the state to private persons But this CO~CILI-
been implemented, constructing a powerful sion is a misleading and dangerous simplification ._.
large firms sector may take a long time. The There was thought to be no point in trying to reform
only alternative is to try cautiously to devise the existing state-owned enterprises while they
remained in state ownership _. UnderAks. Thcrtcher
schemes that can improve the performance of
reform of lhe nationulised corporutions was cnnied
large SOEs for the long period that they must
through while they were in the phlic sector- (Walters,
remain predominantly in public ownership: “It 1992, pp. 102-104, emphasis added).
seems therefore that most of China’s state
enterprises must continue to remain publicly
owned for some considerable period of time, (iii) Building large firms
and that the main issue is how to reconcile We have seen that large firms are central to
this with improving their efficiency” (Wood, the prosperity of the advanced economies and
1994, pp. 38-39). have a key role to play also in fast-growing,
late industrializing ones. A central goal for the
governments in transition economies ought to
(ii) Privatization or manugerial autonomy? have been supporting the emergence of
Instead of making the goal of large SOE “modern industrial corporations”, often in
reform that of “turning back the reel” to the heavy industry, which could have formed the
“primitive capitalism” of “real flesh-and-blood basis for prosperity in other parts of the
persons”, such as happened in Russia’s economy. This task would have been greatly
Bretton Woods-inspired voucher privatization, facilitated by policies that enabled incomes
a more logical path is to learn from the and demand to grow steadily.
business structure of advanced capitalism. This Encouraging the growth of large firms in
would attempt to move toward modern imper- transition economies was complicated by the
sonalization, in which large firms mainly are fact that the communist economies destroyed
owned either by institutions or by other firms. the central idea of capitalist industry, namely
The institutional “distance” to be travelled is the competitive firm. They attempted to run
much less if the goal of reform is the latter the whole economy as a single factory, based
 BEYOND
on administrative orders rather than competi-
tive struggle between rival firms. The transi-
tional economies needed actively to construct
competitive j%ms rather than passively priva-
tizing individual plants (or even segments of
plants), but this goal received scant attention
(if any) in the transition orthodoxy. This is
ironic, since it is the fir-m rather than the plant
that is the key location of decision-making and
competition within the capitalist economies.
Priva tization of individual plants/enterprises
leaves a transition economy with few, if any,
large indigenous firms. An important part of
the reform process was to establish a sequence
of large multiplant firms which could take
advantage of economies of scope as well as
simply plant level economies of scale. This
typically meant reorganization of a number of
plants simultaneously within a given ministry.
The best policy was not passively to sell off,
or, more typically, to give away, individual
plants to private owners, attempting to
construct a textbook form of perfect competi-
tion. After such a privatization, as the case of
Russia demonstrates, it would take a long
time for large indigenous firms to emerge
through the spontaneous play of market forces
in the face of open competition from global-
ized big business.
5. CHINA’S INSTITUTIONAL
INNOVATIONS
(a) Building model-n big business under new
circumstances
In sharp contrast to the transition orthodoxy
the Chinese government has attempted
support the growth of powerful, autonomous
big businesses that can compete with the
global giants: “The goal is to form competitive
and independently managed industrial giants
. . . The fact is that mass production is despera-
tely needed by modern society” (Yao Jianguo,
1992). Large SOEs maintained their leading
role throughout the reform process (see
below). In this strategy, China’s planners have
proceeded experimentally. In the course of its
industrial reforms, China has made important
institutional innovations in respect to the
large-scale sector, no less than in respect to
TVEs.
China’s situation is in many ways different
from that of other East Asian countries. China
is reforming a comprehensively state-admini-
stered industrial system. It is widely thought
PRIVATIZATION 181
that China under Maoist planning was an
economy in which small firms dominated the
industrial structure and that this facilitated the
transition task. This is typically contrasted with
the “over-industrialized” Soviet economy
dominated by large SOEs (Sachs and Woo,
1994). In fact the large-scale state sector was
at the center of China’s industrial structure
under the Maoist system: in 1987 establish-
ments with over 1000 employees occupied
64% of the total value of fixed assets, and
produced 48% of the total value of industrial
output (SSB, ZGGYJJNTJNJ, 1988 p. 7, 293).
China is vastly larger than any of its East
Asian neighbours. This makes it more difficult
for the Chinese state to control economic
activity as closely as in these countries. It
makes the Chinese market and production
level potentially vastly more important. Today
there are much larger pools of mobile capital
than even a decade ago. If a developing
country wishes to have access to the markets
and capital of the advanced economies, then it
must accept greater international regulation of
the rules under which its economy operates
than was the case for previous late-comers.
This applies a fortiori to China because of its
vast size: its trade surplus with the United
States is already larger than Japan’s China’s
size and the fact that it is still ruled by the
communist party mean that it faces much
greater possibilities for economic and political
issues to be inter-linked than was the case for
other East Asian countries.
(b) Protecting and supporting emerging big
businesses
to
The Chinese economy had been isolated
from the world economy since the 1940s. In
the reform period the Chinese leadership
realized that deeper integration with the world
economy was essential for modernization.
They were acutely aware, however, of the
possibility that hasty, unplanned integration
could lead to large problems: “Reforming the
economic structure and opening to the outside
world is our unswerving principle, but it must
be executed with great care so as to ensure
success” (Central Committee of the Chinese
Communist Party and the State Council, 1985,
p. 441). Instead of the “close” integration”
recommended by the reform orthodoxy with
free trade and free movement of capital, the
government’s intention was planned, “strat-
egic” integration.‘” An important component
182 WORLD DEVELOPMENT

of this was a policy of support for emerging 300 MW and at HPEC from 200 to 600 MW.
indigenous big business while simultaneously The program was a calculated risk for the
attempting to benefit from capital and MNCs. They felt that if they assisted the
technology transfer from multinational upgrading of the Chinese power equipment
companies (MNCs). industry, then they might be able to use this as
leverage with the Chinese government to gain
access to the potentially vast Chinese market.
China’s development strategy after 1978
After cautious growth of foreign direct contrasted sharply with that pursued by South
investment (FDI) in the early 198Os, and a Korea and by Japan at comparable phases in
hiatus after the Tiananmen massacre, the pace their economic growth, when they severely
accelerated remarkably in the early 199Os, limited direct foreign investment. The Chinese
with China far and away the most important govermnent was confident that it would be
transition economy destination for FDI. able to control the conditions under which
Paradoxically, it was the transition economy foreign investment occurred, and that the
with arguably the tightest government control economy was so large that no individual
over the conditions under which foreign foreign investor could exercise a large influ-
investors operated, and about which MNCs ence on the state: “Our socialist economic
complained constantly. Still in the mid-1990s, base is so huge that it can absorb billions of
the central government directs large foreign foreign funds without shaking the socialist
investments in accordance with its plan priori- foundation” (Deng Xiaoping, 1984, p. 5). In
ties: the early 1990s the share of China in many
MNCs’ worldwide total assets, sales, and
We shall guide the orientation of foreign investment employment was rising rapidly. Moreover,
in accordance with the state’s industrial policies, mainland Chinese capital invested in joint
directing foreign investment towards infrastructure
ventures w as growing fast. At some point
and basic industry construction, key projects and
upgrading technology in existing enterprises, in
China may become a larger market for many
particular towards prqjects to increase the export of of these companies than their nominal
foreign currency earning projects (Chen Jihua, “home” market. Moreover, their ownership
1994). structure may become “Sinicised” as Chinese
institutions and individuals increasingly
The Chinese government repeatedly used acquire shares in these companies.”
the lure of foreign investment opportunities in
China’s huge potential market in order to
secure technical transfer from multinational (ii) Foreign trude
companies. A good example of this is the China’s attitude toward international trade
program of technical upgrading at China’s two altered radically after Mao’s death. In sharp
leading power equipment companies, Harbin contrast to the prevailing conventional wisdom
Power Equipment Company (HPEC) and in the Bretton Woods institutions, China’s
Shanghai Electrical Company (SEC), which attitude toward international trade was instru-
between them account for around 50-60% of mental: “In foreign trade our principle is to
the domestic market (Xiaoqiang, 1998). Their encourage exports and organise imports
technical level advanced very fast after 1980. according to needs” (Beijing Review, 1990,
A key part of this was the Fifteen Year 33(44)).
(198 l-96) Programme for Technical Transfer In the late 197Os, the whole of the Chinese
to the Chinese power equipment industry, large-scale state sector resembled an “infant
organized by the State Council and the industry”. It was an “infant” in that it was
Ministry of Machine Building, with the inter- technically backward, had not yet developed
mediation of the China National Import/ modern managerial skills, was burdened with
Export Corporation, which negotiated the huge social security obligations, and had not
technical transfer program with Combustion yet progressed from the “no-firm”, command
Engineering (later ABB) and Westinghouse. economy structure based on state-commanded
The program raised the two domestic firms’ plants to a multi-plant large firm structure.
unit capability to design and produce thermal Nor had the price and material balance system
power generating sets. During the 1980s the for large upstream SOEs been reformed
technical transfer program raised the unit substantially until the early 1990s. Under these
production capability at Shanghai from 125 to circumstances, China’s large enterprises could
 BEYOND PRIVATIZATION I83

