Organizational Dynamics of Market Transition: Hybrid Forms, Property Rights, and Mixed
Economy in China
Author(s): Victor Nee
Reviewed work(s):
Source: Administrative Science Quarterly, Vol. 37, No. 1 (Mar., 1992), pp. 1-27
Published by: Johnson Graduate School of Management, Cornell University
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Dynamics This paper underscores the importance of hybridforms
Organizational
of MarketTransition: in the currentmarkettransitions in state socialism
an examination of the emergence of marketized
Forms,Property through
Hybrid
firmsand cadre-entrepreneursin China. The paper
Rights,and Mixed
develops a new-institutionalistanalysis of the
EconomyinChina
organizational dynamics that propel markettransitionin
VictorNee
CornellUniversity
reformingstate socialism. Under conditions of partial
reform,marketizedfirmsenjoy a transaction cost
advantage over alternative governance structures.
Changes in the institutionalenvironmentstemming from
the spread of markets and the changing structureof
propertyrights,however, increasinglyfavor private
firms.Nonetheless, a mixed economy characterized by a
diversityof organizational forms and a pluralityof
propertyrightswill be a persistentfeature of transitions
from state socialism. Analysis of the interactionbetween
government,enterprise,and marketforces illustrates
how the new-institutionalistperspective is applied to a
dynamic model of markettransitionin China.'
China's transitionfromcentralplanninghas assumed a
fromthatof Eastern Europe and the
trajectoryquite different
Soviet Union.Whereas Eastern Europe and the Soviet Union
rejected communismforWestern-styledemocracies and
initiatedrapidstate-guidedtransitionsto marketeconomies,
China has steadfastlyrefusedto carryout reformof its
and has fixedits course to remake the
politicalinstitutions
of state socialism not by revolutionbut
economic institutions
by reform.As a result,China,which was perceived as
innovativeand daringin the 1980s, today is viewed as a
bastion of communistreactionto the changes sweeping
throughEastern Europe and the republicsof the former
Soviet Union.
? 1992 byCornellUniversity.
.00.
0001-8392/92/3701-0001/$1
at the
was presented
Anearlier
draft
oftheASAat
annualmeeting
DC,August11-15,1990.
Washington,
Rachel
Brettde Bary,RonaldBreiger,
Davis,JohnFreeman,PeterGideon,
Meyer,Bruce
ThomasLyons,Marshall
ScottRozelle,Dorothy
Reynolds,
Sijin
Solinger,
DavidStark,DavidStrang,
Young,Xueguang
Frank
Su, SidTarrow,
ASO
Zhou,andthreeanonymous
suggestions
helpful
provided
reviewers
forrevision.
Specialthanksto Kim-chi
Trinh
and PingXinqiaoforresearch
fromthe
assistance.A fellowship
CouncilforLearnedSocieties
American
andSocialScienceResearchCouncil
workon thispaper.Directall
supported
to VictorNee,
correspondence
Cornell
ofSociology,
Department
Ithaca,NY 14853.
University,
in China,the market
Despite the politicalretrenchment
reformsimplementedin the 1980s have lasting
consequences thatare not easily reversed,even witha
hard-lineconservativefactionin controlof state power.
Economic reformfrom1978 to 1989 broughtabout changes
in power relationshipswithinthe state structureand in
society,which in turngave rise to new alignmentsof
First,fiscaland
intereststhatchampionmarketization.
organizationalreformscarriedout in the 1980s led to a
devolutionof power fromthe centralstate
significant
apparatus to provincialand local governments(Tong, 1989).
Despite Beijing's effortsto recentralizefiscalcontrol,over 50
percentof the Chinese state budget is now in the hands of
officialsin the provinces.Second, over the years, forboth
privateproducersand industrialenterprises,dependence on
verticalties to state redistributive
agencies has lessened, as
markettransactionshave assumed greatersignificance(Du,
1988; Nee, 1989b, 1991; Solinger,1989; Lardy,1991). Here
refersto the collection,storage, and
redistributive
fiatin
of goods and services by administrative
redistribution
state socialism (Szelenyi,1978). Peasant households and
firmsin particularhave gained more autonomyas they
shiftedproductionfroma near-exclusiverelianceon staple
food crops to more diversifiedcommodityproductionforthe
marketplace.By contrastto the Maoist emphasis on local
self-sufficiency,
specialization-stimulatedby
37 (1992): 1-27
Science Quarterly,
1/Administrative
commercialization-has broughtto the marketplacea wide
arrayof commodities,both agricultural
and lightindustrial
(Nee and Su, 1990: 9-11).
Market-oriented
growthin the 1980s was centered primarily
in the coastal provincesin China (Vogel, 1989), with inland
regionsundergoingthe least change. This market-oriented
growthwas most pronouncedin the collectiveand private
sectors, which emerged as the most dynamicwithinthe
Chinese economy,with ruralindustriesexperiencing
explosive growththroughthe 1980s (Byrdand Lin,1990;
Naughton,1991). The center of gravityof the collectiveand
privateeconomies is in the countryside,in towns and
villages,where the state initiatedmarketreformsin 1978
and bequeathed marketsthe broadest license forexpansion.
Despite the unauthorizedinterferenceof local cadres, rural
marketsexperienced rapidgrowth(Watson, 1988), largely
unrestrictedby formalstate interventions.
Followinga brief
recession (1989-1990), the Chinese economy resumed its
with industrialgrowthin 1991
high-speedgrowthtrajectory,
at 12 percent.The coastal provincesof southeasternChina
now encompass the most rapidlygrowingmarket-driven
economy in the world.
The transitioneconomy has given birthto a new diversityin
of propertyrights.The
organizationalformsand a plurality
spectrumspans the continuumfromthe formaland
hierarchicalstate-ownedenterprisesto small family-owned
firmsrunby peasant entrepreneurs.Among the
economic growthin
consequences of rapidmarket-oriented
the 1980s was the incrementaltransformation
of collective
enterprisesintoa hybridorganizationalform-the marketized
redistributive
firm(hereafter,marketizedfirm).Marketized
firmsrepresentan intermediatepropertyformshaped by
in rapidly
new pressures forefficiencyand flexibility
changingenvironmentsin which marketforces incrementally
replace the state redistributive
mechanism (see Powell,
1988). Theirstructureof ownershipis in flux.For example,
when townshipand villagegovernmentslease collective
enterprisesto privateoperators,these firmsbecome a
mixed propertyform,with local governmentand private
operatorsclaimingpropertyrightsover them. Like hybridsin
advanced capitalisteconomies, the hybridsof the transition
economy are organizationalformsthat "use resources and/or
governance structuresfrommore than one existing
as
organization"(Borysand Jemison,1989: 235). Similarly,
in capitalisteconomies the advantage of hybridsin the
transitional
economy is theircapacityto reduce uncertainty
in interorganizational
relationshipsinvolvingbilateral
dependency (Pfeffer,1972; Pfefferand Nowak, 1976).
Transactioncost economics explains the emergence of
hybridformsas a means to economize on transactioncosts
in interorganizational
relationshipswhen "parties to the
transactionmaintainautonomybut are bilaterally
dependent
to a nontrivial
degree" (Williamson,1991: 271). Fromthe
perspectiveof transactioncost economics, hybridsare
discrete governancestructuresthatfallbetween marketand
hierarchyand possess theirown institutional
logic.What
distinguisheshybridsfromalternativegovernance structures
is an elastic contractingmechanismthatfacilitatescontinuity
2/ASQ,March1992
MarketTransition
and efficientadaptation.Accordingto Williamson(1991), the
neoclassical contractregimeand excuse doctrine,which
relievepartiesfromstrictenforcement,providethe
mechanismthat backs hybridforms.
institutional
Characterizedby Llewellyn(1931: 737) as "contractas
framework,"the neoclassical contract"almost never
accuratelyindicatesreal workingrelations"but, instead,
providesapproximateguidelinesand specifies the rulefor
appeal, should the relationshipbreakdown.
