Chinese Firms between Hierarchy and Market

This research is organised to provide an institutional perspective, this being a large subject, and is developed in divergent ways. The survey attempts to conduct a comprehensive review of it, whilst giving weight to institutional change. It aims at mapping out a general picture with sufficient detail of some areas in order to guide the research from both the macro and micro points of view. The review starts with the structural paradigm which acts as a base for institutional theory, and then moves to the review of its development in economics and sociology. Finally, it concentrates on the issue of institutional change with two related approaches, the property rights school and North’s theory of institutions and institutional change.

The research design aims at solving two problems: first, to build up a theoretical framework for investigation of the CMRS and, second, to choose a scientific approach to conduct the investigation. The former is concerned with the theoretical issues of the subject, and the latter considers the methodological problems of the research. In addition, the last part of the chapter describes the research process. Thus the chapter is presented under three headings:

The relationship between the government and the state-owned enterprise is the core of the CMRS. The changes of this relationship are inevitably influenced by its historical development (Jiang, 1980; Granik, 1991). This chapter attempts to highlight the basic features of the relationship in the pre-reform period, and also points out the different ideas towards economic development which determines the nature of this relationship. And then it will move to the introduction of the CMRS in terms of its historical experience and current development.

Since 1987, when the CMRS was introduced, the debate on the new scheme has always been at the centre of enterprise reform in China (Wu, 1989, 1993; Yang, 1990; Liu and Zhu, 1989; Tian, 1988; Liu, 1991). This is because the CMRS tackles the most sensitive problem of distribution of power and interests between the government and the firms; moreover it points to the possibility of the emergence of a free enterprise system in the future.

To study the implementation of the CMRS, this research attempts to find out the interaction between the government and the company with regard to the basic contractual arrangements. As regards the government side, the focus is first on the decisions which might alter the basic institutional structure, and second on the measures which aim at monitoring and enforcing the contracts. As regards the company side, the focus is first on behaviour towards the contractual targets, and second on the company’s strategic decisions which would impact on the institutional relations between the government and the firm. In other words, any bureaucratic or management problems which do not directly link to the institutional arrangements will be ignored.

Part III attempts to interpret empirical findings from the case material described in chapters 5 and 6, referring to the theoretical framework formulated in chapter 3 and the institutional perspective described in chapter 2. Drawn on the theoretical framework, the government and the state-owned enterprise are two basic units of analysis which formulate role and institutional relationships. As institutional arrangements, the CMRS and the Enterprise Law formulate a basic framework, determining the nature of these relationships. They also provide opportunities for the two parties to further exploit them. In order to understand the dynamic of the two parties’ interaction, the property rights structure is used as a tool to analyse the regularity which has evolved.

The implementation of the CMRS is a dynamic process, with actions taken by the government and the enterprise. Both parties exert their power through administrative or political or economic strength to influence the process. Correspondingly, their actions follow different rationales by bureaucratic or political rules or by economic rationality. Such interactions constitute a way of institutionalisation. This chapter aims at analysing this process in terms of the following aspects:

Having conducted the analysis of the CMRS in terms of structural feature and the process of interaction, the remaining question is why this institutional arrangement cannot be institutionalised and what reasons or causes can be used to explain this phenomenon. It can be conceived of as the question of how to assess an institutional arrangement in particular, and the economic system in general. In theory, this is the question of the researcher’s taste and choice: for example, it can be explained by functional analysis, transaction costs, or populational ecology etc. Each one has its own limitation. In reality, it results in the interaction between political, social, cultural factors and technology. As a consequence, in some societies economic rationality is a dominant value, while in other societies it is the trade-off between economic rationality and other social values.

As an important part of the enterprise reform, the CMRS has provided rich material for the understanding of economic reform in general and institutional change in particular. The study of the CMRS may yield some insights for further research on these two aspects. This section attempts to draw some conclusions on the basis of an institutional interpretation of the economic reform.