Free to lose: autonomy and incentives in Chinese state entrprises

Abstract

China has introduced a diverging set of policy measures to its state-owned enterprises (SOEs) since the reform began. Two key themes run through the whole process: expanding decision autonomy for enterprises and increasing the role of the market (Byrd 1991). It has been argued that these are also the two most important factors contributing to the success of reform in the state sector (Rawski 1994; Groves et al. 1994; Naughton 1995). In the literature, however, the success of China’s SOE reform remains a controversial issue and the exact mechanisms through which the reforms have impacted on enterprise performance need to be explored (Sachs and Woo 1997; Huang and Duncan 1997a, 1998). Enterprise reform does not seem to have fully achieved the original objective of ‘transforming the SOEs into efficient economic identities’. Inefficiency in the state sector is still one of the major problems facing the Chinese economy today. <p> While it is accepted that comprehensive intervention is detrimental to enterprise performance, we argue that autonomy can deliver better efficiency only when the behaviour of firms or their managers are properly disciplined. These disciplines can be implemented either through direct government regulation or through the functioning of market mechanisms. Autonomy and discipline are the two most important elements of any successful liberalisation program for enterprises in transitional economies.