Criticalto the neoclassical contractregimein market
societies is the maintenanceof legal autonomybased on
clearlyspecified propertyrights.This providesthe basis for
when losses incurredexceed the level specified by
litigation
the excuse doctrineof the neoclassical contract.By contrast,
state socialist societies lack a
hybridsin reforming
well-specifiedstructureof propertyrightsand, therefore,
effectiveautonomy(e.g., Stark,1989). For this reason, the
socialist hybridsmust relymore on personal ties than on
legal contractsto provideassurances thatthe terms of a
transactionwill be met by both parties(Carroll,Goodstein,
and Gyenes, 1988). The need forintense investmentin
personal connections(guanxi),stemmingfromhavingto
cope withwidespread uncertaintiesin the institutional
environment,providesthe impetus behindthe rise of local
corporatismin China.
and private
In China at present,the marketizedredistributive
economic
sectors sustain potentinterestsin market-oriented
growth,which is oftennurturedby directlinksto urban
centers and the worldeconomy throughsubcontractingor
projects (Su,
"puttingout" arrangementsand joint-venture
1992). These interests,moreover,are oftensupportedand
articulatedby local governments,which have become
increasinglyrelianton revenues gained fromthe marketized
sector, as well as the privateeconomy. The
redistributive
new alignmentof interestsstructuredby marketforces and
dynamicsof partialreformhas given rise to
the institutional
neolocalism,a formof corporatismbased on a coalition
between local government,the marketizedfirm,and private
enterprise,oftenagainst the encroachmentof the central
state. Far frombeing unitaryhierarchies,local government,
marketizedfirms,and privateenterpriseconstitutea loosely
coupled coalitionof interestgroups, in which interestsand
group cohesion are continuouslyshiftingand reconstituting
themselves in new combinationsaccordingto changing
environmentalconditions(Pfefferand Salancik, 1978).
Local governmentinvolvementin ruralindustryhas been
interpretedas a distortionof partialreformthat undermines
the efficiencygoals of economic reform(Wong, 1986, 1987,
were
1990). The claim is thatthe causes of inefficiency
fromcentralministriesdown to local
transferred
unwittingly
governments,where theywere compounded by the
antimarket,
protectionistconservatismof local officialsand
the Maoist legacy of closed local economies. AlthoughI do
not disagree withsalient aspects of Wong's analysis, I
analysis in which
propose an alternativenew-institutionalist
the relationshipbetween local governmentand industryis
arrangement
terms,as an institutional
viewedincorporatist
a solutionto the problemofweak market
thatrepresents
3/ASQ,March1992
markettransition.
Local
and incomplete
structures
whichreceive
assist collectiveenterprises,
governments
littlefromthestate,to securereliableaccess to factor
resourcestheyneed,especiallythose inshortsupply.They
also overseelocallabormarketsand appointmanagersto
serve
notleased to privateoperators,
collectiveenterprises
withbanksfor
incritical
negotiations
as intermediaries
access to credit,fixlocalpriceson select numbersof
investment
of
and approveand coordinate
commodities,
extrabudgetary
fundsundertheircontrolforprojects
such
Although
proposedbycollectiveenterprises.
exerta softening
bylocalgovernment
microinterventions
can
localcorporatism
effecton thefirm'sbudgetconstraint,
indomesticand world
enhancethefirm'scompetitiveness
horizontal
and
marketsbyoffering
subsidies,facilitating
access to credit
providing
economicintegration,
vertical
ininfrastructure
such as schools,
capital,and investing
and otherservices.Inshort,
roads,publictransportation,
mayprovidethe backingand resources
localgovernments
inan
to competeeffectively
needed byentrepreneurs
inwhichthe
bypartialreform,
economycharacterized
interact
withmarket
institutions
still-dominant
redistributive
marketinstitutions.
forcesina mannerthatsubordinates
byweak market
economy,characterized
The transition
and institutional
rights,
structures,
poorlyspecifiedproperty
even
cost of redistribution
increasesthe relative
uncertainty
transactions
whilerendering
(Nee, 1992).This
costlymarket
createsan
condition
ofpartialreform
characteristic
inwhichhybrid
formsenjoya
environment
institutional
governance
cost advantageoveralternative
transaction
to markets,
A continuing
shiftfromredistribution
structures.
costs of
however,induceschangeinthecomparative
As marketinstitutions
become moredominant
governance.
foundation
inthetransition
economyand as the institutional
these
constructed,
ofa marketeconomyis incrementally
changesresultina relativeincreaseinthe cost of
parameter
inthecost of
and reduction
hybrid
governancestructures
firms.
The organizational
dynamicsof
forprivate
transacting
I maintain,
markettransition,
are drivenbysuch parameter
environment
1986, 1990;
(North,
changesinthe institutional
Williamson,
1991). Keyfactorsthatexplainthe rapidgrowth
are the expanding
formsand privateenterprise
of hybrid
the
incoordinating
relative
scope of marketinstitutions
and
of property
rights,
economy,changesinthestructure
to a regulatory
the incremental
shiftfroma redistributive
state(Nee, 1989a).These institutional
changesexplain
inChinaafterthe
ineconomicperformance
improvements
in 1978 (Nee and Su, 1990).
of economicreform
initiation
environment
accountforwhy
Changesinthe institutional
economic
state-ownedenterprises
undergodeclining
whilemarketized
and privatefirmsexperience
performance,
rapidgrowth.
THE INSTITUTIONALENVIRONMENT
in
the extentofcentralplanning
Evenpriorto marketreform,
less thaninthe SovietUnionand
Chinawas considerably
EasternEurope.The planning
processinvolvedmultiple
to the
fromthe centralministries
levelsofdecisionmaking,
4/ASQ,March1992
MarketTransition
witheach levelofthe
and township,
city,county,
province,
resourceswithinits
substantial
redistributing
statestructure
(Lyons,1990).Only6 percentof Chinese
area ofjurisdiction
were classifiedas large-or mediumenterprises
industrial
formedthe coreofthe
scale. These state-ownedenterprises
and provincial
supervisedbycentralministries
firmsdirectly
percentof
bureausunderthecentralplan.Seventy-eight
were small-scale,labor-intensive
Chineseenterprises
undercollectiveownership(Kueh,
registered
organizations
were controlled
1985).These and smallerstateenterprises
bylocalgovernments.
ofsmallfirmsin
Itmightbe arguedthatthe preponderance
industrial
economymayaccountforwhy
China'spre-reform
to
economyrespondedmorefavorably
the Chineseindustrial
thanthe Sovietand EasternEuropean
economicreform
plants
economies,wherethe ratioof largeto smallindustrial
was the reverseof China's.As Lawrenceand Lorsch(1967)
formis best suited
haveargued,no generalorganizational
environments.
Formalized
and hierarchical
forall institutional
formsof classicalstatesocialismare wellsuitedto a
Butduringperiodsof
homogeneousand stableenvironment.
organizational
uncertainty,
rapidchangeand institutional
and open to
informal,
formsthatare moreflexible,
exhibitsuperioradaptivecapacity(Piore
entrepreneurship
and Sabel, 1984; Storper,1989).
inthe 1980s involved
reform
The centerpiecesof industrial
ofpowerto theenterprise
and local
thedecentralization
retention
mostclearlyinprofit
and
reflected
government,
theirdecision-making
Byaugmenting
sharingarrangements.
enterprises
power,thestatesoughtto provideindustrial
economic
forimproving
and incentives
withtheflexibility
(Zhangand Zhang,1987).Accordingly,
performance
were permitted
to retain70 percentof
enterprises
funds,whichtheycouldinvestinthe plant's
extrabudgetary
annual
to workersand staffthrough
fixedcapitalor distribute
thestatetransferred
to local
bonusplans.Simultaneously,
and fiscalpower(CASS,
greaterbudgetary
governments
couldretain
localgovernments
1989). Liketheenterprises,
surplusrevenueafterpayinga negotiatedshareof local
The aimwas to overcome
taxesto thecentralgovernment.
and
associatedwithcentralplanning
administrative
rigidities
to
to stimulate
enthusiasmon the partof localgovernment
economicdevelopment.
supportand pursuemarket-oriented
forgeda
arrangements
revenue-sharing
The accompanying
and industry.
betweenlocalgovernment
virtual
partnership
ofagriculture
and thesubsequentreform
Decollectivization
raisedthequestionof property
rights
of localgovernment
Collectiveenterprises,
the
overruralcollectiveenterprises.
drive,
legacyofthe GreatLeap Forwardindustrialization
fromvillageand township
couldnotbe readily
disentangled
norprivate,
the
Neitherpublic(state-owned)
governments.
collectivefirmembodiesa community
form,so
property
the property
belongsto allwho livewithin
that,intheory,
Thislefttownship
ofthe localgovernment.
thejurisdiction
withthestrongestclaimover
and villagegovernments
whichsoon became their
fromcollectiveenterprises,
profits
taxes,levies,and
majorsourceof revenuethrough
arrangements.
revenue-sharing
5/ASQ,March1992
The close interorganizational
relationshipbetween collective
enterprisesand local governmentnot onlyis based on the
structureof propertyrightsbut is reinforcedby bilateral
dependency. First,in a shortage economy, collective
enterprises,which are at the bottomof the hierarchyof
industrialfirms,must relyon connectionsprovidedby local
governmentto secure needed resources and credit.
