The Impact of Shareholding Reform on Chinese Enterprise, 1995-2001

During the 1980s and early half of the 1990s, the entry of new firms, the strengthening of managerial incentives, and the accumulation of non-state assets in the state sector set the stage for China's shareholding experiment, involving the formal conversion of thousands of state-owned enterprises to joint stock companies. Shareholding conversions have also been extensively employed in China's collective-owned enterprises. This paper examines the impact of the conversion of these state- and collective-owned enterprises on a range of measures relating to both equity and efficiency. The analysis distinguishes between the direct effects of conversion holding the asset structure fixed and the induced effect, which involves reductions in the proportion of state-owned assets. For SOEs and COEs, conversion contributes to overall increases in both current productivity and innovation. At least during 1995-2001, the period spanned by this study, by encouraging employment growth or slowing layoffs, conversion seems to have benefited incumbent workers. Among SOEs, the most robust impact of conversion is the reallocation of resources and effort to R&D and new product development, which suggests greater attention to deep restructuring. Conversion greatly enhances the ability of converted firms to attract new investment from outside the state sector. Within the sample used in this paper, the state typically retains its assets after conversion: an indication that state asset sales or stripping is not widespread. The shareholding experiment seems to be creating a channel, in addition to those served by new domestic private enterprise and foreign-owned firms, for the emergence of a domestic managerial and entrepreneurial class. Due to these efficiency effects, the greater concentration of conversion in wealthier coastal areas is likely to contribute to regional inequality in China