not possibly compete on a “level playing field” industries, iron and steel being no exception. China’s
with the world’s leading MN&. From the late steel industry, despite being a behemoth, ib still an
1970s to the mid-199Os, the Chinese govern- i@nrlt inrlustly. Instead of binding quota constraints,
ment maintained a battery of protective China seems to have designed a system which is
discretionary in nature. The government gives itsell’
measures.
the administrative leeway to impose control if ncces-
The government employed a wide array of sary, for example, where “market disruplion” is
quantitative import restrictions. High tariffs perceived. The thmirold ,for i’disruption ” wo~rld he
were maintained right through until the anything thrumring the viubility “f dorncstic iron nrtd
mid-1990s. Despite some decline in the early steel enterprises, so essentially the motivcrtiorz ir protec-
1990s as China attempted to gain access to the tion of industry (Dickson, 1996, pp. 2 l-22).
General Agreement for Tariffs and Trade
(GATT), in 1995 the simple average tariff on
C+ina’s imports still stood at 36%. In addition,
China adopted such non-tariff barriers (NTBs) (c) Redmwing the boundaries between the state
as requiring rigorous inspection procedures and the non-state sector: “ grasp the large, let go
for selected imports. Government procure- of the small”
ment policy, especially for infrastructure
investment, also constituted an important (i) Size structure
form of protection for emerging indigenous During the reform period, the government
large businesses. For example, in the power began gradually to “give up” the myriad of
equipment sector until the mid-1990s, most small SOEs, contracting them out, leasing or
new large power plants were funded directly selling them, and, increasingly, allowing them
by the central government, and all these to go bankrupt (Project Group, 1996, pp.
contracts were awarded automatically to one 18-19). Individually run small businesses were
of the three leading domestic producers. allowed freely to start up. In “socialist China”
In the mid-1990s, the situation began in the mid-1990s, 99% of total industrial
apparently to change, as China sought to gain enterprises were not owned by the state, and
admission to the World Trade Organisation 78% of the total number of industrial enter-
(WTO), and as pressure for reduced protec- prises were owned by “real flesh-and-blood
tion increased from the United States persons” (SSB, 1983, ZGTJNJ p. 207 and
especially due to the large size of its trade 1994 p. 373). During the reforms the share of
deficit with China. In 1996 the government industrial output produced by SOEs
agreed to a larger eduction in tariffs, the plummeted from 78% (GVIO, at current
simple average falling to 23%. Moreover, in prices) in 1978 to 48% in 1992 (SSB, 1993
1994, China and the United States signed a ZGTJNJ, p. 412). In “capitalist” Taiwan in
Memorandum of Understanding (MOU) in 1952, public corporations accounted for 56%
which China committed itself to phase out of total industrial output (Amsden, 1979, p.
import licensing by 1997 (Dickson, 1996, p. 8). 367). SOEs, which once dominated the
But, the overall impact of these changes on centrally planned economy had been slowly
the degree of protection for China’s large turned into “islands in a sea of thriving and
firms is unclear. dynamic non-state enterprises” (Singh and
In the case of the steel industry, although Jefferson, 1993, p. 10).
the simple average tariff on imported iron and Within the state sector the central govern-
steel had fallen to just 9.1% in 1996, and the ment increasingly focused its planning efforts
licensing system was ended, powerful new on the relatively small number of large firms.
non-tariff barriers were erected in the Its policy was: “grasp the large and let go of
mid-1990s (Dickson, 1996, p. 23). These the small” (zhua da, .fung xiuo) . . “The
included import “registration”, which could be dominant role of the state-owned enterprises
withheld if there was felt to be a “market should be brought into play mainly through . . .
need”, and “canalisation” of steel imports the large and super-large enterprises” (Project
through selected state importing companies Group, 1996, pp. 16-17). The share of small
(Dickson, 1996, pp. 98-99). China’s barriers to scale SOEs in total industrial output value
steel imports have been “strengthened and collapsed from around 36% in 1980 to less
reformulated” since 1993, despite apparent than 10% in the early 1990s.‘” But, large SOEs
liberalisation (Dickson, 1996, p. 22): actually raised their share of total industrial
output from 25% in 1980 to over 28% in 1991
Vuy strong national aspirations exist in China for (GVIO at current prices); (SSB, CEY, 1981 p.
the dcvclopment of domestic, import-sub&u@ 212) and (SSB, 1992, ZGTJZY, p. 70). Within
184 WORLD DEVELOPMENT

the “formal” sector (i.e. township level and industry increasingly concentrated on large-
above) their share of industrial output value scale “upstream” activities, with a sharply
rose from around one-quarter in 1980 to over declining share of output originating in
38% in the mid 1990s.‘” Within the state “downstream” activities such as printing,
sector, large SOEs almost doubled their share furniture, wood and straw products, leather
of gross output value from 32% in 1980 to products, plastic products, food products,
60% in 1994 (SSB, ZGTJNJ, 1986 p.276, and metal products, building materials, and drink.
1995 pp. 392-393)“’ and in the mid-199Os, the During 1978-92 light industrial growth (real
500 largest enterprises accounted for 37% of GVIO) accelerated to almost 15% per annum
total assets, 46% of sales value, and 63% of (SSB, ZGTJNJ, 1993 p.58). In China’s highly
total profits (Project Group, 1996, p. 17). protected economy such growth required
Around three-fifths of the top 500 enterprises simultaneous rapid growth of output from
were in six, mainly heavy, industrial sectors,” “upstream” heavy industry (Table 1): during
following the familiar pattern observed by 1978-92 the real average annual growth rate
Chandler (1990) in the advanced capitalist of GVIO in heavy industry was almost 11%
economies . . (SSB, ZGTJNJ, 1993 p. 58). SOEs were
hugely dominant in these sectors. During
1978-94 China’s place in the world’s ranking
(ii) Scctmrrl stmctwe in coal output rose from third to first, in steel
The state increasingly focused upon activi- it rose from fifth to second, in electricity from
tics which could not be fulfilled by other seventh to fourth, in cement from fourth to
ownership forms. These included natural first, in chemical fertilizer from third to
monopolies; industries related to energy second, and in chemi cal fibers from seventh
resources and basic raw materials, including to second (SSB, ZGTJNJ, 1995 p. 779). Heavy
the exploitation and processing of petroleum industrial products typically require much
and natural gas, and the production of iron larger amounts of capital per unit of output,
and steel, non-ferrous metals and basic raw need larger plant sizes, rely much more on
materials; “pillar” industries that play a technical skills than pure entrepreneurship
leading role in the national economy, such as (e.g., marketing, product choice, skills in
the petrochemical and heavy machinery indus- distribution), and have much longer gestation
tries, electricity generating equipment, periods than does light industry. In the uncer-
automobiles and construction; and industries tain environment of a transitional economy, it
“playing an important role in national defence was essential that the state played a central
and national strength”, including defence, role in the expansion of these sectors. The
space and atomic energy, as well as other inter-sectoral relationship shifted from
industries related to high and new technology unbalanced heavy industry growth to a
(Project Group, 1996, pp. 16-17). State balanced growth path, rather than to light