Similarly,local governmentsbecame increasinglydependent
on revenues fromcollectiveenterprises.Second, local
corporatismeconomizes on transactioncosts when the
institutional
arrangementsunderpinning
marketsare weak. In
the absence of contractuallaw hardened by routine
compliance and enforcement,marketizedenterprisesneed
politicalallies to go to bat forthem in negotiatingand
enforcingcontracts,especiallywithdominantstate agencies
and enterprises.Because a state-ownedenterpriseor
foreignfirmmightshow littlecompunctionforstrong-arm
tactics and guile in directdealings withsmallercollectiveand
privatefirms,it may be to the advantage of collective
enterprisemanagers to use jointnegotiationsinvolvinglocal
authoritiesto enhance theirnegotiatingposition.State
enterprisescan be veryslow in payingsmallercollective
firmsforsubcontractedparts; such debts pose severe
problemsforlocal industriesin meetingcurrentsalaries and
expenses. Anothercommon complaintis the abrupt
abrogationof contractswithoutcompensationforpossible
losses sufferedby subcontractors.Obtainingbusiness
contractswith local governmentbackingmay reduce
transactioncosts forstate enterprisesand foreignfirmsas
well, by providingofficialassurance thatthe terms set by
the contractwill be fulfilled
in a timelymanner.In addition,a
foreignor domestic firmsubcontractingthe productionand
assembly of a trademarkcommoditywillwant assurances
thatthe collectivefirmwill not resortto opportunismby
sellingexcess brand-nameproductsindependentof the main
firm.
Fueled by a decade of explosive growthof ruralindustries
and by growingcompetitionwithstate-owned enterprises
forfactorresources and markets,neolocalistgovernments
eventuallyassumed an assertive stance in relationto the
centralgovernment,strongenough to meritthe center's
attention.Publicattacks on neolocalism emanated fromhigh
places. Centralistspointedto the potentialforthe
of the nationaleconomy intothousands of
disintegration
fieflikecountyand provincialeconomies, each withstrong
autarkictendencies. Others pointedto the problemof
federalismwithouta constitutional
frameworklikethatof the
UnitedStates, capable of holdingtogetherpowerful
forces set in motionby neolocalistlocal
centrifugal
governments.Fundamentally,
the controversyhas involved
the loss of redistributive
power by the centralstate
apparatus to marketinstitutions
and local government.This
is reflectedin a widelycirculatedCentralCommittee
document: "The power to distributecapital,foreign
exchange and resources is too decentralizedand the state's
controlseriouslyeroded. Enterprisesand individualshave too
great a share in the distribution
of nationalincome"
(People'sDaily,
January
11, 1990: 1-3).
6/ASQ,March1992
MarketTransition
THE MARKETIZED FIRM AND CADRE-ENTREPRENEUR
economy,centraldecisions distribute
In a redistributive
goods and services througha verticalhierarchy(Polanyi,
at each level of this
1957). What characterizesredistribution
of economic
hierarchyis the structuredcentricity
transactions.Whetherat the local, provincial,regional,or
nationallevel,the circulationof goods and services in a state
economy involvescomplex resource
socialist redistributive
transfersfromthe firmto state agencies, which in turn
allocate factorresources back to firmsand distributeoutput
firm
to consumers. Withinthis system,the redistributive
(whethera collectiveor a state-ownedenterprise)operates
as an appendage of the state, respondingto commands sent
provincialbureau, or local
down fromthe centralministry,
government.In the case of the marketizedfirm,the
of the classic redistributive
economy is
hierarchicalcentricity
replaced by a mixed regimecharacterizedby increased
marketdependence. Withthe expansion of markets,
horizontalmarkettransactionsincrease in significancewhile
dependence on verticalties lessens, as the firm'ssurvival
and growthbecome more contingenton marketexchange.
tendencies of local governments,
Despite the protectionist
the behaviorof largercollectiveenterprisesis oriented
towardextralocaltrade. Because collectiveenterprisesfall
outside the centralplan,which encompasses state-owned
enterprises,theirgrowthbecame increasinglydependent on
markets.Althoughcollectiveenterprisesrelyon local
governmentto gain access to resources allocated through
the plan, such resources are limited.For this reason, they
must turnto specialized marketsto purchase manyfactor
outside (domestic
resources. This ofteninvolvesimporting
and foreign)investmentsand technologiesto sustain
economic growth.Similarly,
productsproduced by collective
enterprises,aimed not forlocal consumptionbut for
extralocalsales, are more readilysold in regionalmarkets
agencies. An additional
than absorbed by state redistributive
marketincentivestems fromstate agencies fixingpurchase
prices at lower than marketprice formost commodities.
Enterprisesthatcould purchase factorresources at
subsidized state prices and sell partof theirproductsat
highermarketprices developed a keen interestin arbitrage.
Collectiveenterprisesquicklyorientedtheirproductionto the
marketplaceand contributedto the rapidexpansion of
marketsin China.
By 1990, ruralenterprises(collectiveand private)numbered
18.4 million,employed 92 millionworkers,accounted for45
percentof total industrialproduction,and broughtin annually
about $10 billionin foreignexchange. Figure1 reveals the
rapidrelativegrowthof outputfromcollectiveand private
enterprisesafter1978. Jointventureswithforeignfirmsare
listedas "other." From 1978 to 1990 the outputvalue of
state enterprisesdeclined,while thatof collectiveand
privatefirmsgrew from23 to 45 percentof the outputvalue
of
of China's industrialeconomy. The transformation
collectiveenterprisesto marketizedfirmsis shown in Figure
2, which indicatesthatthe main source of hybridformshas
been collectiveenterprises.Priorto reform,privatefirms
inthe Chineseeconomy.Below,I
nonexistent
were virtually
7/ASQ,March1992
Figure1. The structureof industrialoutputvalue.*
100
80
*-State
o 60
40
40
*-S
20
0
Collective
Private
Other
1978
1980
1990
Startof Reform
*
Source: State StatisticalBureau(1991: 447).
compare the attributesof nonmarketized,marketized,and
model of the
privatefirmsand develop an institutional
dynamicsof markettransitionin China.
Organizational Dynamics of MarketTransition
Table 1 presents a typologyof governance structuresthat
identifiesthe characteristicfeaturesof alternativeownership
formsof nonmarketizedfirms(NF), marketizedfirms(MF),
and privatefirms(PF) underpartialreformalong multiple
behavioraldimensions.This is an ideal-typeanalysis,first
developed by Max Weber (1949), which contrastsempirical
cases with imaginarycases representinga theoretically
of a phenomenonof interest(forrecent
derivedillustration
applications,see Bonnell,1980; Raginand Zaret, 1983). The
followingdiscussion is based on theoreticalhypotheses
about the attributesof the industrialenterpriseand on field
research I conducted in China fromMarch throughAugust
Bertha
1985, when I and my researchassistants (principally
Dong, SijinSu, and Peng Lian) conducted semi-structured
in-depthinterviewswithfactorymanagers and workersin a
firm,marketized
Figure2. Dynamictransitionmodelof nonmarketized
firm,and privatefirm.
PRE-REFORM
MIXED ECONOMY
State
NonmarketizedFirm
-.
MarketizedFirm
Collective -
'
8/ASQ,March1992
Private Firm
Market Transition
Table 1
Comparisons of Nonmarketized Firm (NF), Marketized Firm (MF), and
Private Firm(PF)*
Attributes
NF
MF
PF
Enterpriseautonomy
Neolocalistorientation
Soft-budgetconstraint
Efficiency
Access to capital
Access to raw material
Access to labor
Access to markets
Workers'compensation
0
0
+ +
0
+ +
+ +
+
+
+
+
+ +
+
+
+
+
+ +
+ +
+ +
+ +
+
0
+ +
0
0
+
+
+
* + + = strong; + = semi-strong;0 = weak.
state and a collectiveenterprise,local officialsin 30 villages
and townshipgovernments,economic bureaucratsin one
countygovernment,and 25 privateentrepreneursin Xiamen
cityand periurbancounties. The aim of the comparative
institutional
analysis reportedin Table 1 is to providemodels
of the organizationaldynamicsof markettransitionin the
industrialeconomy of China.The models are consistentwith
and supportedby the richempiricalstudies conducted by a
World Bank researchteam, which I read afterwritingthis
article.Readers of this articlemightwant to consult Byrd
and Lin (1990), who edited the manyresearch reportsin the
World Bank study.
The last column in Table 1 indicatesthat privatefirmsenjoy
more formalautonomythan nonmarketizedfirms.However,
in the absence of well-definedprivatepropertyrights,private
firmsare vulnerableto unauthorizedinterferenceby
who impose illicitlevies on them, enforce
redistributors
regulationsin a mannerthat may discriminateagainst private
enterprises,and restrictthe access to criticalfactor
resources allocated by state agencies. The greaterautonomy
enjoyed by the privatefirmcomes at the expense of high
transactioncosts (Nee and Young, 1990).
Privatefirmsoperate underhard budget constraints,as their
survivaldepends on marketperformanceand profitability.
This has the effectof imposingthe constraintof market
action on investmentdecisions and operations.However,
entryand exit are not entirelyregulatedby markets,as the
privatefirm'scapacityforsurvivaland growthis also
of access to capitaland raw
constrainedby difficulty
sector. In a socialist
materialscontrolledby the redistributive
redistributive
economy, state banks and officialsources of
creditgenerallyofferloans more on the basis of political
considerationsthan economic ones (Walder,1991). Private
firmslack the legitimacyand necessary politicalbackingto
enjoy reliableaccess to capitaland thus must depend on
private-and often,informal-sources of credit,which are
limitedand are available onlyat substantiallyhigherinterest
in a shortage economy in which state and
rates. Similarly,
collectivefirmscompete forstrategicraw materials,private
firmsmay be forcedout of business forlack of raw
materials,despite strongmarketdemand fortheirproducts.
The onlyfactorresource that is available to the privatefirm
9/ASQ, March 1992
in abundance is labor; yet here, too, the firmis vulnerableto
the enforcementof governmentregulation,which imposes
limitson the numberof workersprivatefirmsare permitted
to hire.
Due to these restrictions
on factorresources and the
continuingpariah-like
status of capitalistsand merchantsin a
socialist state, privatefirmsremainsmall and
undercapitalized.Moreover,the pariah-like
status of the
investment
privateentrepreneursencourages short-term
decisions aimed at fast returns,liquidity,
and a low rate of
-inthe firm'sgrowth.To compensate fortheir
reinvestment
marginalstatus, manyprivatefirmsseek close ties with local
government,oftenpayinga "management fee" for
assistance in obtainingreliableaccess to factorresources
and politicalprotectionor registering
as collective
enterprises.Local authoritiesmay be more willingto
overlookviolationsof governmentregulationsand tax
evasion ifthe privatefirmhas successfullycultivatedgood
connectionswith local government,althoughsuch fees and
levies increase substantiallythe transactioncosts involvedin
doing business. The majorconstrainton the competitiveness
of privateenterprise,however,is the lack of clearlydefined
and routinelyenforcedprivatepropertyrights.
As shown in the middlecolumn of Table 1, marketizedfirms,
by contrast,lack formalautonomyto the extentthat local
governmentsexercise controlover them. Despite the aim of
enterprisereformto providegreaterdecision-makingpower
to managers,the relationshipwith local governmentrenders
local industriesvulnerableto directbureaucratic
microinterventions
that,as Kornai(1989) has argued, weaken
the beneficialeffectsof marketson the firm'sperformance.
Rationalauthoritieswill have an interestin promoting
efficientgrowthto the extentthey perceive that profitable
enterprisesprovideforincreased revenues. But local
governmentsalso have an interestin protectinginefficient
the
collectiveenterprisesfromcompetitionby restricting
flow of goods fromoutside. By virtueof theirsocialist
ideology,they have an interestin seeking fullemployment.
In theirzeal to promoteeconomic growth,local governments
to refrainfrommicrointerventions
into
oftenfindit difficult
the managementof collectiveenterprises.These latter
characteristicsexacerbate problemsof inefficiency.
But suppose local governmentshould serve in a role
analogous to thatof the board of directorsin the capitalist
firm;then the question of autonomyappears in a different
light(Gi, 1991). Justas the board of directorsembodies the
in the capitalistenterprise,so
center of ultimate-authority
mightlocal governmentin the case of the marketizedfirm.
Local governmentprovidesvaluable networksforthe
marketizedfirm,networksthat representthe firm'ssocial
capital. Like the chiefexecutive officerof the capitalistfirm,
the manager of the marketizedfirmis accountable to local
governmentbut remainsin charge of operations.
Unlikethe state enterprise,the marketizedfirmoperates
underhardenedbudgetconstraints.
Although
local
1O/ASQ,March1992
MarketTransition
governmentmay attemptto protectinefficient
marketized
firmsthroughmarketinterventions,
the capacityof local
governmentto supportunprofitable
firmsis much more
limitedthanthatof the centralstate. Whereas state firms
make up only6 percentof industrialenterprises,marketized
firmsare a legion of small-scale,low-capitaloperations; if
any one goes under,thereare manyothers to providea
continuingrevenue base forlocal government.Moreover,to
startup a new firmthattargetsa more lucrativemarketmay
not be thatcostlyan investment.Overall,the hardened
budget constraintand oftenintense marketcompetition
faced by the marketizedfirmenhances efficiency.
Underpartialreformthe majoradvantage of the marketized
firmover the privatefirmis its betteraccess to factor
markets.Local governmentmay actuallyplace higherpriority
on assisting the marketizedfirmin gainingaccess to capital,
raw material,and laborthan it does state enterpriseslocated
in its jurisdiction,
forthe structureof propertyrightsin
collectiveownershipties local governmentin a virtual
partnershipwiththe marketizedfirm,a partnershipthat is
sealed in a common neolocalistorientation.The growthand
of the marketizedfirmhave a greaterand more
profitability
directimpacton maximizingthe revenue streams of local
governmentthan do those of eitherthe nonmarketizedor
privatefirm.Not onlydo the marketizedfirmshave access
to the free marketsystem, but theyalso can markettheir
productsthroughstate supplyand marketingchannels. But
because the collectiveenterpriseis ancillaryto state-owned
enterprisesin the state marketingsystem, local authorities
oftenactivelyencourage the marketizedfirmto be oriented
toward marketcompetitionand growthto circumvent
regulatoryconstraintsimposed by the centralministries.
Despite the policyof decentralizationof decision-making
power to the enterprise,nonmarketizedfirmsdepend on
verticalties to redistributive
agencies fromwhich they
receive resource transfers(Walder,1989). Likewise,their
outputis directedto state and municipalagencies that
redistribute
it underthe centralplan. For these reasons,
managers in nonmarketizedfirmsare less likelyto share the
neolocalistorientationof managers of collectiveenterprises.
As state-ownedenterprises,nonmarketizedfirmsenjoy
in access to raw materialand investmentcapital
priority
allocated underthe centralplan. Onlyafterthey meet the
productiontargetstipulatedby the plan can theyproduce
goods forsale in the market.Thus theirmarketaccess is
limitedand restrictedby the planningmechanism.Although
the supplyof laboris in theoryplentiful,
workersare
assigned to the nonmarketizedfirmthroughthe planning
process. Whereas marketizedfirmsare able to hire
temporaryworkersfromnearbyvillages who can be laid off
and returnedto farmworkaccordingto the firms'needs,
nonmarketizedfirmsrelyprincipally
on permanentworkers
assigned by the state personnelbureau. As a result,the
nonmarketizedfirmdoes not enjoy the same flexibility
as
does the marketizedfirmin regulatingthe size of its labor
force.This resultsin alternatingcycles of shortages and
surplusinthefirm'slaborforce.Shortagesalso are a
recurrent
probleminthefirm'ssupplyof rawmaterials,
as
11/ASQ,March1992
these are similarlysubject to bottleneckscaused by rigidities
in the planningmechanism (Kornai,1980).