Table 1. Output oJ’selected heavy indust~inlpr-otlucts 61 China

Item Unit 1980 1994

Chemical fibres m. tons 0.45 2.80

Plastics m. tons 0.90 4.01
Mining equipment ‘000 tons 160 480
Petroleum equipment ‘000 tons 60 190
Chemical industry equipment ‘000 tons 70 292
Power generating equipmenl m. kwh 4.19 16.74
Computer numerically controllc d (CNC) machine tools number 1613 (1984) 6223
Internal combustion engines m. h.p. 25.4 lh5.5
Crude steel m. tons 37.1 92.6
Cement m. tons 79.9 308.2
Plate glass m. standard cases 27.7 119.3
Sulphuric acid m. tons 7.6 15.4
Coal m. tons 620 1240
Electric power billion kwh 301 928

Sources SSB, ZGTJNJ (1995), section 12 (1986): section 15, and SSB, CEY (1981): section IV
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1X6 WORLD DEVELOPMENT

(Gescher, 1990). In 1993 the tax burden of (ii) Contract responsibility system
large SOEs was more than twice that of joint The contract system was experimented with
ventures. Moreover, as we have noted, the from the late 197Os, and became generalized
state sector supplies underpriced industrial in the mid-1980s, with innumerable local
inputs to the rest of the economy (Wang, variations (Byrd, 1992; Gao, 1996). Enter-
1993; Koo et al., 1993). Moreover, large SOEs prises were required to hand over agreed
bear heavy social responsibilities, in terms of amounts of profits and taxes to the state, in
pensions, housing, education and medical care return for which the management was given
(Perkins, 1988; Minami, 1994).24 extensive autonomy and large responsibility
for raising investment funds from retained
profits, bank loans, and eventually other
(d) iVfunage:en’alautonomy sources (e.g., joint ventures, stock market
flotations, bonds). By the late 198Os, over
China’s large SOEs have not been viewed two-fifths of fixed investment undertaken by
by the Chinese government as objects to be state enterprises was financed from enter-
closed down, but, rather, as institutions with prises’ “self-raised funds”.
“great strength and potential” (Project Group, The contract system established a strong
1996, p. 6), whose performance can be link between the performance of the firm and
improved with careful, experimental reform. the prosperity of the local government or
The central focus of reform of large SOEs has other “principal” to which the “hand-over?
been to grope toward ways of enlarging were made, either in whole or in part. A
managerial autonomy, in other words toward substantial share of contracted profit and tax
the “separation of ownership from control”, a “hand-avers”, even for large SOEs, typically
concept which preoccupied Chinese discussion were han ded over to the local authorities. In
of large SOE reform. some cases the main principal could be more
distant from the SOE,‘” though even these
firms must typically make tax payments to the
(i) Decline of the material supply system local authorities. For example, under the
Over the course of the reform years, the contract system, Shougang accounted for
central authorities engineered a gradual around one-half of the “hand-over? of indus-
decline in resource allocation through the trial sector profits to the Beijing government,
material balance planning system: by 1989, and around one-third of 1% of Beijing’s total
budgetary revenue (Nolan, 1995, p. 9). Even
around two-thirds of SOEs’ output was
in the most unlikely parts of the Chinese state
through the market (Je fferson and Rawski,
bureaucracy, the contract system produced
1994, p. 51). In the early 1990s this process
large changes in behavior. For example,
accelerated, with just 7% of total industrial
China’s leading pharmaceutical firm, Sanjiu in
output value directly controlled by planners in
Shenzhen, grew from nothing in 1987 into a
1993 (Jefferson and Rawski, 1994, p. 63). powerful business, among China’s top 100
Large-scale upstream industry was the slowest firms by value of sales by 1992, while 100%
to be liberalized, but even for these enter- owned by the General Logistics Department
prises, by the mid-1990s, allocation and prices (GLD) of the People’s Liberation Army
had been substantially liberalised. (PLA). The GLD in Beijing allowed the
By the mid-1990s, even in the largest of dynamic management team a high degree of
upstream industries, managers decided all key autonomy in return for a contracted share of
issues. They needed to co-ordinate input the profits (Xiaoqiang, 1998).
supplies through the market. They were The “contract responsibility system” turned
forced to evaluate the capability of different large SOEs toward profit (Perkins, 1988;
suppliers and had to learn to bargain about Jefferson and Rawski, 1994). It established a
price and delivery. They had to decide the strong link between profits and both retained
product mix and product price. They had to earnings and capacity expansion (Jefferson
compete for markets. Accountancy and and Rawski, 1994, pp. 52-55). Simultaneously,
marketing departments grew rapidly. In large there was “a considerable reduction” in the
SOEs producing complex engineering softness of the budget constraint (Jefferson
products such as power equipment, product and Rawski, 1994, p. 52). Workers at poorly-
reliability and after-sales service became signi- performing SOEs faced an increasing prospect
ficant elements in inter-firm competition. of low wage growth, deterioration of bonuses,
 BEYOND PRlVATlZATION 187