In the area of workers'compensation,the salaries and
bonuses of marketizedfirmshave increased at substantially
higherrates thanthose in the state sector. In Guangdong,
growthfor
which has experiencedveryrapidmarket-oriented
the past decade, stimulatedby the Hong Kong economy,
workers' salaries in the marketizedsectors have increased
dramatically,
so thatthe standardof livingin the Guangdong
provinceis now the highestin the nation.Industrialoutputof
townshipenterprisesin Guangdongincreased 345 percent
and thatof villageenterprisesby 600 percentfrom1978 to
1986, while thatof state enterprisesgrew by 210 percent;
collectiveand privateenterprisesproduced 43 percentof the
total industrialoutputin 1986 (Vogel, 1989: 456). In the
southeasterncoastal provinces,and especially in the special
economic zones, the salaries and benefitsof workersin
marketizedfirmshave soared relativeto workersin the
nonmarketizedstate sector. The discrepancyin salaries of
workersin marketizedfirmsand
high-school-educated
university
graduates withjobs in the state sector has grown
so enormous that low morale has become a serious problem
in elite state units.As a result,workersin the state sector
are eager to transferto the privilegedmarketizedsector.
Young people I interviewedin 1990 voiced preferencefor
gettinga job in the marketizedsector aftergraduatingfrom
highschool ratherthan applyingforadmission to a
university.Popularidioms heard among the street-wiseare
"a surgeon makes less than a barber" and "a university
professorearns less than a hotelwaiter." The growthof the
and
marketizedsector thus has increased interregional
intersectoralincome inequality.
Ifthe analysis reportedin Table 1 provides realisticmodels
of behavioraldifferencesbetween private,marketized,and
nonmarketizedfirmsunderthe conditionsof partialreform,
then the system will remainin dynamictransitionas long as
there is discrepancybetween efficiencyand access to
capitaland factorresources. State enterprisesenjoy favored
access to state-allocatedcapitaland factorresources
under
regardlessof performance;theyoperate inefficiently,
soft-budgetconstraints.Privatefirmsoperatingunder
through
hard-budgetconstraintsdisplayhigherproductivity
economizingon productioncosts, yet theiraccess to formal
sources (i.e., state-owned banks) of capital and factor
resources is least favorable(see Kornai,1990). This lack of
fitbetween efficiencyand access to resources is the
structuraltension of partialreform,generating
underlying
change.
pressure forinstitutional
Underthe conditionsof partialreform,marketizedfirmshave
a distinctcompetitiveadvantage over both the privateand
nonmarketizedfirms.They operate in marketenvironments
with hardened budget constraints,are more efficientthan
nonmarketizedfirms,have betteraccess to factorresources,
offermore rapidlyimprovingworkers'compensations than
eithernonmarketizedor privatefirms,enjoy more local
support,and have bettermarketingoutlets. Overall,the
marketized
firmdisplaysbetteradaptivecapacityinan
12/ASQ,March1992
Market Transition
economy thatstands between the plan and the market
because its structurallocationallows the marketizedfirmto
double dip in the redistributive
and marketsectors of the
economy.
Table 2 reportsresultsof ideal-typeanalysis comparing
factorydirectors(FD) in nonmarketizedfirms,cadreentrepreneurs(CE) who manage the marketizedfirms,and
privateentrepreneurs(PE) along multiplebehavioral
indicators.Cadre-entrepreneurs
also can include local
authorities(e.g., the partysecretaryof a township
government)not directlyengaged in the managementof the
firmbut who play a role analogous to the chairmanof the
board of a conglomeratefirm.The overallanalysis indicates
thatcadre-entrepreneurs
are more similarto private
entrepreneursthan to factorydirectorsin nonmarketized
firms.While privateentrepreneurshave the greatest amount
of autonomy,cadre-entrepreneurs
enjoy more operational
autonomythanfactorydirectors.In partthis stems fromthe
of local government,which
social and spatial proximity
fostersa styleof informalconsultationand consensus
makingbetween managers and officials.Cadreentrepreneursand local officialsshare a common neolocalist
orientationand are oftenwillingto cooperate to furtherlocal
development.The shared neolocalistorientationand greater
consensus on goals have the effectof promotingsolidarity
a
and trust,which in turnallow the cadre-entrepreneur
degree of operationalautonomyand, therefore,scope for
entrepreneurship.
Table2
Comparisonsof FactoryDirector(FD), Cadre-entrepreneur
(CE) and
PrivateEntrepreneur
(PE)*
Behavioralindicators
FD
CE
PE
Autonomy
0
0
0
0
+
+ +
Risktakingand innovation
Entrepreneurial
incentive
Profit
maximizing
* + + = strong; + = semi-strong;0
=
+
+
+
++
++
++
weak.
By contrast,factorydirectorsin nonmarketizedfirmsbehave
more likebureau chiefs accountable to local governmentand
more distantcenters of power and authority.
Theirgoal is to
fulfill
the planned productiontargetson schedule withthe
factorresources allocated to them. They striveto increase
the allocationof resources throughbargainingand lobbying
effortswithinthe state bureaucracy(Walder,1991). They
seek to cultivatea good relationshipwiththe partysecretary
in theirfirmand are cautious in theirinterpretation
of policy
guidelinesissued by the partyand state ministries,lest they
jeopardize theirpoliticalreputation,which remainsa crucial
formof capitalwithinthe nonmarketizedredistributive
sector
of the economy. Moreover,theyare carefulto maintaina
good relationshipwithworkersand staff,lest theyprovoke
the oppositionof the partyapparatuswithinthe enterprise,
which championsthe interestsof workers.As professional
bureaucratsin a nonmarketenvironment,
factorydirectors
13/ASQ,March1992
are risk-aversein theirmanagementof the enterprise.There
is littlepremiumplaced on innovationand risktakingwhen
the evaluativeprocess emphasizes meetingproduction
targetssent down fromhigherauthoritiesand when access
to increased allocationsof capital,raw material,and labor
depends on politicalratherthan economic considerations.
Cadre-entrepreneurs,
by contrast,have positiveincentives
forrisktakingand innovation,thoughtheyare more
risk-aversethan privateentrepreneurs,who stand to profit
mightily
fromsuccessful ventures(and lose greatlyfrom
failure).For cadre-entrepreneurs,
success in the marketplace
does not lead to enormous personal wealth, except through
illicitmeans. Like corporateexecutives in capitalist
corporations,cadre-entrepreneurs
striveto advance their
careers, to gain higherbonuses, and to expand their
organizationalpower and influence.Faced with intense
marketcompetitionand operatingunderhardened budget
constraints,cadre-entrepreneurs
know theycannot avoid
takingrisksand innovatingwithoutjeopardizingtheirfirms'
prospects forsurvivaland growth.Cadre-entrepreneurs
realizethatthe capacityof local governmentsto underwrite
unprofitable
and inefficient
firmsis limited,unlikethatof the
centralstate, a considerationthe rash of bankruptciesof
collectiveenterprisesduringthe economic retrenchment
(1988-1990) reinforced.
Privateentrepreneursnot onlyhave strongerproclivitiesfor
risktakingand innovation,but theirprofit-maximizing
orientationand hard-budgetconstraintsencourage more
exactingcost-benefitcalculationsin theirinvestment
decisions. Because profitsaccrue directlyto them,
entrepreneurial
incentivesare fargreaterthan those for
cadre-entrepreneurs.
They are growth-oriented,
to be sure,
but less so than eitherthe cadre-entrepreneur
or even the
factorydirector,who operate undersofterbudget
constraints.Privateentrepreneursface greateruncertainties
due to the continuinginstability
of fundamentalrules of the
game involvingthe marketeconomy (Nee and Young, 1990).
They thereforeare reluctantto make long-terminvestments
in the growthof theirenterprisebecause, in the absence of
adequate legal protectionof privatepropertyrightsand
possible hostility
directedagainst them in a futurepolitical
campaign,theyworryabout possible appropriation
of their
assets. Instead,theyinvestto gain rapidreturnson their
and spend theirprofitson
capital,emphasize liquidity,
conspicuous consumptionsuch as new housingand
importedluxurycommoditiesratherthan investingin fixed
capital. In this sense, theirbehaviorresembles more that of
middlemenminorities(Bonacich, 1973) than thatof modern
capitalists(Schumpeter,1942).