erosion of health benefits, layoffs, compulsory ventures with both foreign and other domestic
transfers to ancillary units, and recently, even institutions.‘” It thereby participated in the
dismissal (Jefferson and Rawski, 1994). complex process of “ownership diversification”
Moreover, in the 1990s some large SOEs (see below).
began to downsize. In 1992, China’s coal
industry cut its total employment by 4%
(Jefferson and Rawski, 1994, p. 62). Large
SOEs began transferring redundant workers to As early as 1985, Wood argued for the need
newly-established service companies, which to “rearrange the pattern of state ownership
over time may attenuate their comrection with rights .. .” Instead of having particular enter-
the parent company. priscs belonging to particular ministries or
Many fast-growing and fast-modernising local governments, the ownership of each
large SOEs emerged under the contract enterprise would be spread among several
system, with strong managers allowed a high different public institutions interested mainly
degree of autonomy in return for fulfilment of in its profits (1994 p. 2X; also see World Bank,
the contracted “hand-ovcrs” (Byrd, 1992; 1985).
Nolan, 1995). For example, at Shougang. By the mid-199Os, in China, the joint-stock
Zhou Guanwu led a massive expansion and company had once more become a powerful
modernisation drive designed to thrust the weapon to transcend the limits of the previous
firm into the number one slot in China’s form of ownership and operation, in this case
booming steel industry (see above) (Nolan, the government as the sole owner and
1995). Under his “military-style” leadership operator of SOEs.
Shougang made large purchases of low-price The introduction of this form of ownership
second-hand equipment from Europe and the was welcomed by SOEs, partly because of the
United States. It bought Mesta (Pittsburgh), flexibility provided by the corporate share-
one of the world’s leading steel technology holding structure, but more importantly
firms, and rapidly advanced the firms’ because it gave a separate identity to the
automatic control capabilities. secured corporation: “The board of directors
In one variant or another, the contract and shareholders could cushion the enterprise
system was the dominant form of relationship against government intervention, which has
between large SOEs and their administrative always been the biggest problem of state-
superiors until at least the mid-1990s. It was owned firms” (Yebi, 1993 p. 1 I).
technically ended in 1994. The goal was to FOX@ direct immtmerlf. The joint venture,
replace it with a system of joint-stock by introducing foreign investors, signalled the
companies (see below) with “handavers” start of ownership reform. By 1993 thcrc wcrc
decided by a combination of dividends from over 20,000 foreign-invested industrial firms
share ownership and a new structure of with 2.9 million employees, which produced
corporation tax and value-added tax. In over 9% of total industrial output (SSB,
ZGTJNJ, 1994; pp. 98, 378). Most of these
practice, there were substantial continuities,
were small value joint ventures with
with negotiation of both sorts of “hand-avers”
downstream firms. A smaller number,
between “principal” and “agent”. Moreover,
however, were large investments with large
for some key large SOEs, such as in the iron
SOEs, the main purpose of which, from the
and steel industry, a form of contracting did
Chinese side, was to assist largescale
survive de jure. This group of enterprises was
technology transfer, and from the side of the
not permitted to diversify its ownership, but
joint venture partner, was to gain access to
remained wholly state owned firms’, still
China’s booming market. The Chinese govern-
handing over an agreed share of profits and
ment specified that “when large and extra-
taxes to higher authorities. For this category
large enterprises are transformed into
of firm, the reforms of the operating system
Sino-foreign joint-stock companies, the stock
under way in the mid-1990s continued to focus rights on the Chinese side must be above
on the provision of greater autonomy for 50%” (Project Group, 1996 1 I. 12-13). The
managers with clear identification of the assets following are some leading examples of joint
for which they were responsible. But the core ventures with large SOEs:
firm within such large SOEs, as an indepen-
dent “legal person”, was permitted to wholly steel.By 1994 Shougang
- Iron ~1nc1 Iron and Steel
own subsidiary enterprises, invest in other Corporation, China’s second largest steel producer,
enterprises as well as to diversify into joint had established 39 Sino-Foreign joint vcnturcs
188 WORLD DEVELOPMENT

(Nolan, 1995). One of the most important of these ownership floated abroad. The main
was with NEC (Japan), with a total invcslment of purchasers of the shares in these flotations
over $300 million by 1996. This new business quickly were institutions (e.g., in 199.5, three Hong
became the largest manufacturer of semi-conducters
Kong institutions held 69% of the shares in
in China, and was the only one to manufacture
value-added semi-conducters, as opposed to mere Harbin Power Equipment Company traded in
assembly (Fil~nncinl Times, January 24, 1996). A Hong Kong). The flotation provided an
major goal was to assist technology transfer so that important source of capital. At least as
Shougang could enter “downstream” production of important, it helped greatly to promote the
such products as computers, faxmachines, video idea of the joint stock company as a suitable
rccordcrs, TVs and video cameras using the products path for large SOEs to follow.
of the joint venture (Nolan, 1995). Tlze plan for joint stock companies. In 1994,
the government unveiled a plan to transform
~ i’~t~ochen~icn1.s. In the petrochemical industry
SOEs, other than those “producing special
there were many small-scale joint ventures, but in
1996 two large scale joint venture investments to
products and military industrial enterprises”,
construct cthylcnc crackers (each of which was into joint-stock companies with managerial
around 600,000 tons) wcrc announced (Firzmcial independence from government control. The
Times, October 22, 1996): one was for $2.5 billion, majority of large and medium-sized SOEs
between Shanghai Petrochemical Company, China’s were to become limited liability companies
largest petrochemical producer, and BP; the other (Project Group, 1996, p. 12). Consistent with
was bctwccn BASF and Nanjing Pctrochcmical the policy of “grasping the big and letting go
Corporation.
of the small”: after the reorganisation of large
and medium-sized SOEs, the state intends
- Power equipment manufacture. Two OS the three
largest power equipnicnt manufacturers in China
through state holding companies to maintain a
cithcr have, or arc negotiating, major joint ventures controlling share ownership in the “pillar
with multinational partners. SEC has a joint vcnturc industries” and “key enterprises in the basic
with Wcstinghousc ?7 and Dongfang (Sichuan) is industries”. As for general enterprises where
negoliating one ,joint venture between its hydro non state-owned capital will be absorbed as
generator plant and GE (Canada), and another much as possible, the state will have equity
bctwccn its thermal generator plant and Siemens participation, not a controlling interest
(Germany). In each cast, the Chinese partner is
(Project Group, 1996, p. 12).
contributing all its productive assets (70% of the
share value of the new joint venture) and the foreign
One hundred large SOEs were selected as
partner injected cash to purchase a 30% ownership the first batch formally to put into practice the
share. “modern enterprise system” with joint-stock
companies as the basis.Ix Behind each of the
International flotation. Beginning in 1993, emerging large joint-stock SOEs lay a multi-
the Chinese government allowed selected plicity of institutions, large and small, each of
large SOEs to issue shares on “foreign” stock which had an interest in the firm’s perform-
markets, the vast majority of which were in ance, mainly, but not exclusively, attributable
Hong Kong, and a small number in New to their share in the firm’s ownership. These
York. By 1995 there were 17 on the Hong might include:
Kong market alone, with more planned for
1996. The companies allowed to list abroad - the local authority who benefited from dividend
are mostly at the forefront in terms of payments to the state holding company and tax
performance and prospects, and mainly from hand-overs, as well as from the income and employ-
ment generated by the firm;
key upstream sectors, including firms from the
petrochemical (there were five from this
- the relevant central ministry or quasi ministerial
sector alone), power generation equipmen t,
body (e.g., Sinopec) which benefited from either the
iron and steel, glass, heavy machinery and
forwarding of some portion of the contracted profit
shipbuilding sectors. Prior to their flotation on payment or from the direct hand-over of contracted
the foreign markets these companies went profits;
through a thorough process of institutional
restructuring. In each case, the original SOE
separated off the social service component - other domestic institutional shareholders,
from the main company, to which fees were to including giant, qtlasi-govcrnmclital investment insti-
be paid, and established a new joint stock tutions, such as CITIC or
company, in which the original SOE was a Ever bright Holdings, as well as smaller ones, such as
majority shareholder, with a minority share- other local authorities;
 BEYOND PRIVATIZATION 189

- a foreign joint vcnturc partner, which bencfitcd under the guidance of the parent company,
from the dividend payments from the joint venture; which was also the conduit for channelling
new technology. They were re-specialized into
a variety of processes, such as assembly,
-foreign shareholders (mainly institutions) which special purpose car production and the
received dividend payments.
producti on of specialized inputs (Yao
Jianguo, 1992). In 1978 Shougang was a tradi-
This was a potentially powerful network of
tional large SOE at a single site in Beijing
institutions, each of which had some common
with around 110,000 employees. By the early
interest in promoting the firm’s performance,
1990s it had expanded into a huge multi-plant
none of which had the interest or capability to
firm, with around 160 “second tier” companies
run it directly, all of which perceived that their
and a total of around 280,000 employees.
best interest was served by having a strong
Sanjiu Enterprise Group only began produc-
management team running the firm. The joint-
tion in 1987, established by the Guangzhou
stock company route to property rights trans-
branch of the GLD (see above). By the early
formation is highly flexible: “There could be
1990s it had become a large multi-plant
any desired mix of public and private owner-
ship, including ownership by various kinds of pharmaceutical producer. In addition,
financial intermediaries. The mixture could however, it had around 100 “second tic?
also be quite easily changed in the light of companies including China’s largest hotel
experience and the development of China’s chain, operating over 30 hotels, a construction
financial sector” (Wood, 1994 p. 39).‘” company that employed scvcral tens of
thousands of laborers, and several large food
and drink plants across China.
(iv) From stute factories to large multi-plant Mergers and acquisitions. A large process of
jhls mergers and acquisitions developed in China
The emergence of the multi-plant firm during the transitional process, in the abscncc
formed another avenue for the development of privatization and a devclopcd stock market,
of independence of managers relative to state but typically with the state acting as the
owners. mediator. There were three main channels
Enterprise groups. Support for the idea of through which this occurred.
industrial groups became a central plank of .First, it was due to the state requiring large
government policy for enterprise reform. The SOEs to absorb and reorganize loss-making
concept helped to legitimate a widespread enterprises, change their management
process of expansion of large SOEs into multi- methods and advance their technology. To this
plant firms, in which the core firm was extent it was a “top-down” process. A leading
“connected through capital” with a network of example of this was the merger of Shougang
smaller firms. At the center of most of them in 1988 with 13 large loss-making military
was a large SOE “core company”. A typical enterprises, employing around 60,000 workers.
large SOE by the mid-1990s would have These were mainly remote, inland “Third
investments in numerous “second tier” Front” enterprises, with little prospect of
companies, mainly supplier firms, sometimes turning their position around on their own.
owning a controlling interest, often a minority Loss-making enterprises with which Shougang
interest. The core firm typically had an incen- merged were given strict performance targets.
tive to upgrade the technology and control the If they failed to meet these targets, they could
quality of supplies from “second tier” be returned to their original administrative
companies. It typically appointed the authority and cast out of the Shougang system.
managers of the subsidiary company, reorgan- Second, mergers were due to “bottom-up”
ized their production structure, might shift pressure from a successful, emerging large
workers and equipment to other locations, and firm. A large part of such mergers came from
set contract targets for profits to be achieved the initiative of the more powerful firm, but
and “hand-avers” to the core firm. they always required state mediat ion and
For example, Dongfeng Automobile Group sanction. An important clement in the merger
was based at the former giant No.2 movement in China was the acquisition by
Automobile Plant in Hubei Province. By the strong, fast-growing firms of weaker, loss-
early 1980s it had expanded to include around making firms. Frequently, the superior
300 smaller automobile plants. The authority of loss-making firms sought out
constituent plants reoriented production more powerful firms in order to initiate a
190 WORLD DEVELOPMENT

take-over, in the hope that they would be severing their connection with the factory,
relieved of the burden of the loss-making though this did not necessarily mean they
enterprise. The taking-over firm typically would forfeit their right to company housing
participated in the take-over in the belief that or a pension: “in all things in China one has to
under new management, “hidden value” might go carefully”.
be “dug out” by the taking-over company. Third, the merger movement is due to
This concept is used routinely, by taking-over opportunism by large SOEs. They use their
firms in China to describe the economic logic bargaining power with local governments to
behind their take-over. enhance the number of firms owned by them,
A typical large-scale administrative merger in order to be able to increase the size of their
undertaken by the initiative of a powerful firm business empire as property rights became
was the take-over by Shougang in 1983 of 17 more formalized and ownership became more
large steel local works, with around 30,000 tangible. To some degree (unknown),“’ this
employees. The merger enabled Shougang to can be seen as a “positioning” process, in
gain access to the more profitable anticipation of a possible future move toward
“downstream” segments of steel production in more concrete private property rights being
which thcsc firms specialized (Nolan, 1995). permitted over former SOEs. Through
The enterprises being taken over were trans- merger, a large state firm can acquire poten-
ferred to Shougang at a stroke. tial future assets of great value, including the
A large number of “mergers” were cssen- land on which the firm is located. In principle,
tially “take-0vers” involving careful calculation a merger between two SOEs today could bring
of the prospects for turning around the considerable personal gain for employees at
performance of the firm being taken over, some future point.
with tough insistence on the conditions neces- Merger may be an especially powerful
sary to bring about this goal. A typical process of advancing business capabilities in a
example of this is the take-over in 1995 by the transitional economy, since business and
Sanjiu Group (see above) of the Shijiazhuang technical skills are not so widely available as
Beer Factory (Hebei). This was one of many in an advanced economy. The merger process
take-overs undertaken by Sanjiu in its rise to a led by capable firms with advanced techno-
powerful position in pharmaceuticals and logical and management skills, can have a
allied industries. The Shijiazhuang Beer powerful positive externality effect, spreading
Factory had around 2-3000 employees. This business capability more rapidly than would be
loss-making firm was administered by the local the case in the absence of merger. Moreover,
City government. In the take-over deal Sanjiu the pressure for mergers is reinforced in a
was assigned an option to take a 5 1o/o control- poor transitional economy such as China. This
ling share ownership in the firm, in rccogni- provides especially large incentives for merger
tion of Sanjiu’s good image, marketing consequent upon the undeveloped state of
network, trademark and capital that it would market institutions, which inhibits the capacity
inject into the business. Sanjiu took a five-year to obtain needed inputs easily and reliably
contract on the business. If, at the end of the through contracts mediated by the market
five year period, the firm was making suffi- mechanism.
ciently large profits, Sanjiu could exercise the
right to purchase the shares that had been
reserved for this purpose, and could become (v) Ptktization or pluralized institutional
the majority owner of the business. Sanjiu was ownership?
given a high degree of autonomy in manage- Is China’s reform of large SOEs essentially
ment. In the case of the Shijiazhuang plant, as a process of privatization‘? In fact, as owner-
in other Sanjiu take-overs, the company head ship reform went progressively deeper, it
was appointed by Sanjiu headquarters. In this could not be said that the main direction was
case Sanjiu advertised for an expert in the a change from public to private ownership.
beer industry and replaced the existing Only a tiny fraction of ownership rights of
manager. Sanjiu cannot simply dismiss large firms in China was in the hands of
“surplus” workers. It developed the idea of individuals. It was also hard to see that the
providing surplus workers with the incentive newly diversified owners were, indeed,
of a lumpsum severance payment. A condition controlling management. Ownership reform in
of receiving this was that the worker China was altering the role of the government
concerned had to sign a contract formally as the sole owner and operator of enterprises.
 BEYOND PRIVATIZATION 191