Cadre-entrepreneurs,
by contrast,are more orientedtoward
growththan are privateentrepreneurs.Though theirfirms
operate underharderbudget constraintsthanthe
nonmarketizedfirm,theyare subsidized by local government
throughtax reductionarrangements,access to raw materials
at below-marketprices,and cheap credit.Moreover,as
profitsdo not directlyincrease theirpersonal wealth,
cadre-entrepreneurs
have less incentive,
comparedwith
14/ASQ,March1992
Market Transition
naturalowners, to economize on wages and bonuses. For
fundsgoes
this reason, the largestportionof extrabudgetary
to increase salaries and bonuses or intosocial investments
who
such as employee housing.Thus cadre-entrepreneurs
in their
manage marketizedfirmsare less discriminating
investmentdecisions than privateentrepreneursand favor
rapidgrowthas a strategyto enhance theirpower and
prestigewithinthe local elite.
is more orientedto
Nonetheless, the cadre-entrepreneur
profitmakingthanthe factorydirector.The local government
can be likenedto the majorshareholderwho has an interest
and dividendsand who expresses
in maximizingprofitability
voice on the board of directors.
interestthrougha controlling
Whereas the factorydirectoracts to conceal profitor absorb
benefitfrom
it in operationcosts, cadre-entrepreneurs
managinga profitableenterpriseinsofaras this maximizes
the revenues of local government,increases their
organizationalpower, and advances theircareers.
The above analysis needs qualification,however,to provide
forgreaterrealism.First,it may seem to suggest thatthe
centralgovernmentdoes not supporteconomic reform.This
inferencewould be inaccurate.The economic retrenchment
greaterrelianceon
of 1988 to 1990 has sought to reinstitute
mechanisms,and this has undercutsome
redistributive
reformprogramsespoused by the radicalreformfaction;but
the conservativefactionin command of state power has
refrainedfromattackingthe overallobjectives of economic
reform.Instead, differencesbetween the conservativeand
radicalreformfactionsare based on opposing strategiesfor
realizingthese broaderaims (Liu, 1989).
policies
the post-1988 economic retrenchment
Ironically,
have probablymade marketizedand privateenterpriseseven
more competitivethan beforethe currentconsolidation.
Whereas veryfew state enterpriseshave closed down,
and chroniclosses, in 1989, 800,000
despite inefficiency
collectiveenterprises,underpressure fromthe state's
Another2.2 million
austeritypolicies,declared bankruptcy.
their
eithermerged withotherenterprisesor restructured
operation.Recessionaryconditionsin the domestic economy
have drivenmanycollectiveenterprisesto orientproduction
even more to the world economy. Reflectingthe speed of
response to changingmarketconditions,export-oriented
collectiveenterprisestripledin numberin 1989 to 45,000
firms.Althoughthe growthrate of collectiveenterprises
slowed down frompreviousyears, it stillregisteredan
increase in gross value of goods produced of 7.3 percent
duringthe firstsix monthsof 1990, while state enterprises
recordednegativegrowthrates. Even more impressivewere
privateenterprises(China Daily,August 13, 1990: 13), which
reboundedfromthe state-imposedausteritypolicies witha
growthrate of 43.7 percentin May 1990 (China Daily,July
10, 1990: 4). As one local officialquipped, "Township
vital.Ifyou encourage them,they
enterprisesare incredibly
grow fast; ifyou tryto slow them down, theystillgrow fast.
They can always findmoney to investand marketsto sell. If
wage cuts
necessary,you'llsee workerstakingvoluntary
Theywillsurvive."
and makingloansto theirfactory.
both
"Workersand management
remarked,
official
Another
15/ASQ,March1992
know that ifthe venturefailstheywill have to go back to
the fields.This is a verystrongincentiveforcooperation
between managementand labor-one which state
enterprisesdon't have" (Far Eastern Economic Review,
September 14, 1989: 65).
Second, the model assumes that local governmentssupport
marketreform.Yet this assumption probablydoes not hold
outside of the regionsthatexperienced rapidmarketorientedgrowthduringthe 1980s, mainlythe coastal
provincesfromGuangdongto Shanghai and ruralcounties
near large commercialcities. In inlandregions,local
governmentsoftenin fact oppose marketreform,harass and
extortfledgingprivatebusinesses, and practiceprotectionist
measures that resultin economic autarky.In these regions,
local authoritiesseek to controlmarketinstitutions
and limit
the extentof marketreformto stem the erosion of
redistributive
power caused by the expansion of free
markets.Because privateenterprisesrepresentalternative
and potentiallyrivalpower bases, local authorities
accustomed to monopolizingpower may bullyprivate
entrepreneursto keep them in line,reminiscentof the way
scholar officialstreated merchantsin traditionalChina.
Where local industriesare unable to compete with
manufacturedproductsof the marketizedand economically
developed regions,ratherthan let theirindustriesgo under,
local and provincialgovernmentsestablish "inspection"
stationson theirbordersto blockthe in-flowof their
competitors'products.
In these regionsand localities,the centralization
of the
and enforcement
economy and the enhanced regulatory
power of the centralgovernmentmay actuallyenable market
institutions
to penetrateconservativelocalisteconomies.
This involvesthe promulgationand greaterrelianceon
constitutional
and civillaws thatdefinethe fundamental
rules of the game and the structureof propertyrightsand on
the indirectmacroeconomicregulationof the economy (Nee,
1989a). Recent examples of regulatoryand legal measures
pursued by the centralgovernmentin an attemptto
overcome malfeasance and illegalinterventions
by local
authoritiesinclude(1) the passage in April1990 of the
Procedure Law, China's firstlaw thatenables
Administrative
privatecitizensto sue governmentadministrations;(2)
continuedeffortsto enforceregulationsand laws that
sanctionofficialswho leverage redistributive
power (e.g.,
controlover factormarketsand business licenses) in order
to gain illicitprivateadvantages; (3) upgradingthe
educational requirementforgovernmentofficials;(4)
improvinglegal protectionforprivatepropertyrights,
especially forforeigninvestors,and intellectualproperty,
througha new copyrightlaw; (5) creatinginstitutional
of increasing
arrangementsthatenable the marketization
numbersof commodities(e.g., a new commodityfutures
marketin grain);and (6) providingincreased creditcapital for
ruralenterprises.In short,recentralization
of fiscalcontrols
and regulatorypower may be a needed adjustmentto
balance the growingpower of regionaland local fiefsand
the threattheypose to economic integration
and
interregional
markets(Boisot and Child,1988).
16/ASQ,March1992
MarketTransition
To the extentthat retrenchment
resultsin more effective
regulationof boundarytransactionsacross the redistributive
and marketsectors, it providesa more sustainable basis for
piecemeal, open-ended reformstrategy,the hallmarkof
Chinese economic reform(Lin,1989). Closing down "trading
companies" operated by cadre-entrepreneurs
thatspecialize
in arbitragebetween the redistributive
and marketsectors, in
which commoditiesare sold forexorbitantprofitson the free
market,has been an importantobjective of economic
retrenchment.
Such tradingcompanies involveillegal
collusionwith local authorities,aggravatethe problemof
corruption,
and exacerbate inflation.
Further,my models assume that,althoughtheyshare
various characteristics,collectiveand privateenterprisesare
distincttypes. However, manycollectivefirmsare actually
familybusinesses whose owners registeredtheirfirmsas
collectivein orderto gain access to factorresources, bank,
loans, markets,politicalprotection,and tax subsidies and to
circumventregulatoryhurdlesthatdiscriminateagainst
privatefirms(Ma, 1988). In exchange, these "red hat" firms
pay a percentage of theirprofitto local governmentas a
"management fee." A typical"management fee" mightbe
as highas 30 percentof the profit;yet this may representa
fairfee forservices renderedby local government.By
registeringas collectiveenterprisesthese firmscan avoid
payingtaxes to the centralgovernment.To the extenttheir
profit-sharing
arrangementwith local governmentis less
than theirtax, "red hat" firmseconomize on transaction
as collectiveenterprises,they
costs. However, by registering
dilutetheirpropertyrightsto theirenterpriseand become
vulnerableto legal complicationsarisingfromthese blurred
propertyrights.Reflectingthe increasinglyblurreddistinction
between collectiveand privateenterprises,ruralenterprises,
labeled "township
whethercollectiveor private,are officially
and villageenterprises"(xiangzhenqiye).
the convergence of collectiveand private
Illustrating
enterprisesis the Wenzhou model in Zhejiang province,
which has attractedattentionforits relianceon developing
the privateeconomy. In fact,64.13 percentof firmsin
Wenzhou are registeredas collectivelyowned, 34.96 percent
as state-owned,and only.24 percentas privatelyowned
(State StatisticalBureau, 1987: 404). Yet the 1987 Statistical
Yearbookof China (p. 129) reportedthatcollectiveand
privateenterprisesaccounted for56.3 and 26.7 percent,
respectively,of Wenzhou's industrialproduction.According
to Kikuchi(1988), who conducted fieldresearch in Wenzhou,
family-ownedbusinesses commonlyregistertheirfirmsas
collective; he claims this accounts forthe discrepancy
between the reportedstatisticsforregisteredownershipand
industrialproduction.