Diversification did not enhance the power of sharing the ownership rights of large SOEs
owners, but, rather, augmented managerial with other institutions. These institutions
autonomy. In terms of Kornai’s theory of bargain with multinationals for technical
“turning back the reel to the beginning”, transfer, attempt to attract large-scale invest-
ownership reform in China failed to turn the ment away from contending Third World
reel back very far. Indeed, China’s newly locations, and lobby the central authorities to
diversified ownership structures in large SOEs protect “their” firms from unsustainable inter-
hardly even began to “turn back” in the direc- national competition. The different institu-
tion of “real flesh-and-blood persons”. Indeed, tions which own the large SOEs share a
from the point of view of property rights, the common interest in having the firms run by
ownership reforms in large SOEs, as in TVEs, effective managers. Neither the term
were producing a “vaguely defined ownership “developmental state” nor “entrepreneurial
maze” (Singh and Jefferson, 1993, p. 9). By state” is adequate to capture the complex web
contrast, from the perspective of managerial of interests that now connect government and
autonomy, the picture became gradually emerging big businesses in China. Whatever
clearer. As ownership reform went deeper in the name one chooses to give it, it is clear that
large SOEs, they evolved progressively from a new institutional form is being born.
state-ad ministered plants toward pluralized Based on the “ownership maze” and
institutional ownership and de fucto manage- vaguely defined property rights, the powerful
ment control. growth of China’s large-scale upstream SOEs
The ownership of each of China’s large has already lasted for 16 years and seems set
SOEs has spread gradually among a variety of to continue. This growth has shown that
public institutions each of which has an “there is no inherent reason why secure
interest in the firm’s performance. This has property rights will be an effective incentive
led bureaucrats to have a vested interest in only if they are assigned to individuals” (Oi,
assisting the firms to do business more effect- 1992, p. 100). China’s bureaucrats have no
ively. This phenomenon has been most studied individual ownership stake in China’s large
and is most transparently visible at the local firms. It is the bureaucrats, however, who are
level, especially in the operation of the TVEs: restructuring state industry, withdrawing the
“Local officials have assumed new roles as state from downstream arcas of competitive
entrepreneurs, selectively allocating scarce light and processing industries, concentrating
resources to shape patterns of local economic instead on upstream areas of natural monopo-
growth . . In the process local governments lies and capital intensive industries. It is the
have taken on many characteristics of a bureaucrats who are restructuring SOEs, by
business corporation, with officials acting as allowing small SOEs to shrink, and expanding
the equivalent of a board of directors” (Oi, large SOEs’ autonomy through carelul,
1992, p. 124).“’ This phenomenon can be seen persistent, institutional experimentation. It is
also, however, in the behavior of municipal bureaucrats at both the local and national
officials, under whose tutelage there often are level who mobilize resources that the market
large SOEs upon whom the city’s prosperity would be unable to organize, such as technical
more or less substantially depends, both in transfer from multinational firms. A principal
terms of direct revenue and indirect benefits reason why China’s large SOEs have grown so
that prosperous large firms brings (ask powerfully is that the bureaucrats have been
Atlanta, Seattle, Pittsburgh or Detroit): Yulin so active in the areas where China’s emerging
City’s future is intimately bound up with the big businesses riced help.
performance of Yuchai Diesel Engine
Company; the future of Harbin, “City of
power equipment generation”, is intimately
related to the performance of HPEC;.2
Beijing’s future is linked closely with that of
Shougang, and Shanghai’s is linked closely We have seen that during China’s reforms a
with that of SPC. powerful group of large SOEs emerged which
Even at the national level, however, there are gradually becoming genuinely autonomous
are strong bureaucratic interests in the competitive firms. The “merger” boom has
performance of large SOEs under the tutelage involved large SOEs “merging” with small
of the central ministries or quasi-ministerial ones, or small ones merging among
bodies, such as Sinopec, which are increasingly themselves. But, up to the time of writing
I 92 WORLD DEVELOPMENT

(early 1997) tzot one mygel- ~$0 large SOE with technical transfer. Moreover, the leading
another Im occ~u~ecl. The local authorities international firms in the power equipment
jealously protect their right to the stream of sector are intensely competitive. Thus a
revenue from “their” large SOE. The increas- bargaining agency in China would be in a
ingly autonomous large SOEs are jealous of strong position to play one leading firm off
their hard-won independence from the state. against the other. Moreover, this possibility is
Nor does it appear that the Chinese govern- increased by the close identification of these
ment has given much thought to the possibility huge firms with a given country (or two in the
of merging one large enterprise with another case of ABB and GEC-Alsthom). This makes
to create firms that can chailenge the world’s it possible to involve closely the government
largest. Therefore, in the mid-1990s, despite of that country (or countries in the case of
large changes in their behavior, with powerful ABB and GEC-Alsthom) in the negotiation
growth and modernization, even the largest of and bargaining process.
China’s large SOEs was still small compared There is a danger that in their fight with
to the global giants in all aspects other than each other, the increasingly autonomous
employment. Chinese firms may be prepared to improve
For example, despite large changes in its their own firm’s short-term position through
operational methods and its growth in size, in joint ventures that do not extract the
maximum possible technical transfer from the
1996 HPEC was still far from being able to
multinationals. This may leave them in the
compete directly with the leading multina-
position of dependent subcontractors for the
tional power equipment makers. It remained
multinational firm, but technically a “domestic
very small indeed compared to the giants of
firm” as far as the supply of equipment is
world power equipment generation (Table 3).
concerned, even though the technology is
If the Chinese “playing field” in the power mainly developed elsewhere. Large Chinese
equipment market were made truly “level”, SOEs may then find that having struggled to
the competitors standing on the field would be gain autonomy from the Chinese state, they
of grotesquely unequal size. give it up to multinational firms.
HPEC cannot compete with the multina- In the mid-1990s HPEC was at a crossroads.
tionals in new technology. It has mainly to It had made the “first jump” from a state-
conccntra te on catching up through acquiring administered plant to a relatively autonomous
existing technology from the world’s leading competitive firm, with diversified institutional
multinational firms. How can this be done? ownership. It had developed institutional and
HPEC cannot afford to purchase the technical capabilities that could form the basis
technology. It has, therefore, to be acquired for a further development to challenge the
through some form of co-operation with the existing multinationals and themselves join the
multinational giants in the industry. A ma,jor ranks of the leading world producers. More
advantage for Chinese power equipment firms over, there was a huge domestic demand
is that the potential market is so huge that potential would could underpin this effort.
they can bargain for excellent terms for The Chinese domestic power equipment

Employees Turnover Assets Profits R and D

(‘000) (m. $) (m. $) (m. $) (m. $)

HPEC 27,000 310 898 14 3

General Eicctric 216,000 59,316 252,000 (‘93) 5,915 1,280
of which: Power Division 25,000 (‘94) 5,900 (‘94) _ 1,200 (‘94) _
Wcstinghousc 84,400 8,848 10,398 (‘92) 77 -
of which: Power Division _ 3,000 _ _ _
CEC Alsthom _ 11,108 _ _ 444
of which: Power Division 4,000 _ -
Sicmens 393,900 57,948 58,400 (‘94) 1,445 5,008
ABB 207,557 29,718 24,900 (‘94) 1,447 2,589
of which: Power Division - 870

Sources: HPEC (IUOS), FT, January I, 1996; June 27, 1996; May 15, 1996, UNCTD (1995), 20-21, AND DRC
(1993), 478-479.
 BEYOND PRIVATIZATION 193

market is the fastest growing and potentially “hard-line” in its opposition to fundamental
the world’s largest. In order to capitalize on system reform, its interests irreconcilable with
the large gains so far made in the Chinese the market economy. Its members were
power equipment industry and to enable thought to be incapable of turning toward the
HPEC to make the “second jump” to a firm market and competitive behavior. The
that is truly competitive with the giants of the evidence from the reform years shows that
world’s leading power equipment manufac- contrary to this view, the CCP and the PLA
turers, it is necessary that important interven- possessed a rich legacy of organizational and
tions are by the state. The technical and motivational skills. Even old Party cadres and
institutional gap is still too large for the army officers were able to make the transition
leeway to be made up under free competition to the market economy if given the correct
in capital and product markets. Just as the incentive structure. Indeed, their lifetime
leading firms of the advanced capitalist econo- experience of thinking strategically and
mies were strongly supported in their forma- mobilizing people in complex institutions was
tion by their respective national governments, an invaluable weapon for the construction of
so too at this critical juncture, if China wishes an effective market-oriented business organiz-
to build up firms of comparable size, consider- ation. Many of them were to lead the modern-
able state intervention is required. To some ization of China’s prominent SOEs during
degree this requires a continuation of policy, these years .14 Moreover, the Cultural Revolu-
such as in the allocation of procurement tion generation of Party members, steeled by
contracts. In some other respects, however, the complexity and ferocity of that struggle,
such as merging the leading firms and coordi- often also proved highly effective heads of
nating the bargaining with leading inter- fast-growing large SOEs.“”
national firms in order to secure technical After 16 years of reforms and growth, the
transfer, it requires much more extensive state Chinese government has not only transformed
action. the economic structure. It has also been trans-
formed by it.‘” Many different government
agents, used to being components of the
(f) Government reform is unother core
command system, have been reformed into a
new mixed system. Some of them have been
China’s “bloated” bureaucracy grew even
more “bloated” during the reform period: the downgraded “; some of them have been
numbers of full time government and Party commercialized as companie?; some of them
employees rose from 4.7 million in 1978 to have been changed into professional social
10.3 million in 3994 (SSB, ZGTJNJ, 1995: organisations “; some of them have been
Table 4.3),‘” while the total number of Party combined with others 40; some new agents
members grew from 35 million in the mid have been estab1ished.l’ There is a
1970s to over 50 million in the early 1990s. mushrooming of “quasi-state institutions”
In 1994, China’s courts convicted over which are “most often in the form of
20,000 people of corruption, including a Vice companies or corporations, designed to act as
Minister, 28 bureau directors and 202 branch an intermediary between enterprises and state
directors (Beijing Review, March 27-April 2, agencies proper” . . inhabiting “a new hybrid
1995, p. 6). The level of high corruption institutional world which is neither fully state
makes China’s future both economically and nor enterprise but a fusio n of both” (White,
politically uncertain. Even collapse of the 1991 p. 12).42 Meanwhile, there has been a
Communist regime cannot be ruled out. huge increase in the technical competence of
Ownership reform in China goes steadily Chinese officials at all levels. In short, China’s
deeper. But the “ownership maze” leaves a outstanding growth since the 1970s has relied
huge space for the state to intervene. not only on enterprise reform but also reform
Formerly, the state was giving commands to of the government itself.
state firms. Today, the newly autonomous Both transition and growth in China are
large SOEs need a variety of state interven- continuing. During this dynamic process, it is
tions to help them to grow and compete on difficult to conclude which government agency
the world stage. In this situation it is essential ought to be closed, and which ought to be
that enterprise reform is combined with the strengthened. It is a progressive process corre-
reform of the state itself. sponding to the progressive process of enter-
In the 1980s almost all experts considered prise reform. Typically the function of many
that China’s leadership was irredeemably “quasi-state institutions” cannot be defined
 194 WORLD DEVELOPMENT

precisely or copied from a textbook. The Despite large remaining problems, however,
combination of enterprise reform and govern- China’s large SOEs have played a central and
ment reform also is a process of “groping for essential part in China’s new industrial revolu-
stones to cross the river”. Since “turning back tion. China’s bureaucrats have played an
the reel to the beginning” is not an option, active role in the institutional reconstruction
China must explore a new way to survive. In and modernization of large SOEs. This
other words, China needs a new theoretical contrast between the World Bank’s advice and
interpretation transcending conventional the results of the reform process in China’s
theory, in order to understand both the large SOEs calls into serious question the
relatively successful past and the uncertain wisdom of the “transition orthodoxy” which
future. the Bank represented. It raises the counter-
factual question: What would China’s large
SOEs look like today if they had followed the
“transition orthodoxy” of an anti-bureaucratic
6. CONCLUSION revolution, “close” integration with the world
economy, and privatization?
The World Bank (and the transition ortho- It is tempting to say that China is so large
doxy in general) conceived of only one that its experience is irrelevant to other
feasible path for large SOEs in all former developing countries. Even small countries,
command economies: privatization. It was however, need big business in order to be
completely disinterested in the construction of prosperous. Many of the potentially powerful
big businesses as a policy goal. It totally failed lirms of the future could emerge from today’s
to distinguish between the privatization of large SOEs in developing countries. Thes e
former command-run plunts as opposed to the plants contain large reserves of human skills
building of multi-plant J~/YYZS. It visualized only and technical capabilities. Simply privatizing
four possible ways for the performance of them and forcing them immediately into open
large SOEs in former command economies to competition with the world’s giant firms, as
bc improved, each of which put privatization has happened in Russia, will result in their
at the forefront: “salts to outsiders”, demise or, at best, in their becoming branch
“managcmcnt-employee buyouts”, “equal- plants of globalized big business. China has
access voucher privatization”, and shown that a different path is possible: instead
“spontaneous privatization” (World Bank, of allowing the destruction of large SOEs, it
I996b pp. X-56). Each of thcsc is now has attempted the long, slow path of institu-
acknowledged, even by the World Bank, to tional and technical reconstruction. Such a
have large problems, which were not antici- path means accepting that there must be a
pated when it confidently gave its advice in the large role for bureaucrats: hence, improving
early phase of the “transition”.“3 the bureacracy, rather than destroying it,
China has not followed this path. It has becomes a central policy task. It involves
adopted none of the methods recommended accepting that the institutional solutions are
by the transition orthodoxy for the improve- often awkward, and muddy, specific to the
rncnt of large SOEs. Despite following an country and sector concerned, rather than
unorthodox path, Chinese big business has following an idealized universal form of
grown rapidly, modernized at speed, and business organization, which rarely existed
substantially changed its operational methods. anyway, except in the early days of capitalism.

NOTES

I. The authors of this paper are engaged in a 4. For a more comprchcnsivc discussion, see Nolan
rcsca~ch project to closely cxaminc this issue. Puhlica- (1995).
tiona from this project so far include Nolan (1995,
1998); Xiaoqiang (1998). 5. See Singh (1993); for a critical discussion.

2. See Nolan (1995) for a tlccper exploration of this 6. Among the 50 largest US cornpanics, only eight
issue. have sharcholdcrs who hold S?6 or more of the equity.
The California Public Employees Retirement System
3. The issue of why this is so is explored in depth in holds equity in 1,300 US corporations plus 300 inter-
Chang and Singh (1993). national ones. (Economi.rt, 1996, p. 6).
 BEYOND PRIVATIZATION 19s

7. Thirty percent is owned by the government capital spread among millions of shareowners,
directly, 40% by the Korea Development Bank employee ownership plans, outsider control by pension
(government owned) and 30% by private commercial funds, managerial insider control”. Andreff (1996, p.
banks, themselves government-controlled. Amsden 76).
(1989) p. 315).
15. For an extensive evaluation of the Chinese
8. This monopoly was only recently broken, with the government’s approach toward integration with the
permission granted by the Korean government to world economy in terms of “close” versus “‘strategic”
Hyundai to set up a 10 million ton plant. This was said integration see Singh (1993).
to bc a reward to Hytmdai for the “the group’s efforts
in winning Seoul co-hosting rights to the 2002 World 16. “Our aim in expanding economic and techno-
Cup”. Mr Chung Mong-joon, a son of Hyundai’s logical exchange with foreign countries is to enhance
founder, and head of Hyundai shipbuilding business, is our ability lo be self-reliant and to promote the
also the president of the Korea Football Association development of the national economy”, Hu (1982) p.
and FIFA vice president (Financial Times, July 4, 287).
1996).
17. It is not too fanciful to imagine that at some point
9. In 1994 the world’s top 300 companies (in terms of global companies which today are “based” in Europe
research and development expenditure) allocated a or the United States may become “based” in China
total of over f124 billion to R & D., amounting lo with Chinese directors and managers of these
4.3% of their total sales value Among these was an companies more influential than those from other parts
elite “club” of around 30 firms which spent over fl of the world.
billion each on R Xr D. Within these was a tiny cl&e of
just nine firms which spent over f2 billion each on R & 18. Derived from SSB, CEY (1981, p. 212) and SSB,
D. Hitachi, Sicmens and AT &T each spcnl f3 billion, ZGTJZY (I 992, p. 70).
and General Motors spent more than f5 billion on R
& D. (f;inancial Times, June 27, 1996). 19. The share of large enterprises in gross industrial
output value (al current price) of enterprises at xiang
10. This is not to say that it may not be politic for the level and above rose from 25.1% in 1980 to 38.0% in
poor countries lo sometimes obey these rules, nor lo 1994. SSB, CEY (1981, p. 212) and SSB, ZGTJNJ
deny that aspects of the international rules may (1996, p. 388).
somctimcs work to the advantage of a given poor
country. It is simply to suggest that these rules should 20. The figure for 1980 is at constant 1970s prices and
be looked at pragmatically, in relation to the degree to that for 1990 is at current prices. It was not possible to
which obeying them or not contributes to the growth of obtain a comparison at a completely consistent set of
any given poor country at a given juncture. prices.