The collectiveand privateeconomies have undoubtedly
become loosely interwovenand interactin a mutually
beneficialmanner,more so than eitherdo withthe state
sector. The growthof the privateeconomy stimulatesthe
ruralcollectiveeconomy by providingthe collectivesector
withboth factorresources and marketdemand, and vice
versa.Sustainedinteractions
betweenthese organizational
formscan be expectedto induceinstitutional
isomorphism
17/ASQ,March1992
(DiMaggio and Powell, 1983). As privatefirmsmimicthe
organizationalritualsand practicesof collectivefirms,they
gain greaterlegitimacy(Meyer and Rowan, 1977), rendering
them less vulnerableto social hostility
and cadre
malfeasance. By contrast,state enterprisesview rural
enterprisesas rivalsthatcompete forscarce resources and,
especially,formarkets.Thus, whereas "blending" is
increasinglyevidentin interactionsbetween the collective
and privatefirms,"segregating"tendencies appear to be
strongerin boundarydynamicsbetween the state and
marketizedsectors (Hannan and Freeman, 1989).
Nonetheless, the rivalry
between state-ownedand rural
enterprisesis muted somewhat by the factthat rural
enterprises,throughsubcontractingarrangements,now
providepartsand assembly formost industrialproducts
made by state enterprises.This may be analogous to the
Americancorporationthatcomplainsabout foreign
criticalcomponents and
competitionwhile importing
products.
to
The incrementalshiftin the 1980s fromredistribution
increasingrelianceon the marketmechanism is seen in
Table 3, which reportsthatby 1987, 65 percentof all farm
and sideline products,67 percentof consumer goods, and
40 percentof all industrialmaterialshad theirprices
determinedto some extentby the market.The post-reform
role of the marketis impressive
expansion of the price-fixing
in lightof the factthat in 1978 the state determinedthe
prices of 92.6 percentof farmand sideline productsand 97
percentof consumer and industrialmaterials.Likewise,as
reportedin Table 4, the numberof industrialproducts
plannedand distributedby the state declined from120 to
60, and the numberof raw materialsdistributedby the state
fellfrom256 to 27. Whereas in 1980 the state allocated 70
percentof industrialproducts,this dropped rapidlyas
economic reformprogressed in the 1980s, so thatby 1987
only20 percentof industrialproductscame underthe state
plan.
Table3
Changein the Scope of State DeterminedPrices*
% State-determined
Pricesforagricultural
products
Pricesforall manufactured
products
a. Consumerproducts
b. Factorproducts
1978
1987
92.6
97.0
83.0
100.0
35.0
47.0
33.0
60.0
* Source:EconomicManagement
Publisher
(1988: 799).
Figure3 chartsthedeclining
economicperformance
of state
enterprises
after1978; when reform
began.The ratioof
profit
to capitalallocatedto stateenterprises
declines
progressively.
Thispattern
ofaccelerating
declinein
ofstateenterprises
is also seen
economicperformance
whenprofit
and taxare combined,whichprovidesa picture
ofthetotalincomegeneratedbystateenterprises.
After
18/ASQ, March 1992
MarketTransition
Table4
Changein the IndustrialProductsRedistributed
by the State Plan*
allocated
No. ofindustrial
products
bythecentralplan
No. ofindustrial
materials
allocatedby
thecentralplan
No. ofcommodities
distributed
bystate
commercial
departments
material
allocated
Percentofindustrial
bystateplan
*
1980
1987
120
60
256
27
188
22
20%
70%
Publisher
Source:EconomicManagement
(1988: 798).
1984 profitis retainedby the enterprise,while the state's
share is paid as tax on profit.
Figure4, which traces the performanceof marketizedfirms,
reveals a perceptibledecline in economic performance.
Althoughthe ratioof gross income to capital increases
throughmost of the 1980s, there is a steady decline in the
ratioof profitto capital investedand profitto gross income.
This indicatesthatdespite the impressiveperformanceof
marketizedfirmsin the 1980s, thereare limitsto their
continuedgrowth.Managers of marketizedfirmsapparently
maximizeon gross income, but not profits.This is consistent
withthe view thatmanagers pass on profitsto workersand
staffthroughincreases in wages and bonuses. Expanding
and a changing
markets,new economic institutions,
transforming
structureof propertyrightsare incrementally
environment,
resultingin changes in the
the institutional
comparativecost of governance. Figure5 shows the
explosive growthin the numberof privatefirmsin rural
industryafter1983, which includesjoint-stockcompanies,
privatecooperatives,and a multitudeof verysmall family
businesses. The numberof enterprisesowned by township
and villagegovernmentsremainslargelyconstantthrough
Figure 3. Economic performance of state enterprises.'
26
24 22 -
2018 -
14
12
16 -
yuancapital
Profit+ tax/100
Profit/lO
yuancapital
19/-
S
i
e
1
6
41978
1980
19/ASQ,March1992
1990
1988
1986
1984
Year
*Source: StateStatisticalBureau(1991: 416).
1982
of marketizedfirms.*
Figure4. Economicperformance
300
260
220 -- -
180
-
C
>
140
Profit/100
yuan capital
yuan gross income
Profit/100
------- Gross income/100 yuan flow capital
100
60
20
0
1978
1980
1982
1984
1986
1988
1990
Year
* Source: State Statistical Bureau
(1991: 379).
all privatefirms.
this period.Start-upcompanies are virtually
Althoughmost of these are verysmall familyfirms,many
are genuine capitalistenterprises.Althoughthe numberof
privatefirmsfarexceeds thatof the township-and
village-ownedmarketizedfirms,as Figure6 indicates,the
value of privatefirms'outputvalue is less than thatof the
marketizedfirms.Yet the rate of growthof gross receiptsof
privateenterprisesis faster.
Figure7 shows a dramaticincrease in tax revenue and
decline in non-taxrevenue fromstate enterprisesafter1978.
Althoughoverall,tax revenues soar followingthe shiftto
markets,by the mid-1980s the decliningeconomic
performancesof state enterprisesand the increasing
demands of money-losingfirmsforsubsidies transformed
formsin ruralindustry.*
Figure5. Property
18 16
~
---
Township
Village
Private
14
12
C
D
C
0
10
6
4
2
0
r---I
1978
1980
1982
1984
1986
1988
1990
Year
Bureau(1991: 377).
*Source: StateStatistical
20/ASQ,March1992
Market Transition
Figure 6. Value of economic transactions (industry,commerce,
construction, transport) of rural enterprises.*
320
280
240
/
--Township
Village
--Private
2400
C
c
0
20
160
//
120
80
a
40-
-
1979
1981
1983
1985
1987
1989 1990
Year
*
Source: StateStatistical
Bureau(1991: 378).
state enterprisesprogressivelyfromrevenue-generating
assets to sources of financialliability.
Figure8 provides
anotherview of the decliningperformanceof state
enterprises.Profitability
declines progressivelyafter1987,
while losses increase. Viewed as elements of a largerstory
in the transitionto a hybridmarketeconomy, figures3 to 8
convey the extentto which parameterchanges in the
institutional
environmentaffectedthe comparativecosts of
governance,resultingin changes in the relativeeconomic
performancesof the state, collective,and privatesectors.
They show thatstate enterprisesbecame a financialburden
to the state just as the thriving
privateand hybridsectors
emerged as sources of sustained increases in revenue to
the state. Despite uncertaintiesrooted in weak market
Figure7. State revenuesand subsidiesto state enterprises.*
280
---Tax
revenue
Revenue fromstate firms
C
c
220
--
Subsidies to state firms
160
120
80
,
40
---I
1950
1955
1960
1965
1970
1975
1980
1985
1990
Year
* Source: State Statistical Bureau (1991: 212).