11. MIT1 skilfully played off one iirm against another 21. Ferrous metals, 85; tobacco processing, 50; trans-
by promoting the fear that if they did not sell-out now port equipment, 47; machinery, 46; chemicals, 38; coal
the Japanese would simply buy from another foreign mining, 31. Development Research Centre (1993, pp.
firm. Ncstor (1991, p, 104). 2-3). Among the top 100 enterprises (by value of
sales), 34 were in petroleum and petrochemicals, 29 in
12. During 1973-80 Japan’s global market share rose ferrous metals, 11 in motor vehicles, and tight in
from 18% lo 30%. By 1996, Japanese producers tobacco processing Dcvelopmcnl Research Ccntre
occupied 24% of the US market for automobiles and (1993, pp. 2-3).
light trucks.
22. Indeed, during 1978, China’s ranking in total
13. Daewoo’s purchase of Thomso n Multimedia has world output shifled from fifth to fourth largest in
turned it into the world’s biggest manufacturer of TV steel, third to first place in coal, eighth to fifth in crude
sets, with 15% of the global market (Financiul Times, oil, seventh to fourth in electricity, and fourth to first in
October 22, 1996). Samsung has manufacturing sites in cement. SSB, ZGTJNJ (1993, p. 901).
seven European countries, producing TVs, microwaves,
compuler moniters, excavators, microchips, cameras, 23. It has been estimated that in 1990 the total
TV tubes, TV glass, and refrigerators (Financinl Times, subsidy provided for coal-using industries on account
October 21,1996). of the low price of coal relative to international prices
was 3.3 billion yuan, Albouy (1991, pp. lo-l2), equiva-
14. Andreff has expressed a similar view: “Should WC lent to 66% of total losses in state coal mines in the
introduce into [transition economies] the “purest” form same year. SSB, ZGTJNJ (1990, p. 442).
of private ownership, that of the “boss-owner” who
supervises, monilors, controls the exercise of all 24. In 1991, for example, the expenditure on cmploy-
property rights, when in capitalist market economies a ment insurance alone in the state sector reached 91.3
number of medium-size and big firms have adopted billion yuan, which was equivalent to 33% of total wage
more “socialized” forms of corporation, e.g., social bill of the state sector, and was twice the size of the
196 WORLD DEVELOPMENT

total losses of SOEs. SSB, ZGTJNJ (1992, pp. revenue from Yuchai, and the local Yulin City’s Assets
806,424). It is questionable how many Chinese SOEs Management Bureau obtains 40% of the dividends
would be loss-makers if their accounts were handed over to the state holding company. Similarly,
constructed according to Western practice, and if such Harbin City in Heilongjiang Province is heavily
services as housing, health, and education were dependent on HPEC. Dividends from HPEC are
provided at market prices. These are typically provided handed over to the majority owner, the slate holding
at a nominal price, even in the mid-199Os, constituting company, and help to directly su stain the life of the
a huge subsidy to SOE employees, and a correspond- city. In addition, tax payments from HPEC account for
ingly large drain on profits. around 60% of the total industrial tax revenue of
Harbin City.
25. For example, most tobacco companies contracted
directly with the central authorities in Beijing. The 33. A wider definition would put the numhcr of
main producers of petrochemicals, such as Shanghai government bureaucrats at a considerably larger figure.
Petrochemical Company, from the mid-19SOs
contracted directly with Sinopcc in Beijing, a quasi- 34. On the importance of continuity of leadership at
ministerial holding company, under which are 38 large Erqi, see Byrd (1992) and at Shougang, see Nolan
petrochemical plants, producing more than 80% of (1995). On the role of the Al-my’s motivational and
China’s petrochemical output. Sinopec in turn strategic skills see Nolan (forthcoming).
contracts to hand over an agreed amount of profits lo
the central government each year. One of the most 35. For cxamplc, the head of one of China’s most
prosperous businesses under the General Logistics powerful, fast-growing heavy engineering firms in the
Department (GLD) of the PLA, Sanjiu Enterprise mid-1990s, Yuchai, had been a Red Guard leader in
Group, after an initial period of contract with the local the Cultural Revolution. Nolan and Wang Xiaoqiang
branch of the GLD in Guangzhou, shifted to (1998).
contracting directly with the GLD headquarters in
Beijing. 36. For an accotml of the same process in Taiwan at
an earlier stage see Amsden (1985, p. 101).
26. A huge company such as Shougang continued to
have a”wl;olly state -owned” core firm: with around 37. E.g., in 1994, the State Bureau of Price Managc-
58,000 emulovees. dcalinrr directlv with the state. with ment and the Ministry of Materials, extremely
formalizecf own&hip r&hts o&r subsidiary branch important agenls of the planning regime, were incor-
companies employing over 200,000 people as well as portated separately into the State Planning Commis-
investments in around 70 joint ventures with either sion and the Ministry of Domestic Trade.
domestic or foreign capital.
38. E.g., the former material and commerce distribu-
27. Westinghouse has committed itself to invest $100 tion systems and most former industrial ministries have
million in modernising the plants in Shanghai (Finan- hccome companies.
cial Time.sSeptember 16, 1996).
39. E.g., the Ministry of Electronic Industry has given
28. By 1996, they had “established 348 fully capitaliz up all administrative control of enterprises and become
ed subsidiary companies, 437 subsidiary holding an industrial association.
cornpanics, 310 subcompanics, and 619 sharcholding
companies”. Li Rongxia (1996, p. IS). 40. E.g., with “quota purchases” dramatically
reduced, the Ministry of Grain, the Ministry of Trade
29. For example, interviewed by us in March 1996, and the General Commune of Supply and Salts have
the head of the Shanghai Pctl-ochemical Company, Wu been merged into the new Ministry of Domestic Trade.
Yixin, said he could easily foresee the day when the
state’s ownership share in the firm could fall from its 41. E.g., the Comission for Security Supervision with
presenl majority position, to around 300/o, as other authority over the newly established stock and future
sources of capital were invested in the business. But hc markets.
found it hard to imagine in the foreseeable future that
it would be allowed to fall below this level. 42. Prominent examples are many labor service
companies attached to local labor bureaux, six newly
30. This is a highly sensitive issue, which it is not established investment companies attached to the
possible to directly investigate. It involves also complex Planning Commission, and many industrial trade
psychological issues. companies established under the Ministry of Foreign
Economic Co-operation and Trade.
31. oi labels this new institutional development “local
state corporatism”. Oi (1992, p. 100). 43. For example, to the former USSR and to the
successor government of the Russian Federation, and
32. For example, Yulin Yuchai in Guangxi Province helped inspire Mr. Chuhais’s mass privatization
is the largest medium-duty diesel engine manufacturer program, “the fastest privatisation in human history”,
in China. Yulin City obtains around 80% of its tax in the words of British advisor Richard Layard.
 BEYOND PRIVATIZATION 197

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