21/ASQ,March1992
of state enterprises.*
Figure8. Economicperformance
180 _----
160 -
---
Totallosses
Total profits
Profits+ taxes
140
120
C
100
-
80
60
40
20?T--
0
r--n
1978
--r-
1980
,--
__
1982
1984
___
1986
___
1988
I
1990
Year
* Source: State Statistical Bureau
(1991:410).
theexplosiveincreasein
rights,
and property
structures
entryof privatefirmsand the rapidgrowthoftheiroutput
firmsand stateenterprise
to marketized
valuerelative
The
incentive.
ofentrepreneurial
the importance
highlight
the
staterevenuesthrough
increasing
ofsharply
significance
1980s shouldnotbe missed,as itexplainswhythe Chinese
market
interest
insupporting
stateacquireda compelling
As
thefirstdecade of marketreform.
during
transition
rulerswill
North's(1981) theoryofthestatemaintains,
and
rights
of property
changesinthestructure
implement
whensuch changesincrease
lowerthecost oftransacting
theiroverallrevenue.
DISCUSSION AND CONCLUSION
Ratherthan conceivingof markettransitionsas a linear
progressionto capitalism,we may analyze the departures
fromstate socialism as likelyto produce hybridmarket
economies that reflectthe persistence of the institutional
of theirparentorganizationalform.The deep
centricity
structuresof the reformregimeare likelyto reproduce
importantfeaturesof the state socialist redistributive
economy in emergentorganizationalforms.This is the
meaningof path dependence. The emergence of the
sector rests on a corporatist
marketizedredistributive
which
alliance between local governmentand industry,
represents,in transactioncost terms,a locallyefficient
solutionto the problemof weak marketstructuresand
foundationsfora marketeconomy.
incompleteinstitutional
For the economy as a whole, however, local corporatism
allocationinasmuch
may exacerbate problemsof inefficient
arrangementsof state socialism that
as the institutional
cause Kornai'sshortageeconomy persist,albeit in the guise
of paternalismon the partof local governmentratherthan
The relianceof flexiblespecializationon
the centralministry.
local governmentsupport,forexample, in the "thirdItaly"
(Brusco, 1982; Piore and Sabel, 1984; Trigilia,1986),
suggests that local corporatismmay well be aroundfora
22/ASQ, March 1992
Market Transition
long time to come. Whetherin Eastern Europe or the
republicsof the formerSoviet Unionor China,the transitions
fromstate socialism to marketeconomies are likelyto take
place over a protractedperiodduringwhich a hybrid
marketizedsector mediates interactionsbetween the
and risingprivateeconomies. Rather
decliningredistributive
than a single path,there are multiplepaths fromstate
socialism to a marketeconomy in which the trajectoriesof
formsand the
transitionare shaped by previousinstitutional
politicsof markets,as demonstratedin this paper, observed
in Eastern Europe (Stark,1990), and evidentin the former
republicsof the Soviet Union.
The emergence of the hybridmarketizedsector reflectsa
fundamentalstructuralchange thatis stillin progress. In
China,the marketizedsector is gaininggroundrelativeto the
nonmarketizedsector, and the marketizedcoastal regions
are progressingmore rapidlythan inlandregionsin levels of
economic developmentand growthof per capita income. In
output
1981, the ratiobetween the industrialand agricultural
value of coastal and inlandregionswas 55.7 to 44.3. This
gap in outputwidened to a ratioof 58.5 to 41.5 by 1988. In
monetaryterms,the marginincreased from85.8 billionyuan
($18.2 billion)in favorof the coastal provincesto 408.3
billionyuan ($86.7 billion)(ChinaDaily,September 28, 1990:
4). The social outcome of this change has just begun to be
played out.
The marketizedfirmspose the problemof propertyrights
and ownershipform.The partnershipbetween local
governmentand marketizedfirmsentails hightransaction
costs. Economizingon transactioncosts would require
reducingbureaucraticinterferencein economic decisions of
the enterprise.Yet the structureof propertyrightsof
collectiveownershipinvolvesgovernmentin
in the firm.Althoughthe
microinterventions
board-of-directors
analogypermitsa more positiveevaluation
of the role of local government,there remainsa crucial
distinction.The board of directorsof a capitalistfirmdoes
not includegovernmentofficialscommittedto redistributing
by directorsintothe enterprise's
income, and intervention
operationis constrainedby custom and corporaterule.The
collectiveownershipform,in contrast,at best places only
informalconstraintson continuedbureaucratic
it exposes the
and more importantly,
microinterventions,
firmto politicalinfluencein investmentdecisions. Although
marketizedfirmsoperate with hardened budget constraints,
involvementof governmentinstitutesa
the third-party
persistentsofteningeffectby weakening the disciplineof
marketcompetitionon the firm'sinvestmentdecisions.
These negativeeffectsmay be compensated forby the
positiveaspects of cooperationwithgovernment.But as the
economy evolves toward increased relianceon the market
mechanismand as privatepropertyformsare backed by law
and the state, the highertransactioncosts of interventions
by local governmentmay act increasinglyas a drag on
economic performance.The cost to the firmof redistributive
claims imposed by local governmentwillsurelyoutweigh the
supportwhenthe institutional
benefitsof political
inplace.
of a marketeconomyare morefully
foundations
23/ASQ,March1992
To overcome currentstructuralimbalances in the Chinese
a
industrialeconomy,furtherprogresstoward instituting
marketeconomy is needed. Fundamentallythis entails
puttingprivatepropertyrightson an equal basis withother
ownershipforms,creatinglegal normsand regulations-and
means to enforcethem-that protectprivatepropertyrights,
a market-clearing
and makingfurther
progress in instituting
pricestructure.
One problemis providingadequate incentivesformanagers
forthe growthof the capital assets
to assume responsibility
of the industrialfirm.As an economist observed, "In a
countryoperatingwitha privateownershipsystem,the
owners of capital property(assets) willdo theirbest to
suppress wages and increase accumulationin orderto attain
the goal of maximumgrowthin value of the assets. Without
this role of asset owners, therewill not be a motivating
forceforthe growthof the value of capitalassets" (Wang,
1988: 44). At present,managers have littleincentiveto
resistthe politicalpressure of workersto seek higher
salaries, bonuses, and fringebenefits.The power of the
partyapparatus entrenchedin the firmand the influenceof
socialist ideologyfarexceed the willof managers to
As a
overcome laborcosts thatoutrungains in productivity.
investment
share of extrabudgetary
result,a disproportionate
capital has been spent in the past decade in social
investments,such as constructingnew housingforworkers,
ratherthan in modernizingtechnologicallybackwardplant
facilities.At the same time,local governmentshave become
dependent on revenues fromthe marketizedfirmto provide
fundingfora wide range of activities.Despite the impressive
performanceof the hybridmarketizedeconomy in the
1980s, it bears the markingsof its origin.The structureof
propertyrightsof the collectiveenterpriseis such thatthe
social benefitsof a profitablefirmexceed by farprivate
returns.The fatalflaw of the marketizedfirmmay be that its
institutional
innatetendencies are definedby the conflicting
and market.There is stillthe tendency
logic of redistribution
allocationof resources.
for"rush growth"and inefficient
Despite a substantialincrease in capital investmentsin the
and profitsin state enterprises
early1990s, productivity
continueto plunge. Despite decliningreturnson investment,
the state must pump in more capitalto bail out money-losing
state enterprises.As a result,the centralgovernmentfaces
a classic budget squeeze. Insofaras the state seeks to
maximizetax revenues, itfavorsinstitutional
arrangements
thatdeliverthe highestreturns(North,1981). The
state-ownedsector has responded poorlyto the central
government'seffortto sustain economic growthand
increase revenues. By contrast,privateenterprises,which
were the hardesthitby the recession, recoveredquicklyand
constitutethe fastest-growing
sector of the Chinese
industrialeconomy. The organizationaldynamicsgrowingout
of disparitiesin economic performanceand access to
resources among the state, collective,and privatesectors is
what drives markettransitionin China.
The East Asian developmentmodel-Japan, South Korea,
and Taiwan-rested on continuousbut selective state
interventions
(e.g.,Amsden,1985; Hamilton
and Biggart,
24/ASQ,March1992
Market Transition
1988). There, authoritarian
states intervenedin marketsand
firmsto shape the course of development,which enabled
these late-industrializing
economies to mountand sustain
highlevels of economic growth.China's markettransition
bears familyresemblance to the East Asian model, and
economic developmentthere may in time take a similar
course (Perkins,1986). As Biggart(1991) argued, the East
Asian culturaltraditionencompasses the deep structures
thatproduce the distinctiveinstitutional
environmentsof
East Asian marketeconomies, which cannot be readily
accounted forby neoclassical assumptions. The markethas
penetratedthe state socialist redistributive
economy and is
in the process of transforming
it intoa hybridmarket
economy characterizedby stronggovernmentinvolvement.
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